’WPCß kāf&-#¬Ō=(/Gē\ŽŻŗK;¤ä՗‰Ś“ŗĆ(0=ō!<õßć5f’ ŽT§ütŁ ©’ś>%9…\c\Į““&„ó†ņI̛ļOśĪ;ȅŠ«ƒč2ņš ÜČv3WĆoÅQ|ķ·ą˜p7ļnŲcGēĶūŅą¤5\E<š»Ž»ō§¾(ÓUņ@@~HŌœ4÷‚[Æn ż«1‰:)·j Ūf=Żŗrc‚½=U›³ZFI5ØRwŁ2™Š:ęg2Ųm ø—Š‘Ś-įņњiCŃ %jāéFU†(óˆm¹`ź¬žŖ¢RŲShÆćŽėd¾%Ģv=zÖļ O/žb÷t™Q²nōcE"NVV•JŌ=ė~ĪøD…mgP oDé(ēi£ŅLėR –)x'ÜrÅÓ\¦V\ƒmUńé łŒ„Q‡ńłźī}OHķ>³vIžššO`ó÷‚|ļYP÷½uØČī –ŲiW>-õvŁ0żFČq$”¾¼²ę6yY,Ճ³«‹~uŁ9Ģš·Ųīū>ō«DÖPqiżĄ Biįև¼bzĖFMéč>}k„_|Y¤H=‘5OłŪK‡:Ż«šįSų—Ų:avÓ%ŁĢ#Į4U.Nõ %C 0:I^ ƒw4“§¶ møĻN×b^ŁU,7U:c2 0NĻ64SU @‡Ē˜HP LaserJet 2100 Series PCL 6,ä,,,,,ä0(ÖĆ9 Z‹6Times New Roman RegularX(üœ$””ŌUSUS.,Ōb7). j„-xź:i¢×+003|x0’U‹’ĄĄĄ Koniak, Cramton and Cohen Comments -- Page ł,†r‰AZ‹Arial ,†r‰AZ‹"Arial Regularmailto:<spkoniak@bu.edu>(ĶO$——Ō’ŌņņóóŌ’Ōmailto:<rcc10@cornell.edu>mailto:<gmc3y@viginia.edu(ÖĆ9 Z‹(Times New Roman  ŲŲŻ ƒüœ!ŻŌUSUS.,ŌŻ  ŻŌ_ŌŃ€ ŃŃ8€[XXdędČ8ŃŃ  ŃĢĢĢJonathan€G.€Katz,€Secretaryą  ąą h ąą Ą ąą  ąņ ņó óŠ b² ŠSecurities€and€Exchange€CommissionŠ H˜ Š450€Fifth€Street,€NWŠ . ~ ŠWashington,€D.C.€€20549„0609Š  d ŠĢą€:(#ąDecember€17,€2002ˆŠ ą 0 Šņ ņņņóóĢą0  ąFile€No.€ņņ33„8150.wpó óóóŠ¬ ü (#(# Šņņņ ņĢą0  ąRe:€€Proposed€Rule:€Implementation€of€Standards€of€Professional€Conduct€forŠ xČ  ŠAttorneys,€17€Ō_ŌCFRŌ_Ō€205:€Comments€of€Susan€P.€Ō_ŌKoniakŌ_Ō,€Roger€C.€Ō_ŌCramtonŌ_Ō€andŠ ^®  ŠGeorge€M.€Cohen€(with€List€of€Academics€Who€Are€in€General€Agreement)ŠD” (#(# Šóóó óÓ  ÓĢŅ °ŅŅ‘°ŅÓĢ ÓDear€Mr.€Katz:Š ` ŠĢą é ąWe€are€writing€to€provide€comments€on€the€proposed€rules€issued€by€the€CommissionŠ ņB Što€implement€šš€307€of€the€Ō_ŌSarbanesŌ_Ō„Ō_ŌOxleyŌ_Ō€Act.€€We€are€law€professors€who€have€spoken,Š ć3 Štaught€and€written€on€the€professional€responsibilities€of€lawyers€in€client€fraud€situations€forŠ Ō$ Šmany€years.€€With€Geoffrey€Hazard,€we€are€coauthors€of€the€forthcoming€fourth€edition€of€Š Å ŠņņThe€Law€and€Ethics€of€Lawyeringóó(Foundation€Press),€one€of€the€leading€teaching€books€onŠ ¶ Šthe€subject.€€Professor€Ō_ŌKoniakŌ_Ō€testified€before€the€Senate€Judiciary€Committee€earlier€this€yearŠ §÷ Šat€a€hearing€on€lawyer€conduct€in€the€Ō_ŌEnronŌ_Ō€affair.€€Professor€Ō_ŌCramtonŌ_Ō€has€recently€publishedŠ ˜č Šan€article€on€the€same€subject€(š šŌ_ŌEnronŌ_Ō€and€the€Corporate€Lawyer:€A€Primer€on€the€Legal€andŠ ‰Ł ŠEthical€Issues,€58€ņņThe€Business€Lawyeróó€143€(Nov.€2002.)€€Professor€Cohen€has€participatedŠ zŹ Šin€a€number€of€recent€Ō_ŌCLEŌ_Ō€programs€dealing€with€the€role€of€lawyers€in€the€numerousŠ k» Šcorporate€frauds€and€failures€that€have€damaged€investor€trust€in€the€integrity€of€securitiesŠ \¬ Šmarkets.Š M ŠĢą é ąWe€have€circulated€a€draft€of€these€comments€to€a€number€of€academic€colleagues,Š /! Šinviting€them€to€endorse€the€comments€or€to€submit€comments€of€their€own€to€theŠ  "p  ŠCommission.€€At€the€end€of€these€comments,€we€list€the€names€and€affiliations€of€those€whoŠ #a! Šare€in€general€agreement€with€our€comments€and€recommendations.€€Because€time€did€notŠ $R" Špermit€consideration€of€each€individualššs€suggestions,€they€are€not€responsible€for€ourŠ ó$C # Šlanguage€or€the€details€of€each€comment€or€recommendation.€€They€have,€however,€authorizedŠ ä%4!$ Šus€to€attach€their€names€and€to€say€that€they€agree€generally€with€the€substance€and€tone€of€thisŠ Õ&%"% Šletter.Š Ę'#& ŠĢą é ąWe€have€organized€our€comments€under€headings€to€facilitate€the€Commissionššs€work.€Š Ø)ų$( ŠWe€begin€by€providing€an€overview€of€the€issues€we€address.€€The€body€of€our€commentsŠ ™*é%) Šdiscusses€each€issue€in€turn€and€offers€language€that€we€believe€would€improve€theŠ Š+Ś&* Šeffectiveness€of€the€rules€and€clarify€their€meaning.€€The€text€of€changes€we€propose€areŠ {,Ė'+ ŠŌ_Ōincluded€in€each€comment,€following€our€discussion€of€the€need€for€the€change.Š l-¼(, ЇĢŃ€—-Ńą@®®&äąņ ņOVERVIEWˆŠ ”ń ŠĢ1.€€Standards€that€Trigger€the€Attorneyššs€DutiesŠ ƒÓ ŠĢą é ąó óOur€most€important€recommendation€concerns€the€one€issue€that€more€than€any€otherŠ e µ Šwill€determine€whether€the€Commissionššs€regulations€will€achieve€the€objectives€for€whichŠ V ¦ Ššš€307€of€Sarbanes„Oxley€was€enacted:€the€standards€that€trigger€the€attorneyššs€report€dutiesŠ G — Šrequired€by€the€statute.Š 8 ˆ ŠĢą é ąThe€language€and€history€of€šš€307€requires€an€objective€standard€at€each€of€theŠ j  Šreporting€stages€within€the€corporation,€as€the€Commission€recognizes€in€its€Comments.€Š  [  ŠSection€307€also€requires€standards€that€turn€on€the€existence€of€š ševidencešš€of€a€materialŠ üL  Šviolation€rather€that€on€the€existence€of€a€material€violation.€€The€purpose€of€šš€307€was€toŠ ķ=  Šensure€that€š ševidencešš€of€law€violations,€indicating€that€the€company€faces€legal€risks,€shouldŠ Ž.  Šbe€known€and€considered€by€higher€authority€in€the€company,€not€brushed€off€by€lower„levelŠ Ļ Šmanagers.€€Requiring€more€than€what€the€statute€requires€š!š€š ševidencešš€š!š€will€cripple€theŠ Ą Šeffectiveness€of€the€report€rule€and€runs€counter€to€the€language€of€the€statute.Š ± ŠĢą é ąNotwithstanding€the€language€concerning€an€objective€standard€in€the€Comments,€theŠ “ć Šš šreasonably€believesšš€standard€will€not€achieve€that€result€because€its€usage€in€all€other€areasŠ „Ō Šof€the€law€and€its€plain€language€means€that€the€particular€lawyer€must€š šbelievešš€somethingŠ uÅ Šņņandóó€that€the€belief€be€š šreasonable.šš€€Tort€law,€criminal€law€and€the€law€of€professionalŠ f¶ Šresponsibility€all€use€the€phrase€reasonably€believe,€as€we€have€just€described€and€no€amountŠ W§ Šof€redefinition€in€the€Comments€here€will€avoid€the€confusion€and€misleading€nature€of€theŠ H˜ Šwords€the€Commission€has€chosen.€€Trying€to€redefine€this€phrase€even€in€the€text€of€the€ruleŠ 9‰ Šwould€be€a€mistake€and€would€not€forestall€confusion.€€€When€confronting€a€commonly€usedŠ *z Šlegal€phrase,€such€as€š šreasonably€believes,šš€most€lawyers€would€not€bother€to€look€for€aŠ k Šunique€interpretation€of€those€words€in€the€definition€section€of€a€rule€or€statute,€no€less€in€theŠ  \ ŠComments.€€See€also€Part€X,€below,€on€access€to€the€Comments€to€these€rules.€€€€Š żM ŠĢą é ąThe€natural€and€usual€use€of€the€š šreasonably€believesšš€standard€is€when€the€law€isŠ ß!/ Štrying€to€ņņdeteróó€particular€conduct,€e.g.,€the€law€of€self€defense€in€tort€and€criminal€law.€€InŠ Š"   Šthose€situations€the€law€wants€to€impose€a€heavy€burden€on€an€actor:€action€should€not€beŠ Į#! Štaken€unless€the€actor€believes€the€action€is€necessary€and,€in€addition,€that€the€actorššs€beliefŠ ²$ " Šis€reasonable.€€Here€Congress€intended€that€attorneys€be€ņņrequired€óóto€communicate€evidenceŠ £%ó # Šof€a€material€violation€up€the€corporate€ladder,€so€that€higher€authority€in€the€company€wouldŠ ”&ä!$ Šlearn€about€the€major€risks€involved€and€handle€them€appropriately.€€Using€a€standardŠ …'Õ"% Šdesigned€to€deter€action€undermines€the€purpose€of€šš€307.Š v(Ę#& ŠĢą é ąWe€agree€with€the€graduated€approach€included€in€the€Commissionššs€proposal,€usingŠ X*Ø%( Šless€demanding€triggers€for€reporting€within€the€corporate€client€and€more€demandingŠ I+™&) Šstandards€for€required€notification€of€withdrawal€to€the€Commission€and€disaffirmance€ofŠ :,Š'* Šdocuments€(the€š šnoisy€withdrawal€provision€of€šš€305.3(d)),€and€for€permissive€disclosure€ofŠ ° Šconfidential€information€(šš€205.3(e)).€€Our€proposal€keeps€that€graduated€approach.Š ”ń ŠĢą é ąWe€propose€new€objective€standards€to€govern€an€attorneyššs€duty€to€report€and€a€higherŠ ƒÓ Šstandard€to€govern€the€duty€to€make€a€noisy€withdrawal.Š tÄ ŠĢņ ņą0 é ąą ‘ ą2.€€Enforcement€Policy€(Sanctions)ŠV ¦é8"é8" Šó óą€8"8"I8"ąˆĢą é ąWe€urge€the€Commission€to€remove€discussion€of€enforcement€policy€from€the€textŠ 8 ˆ Šof€šš€205.6(b)(2)€.€At€most,€enforcement€policy€should€be€mentioned€in€a€comment€and€theŠ ) y  Šcomment€should€be€clear€that€the€policy€does€not€change€the€terms€of€the€rule€itself,Š j  Šparticularly€that€it€does€not€alter€the€triggering€standards€for€action.€€We€also€propose€someŠ  [  Šnew€language€to€the€Sanction€section.Š üL  Š€€€Š ķ=  Šņ ņ3.€€š šNoisy€Withdrawalšš€and€Discretion€to€Report€to€the€Commissionó óŠ Ž.  ŠĢą é ąWe€support€the€Commissionššs€narrowly€circumscribed€rule€requiring€lawyers€to€makeŠ Ą Ša€noisy€withdrawal€by€notifying€the€Commission€in€circumstances€that€will,€as€theŠ ± ŠCommission€rightly€notes,€be€rare.€€What€the€Commission€proposes€is€largely€consistent€withŠ ¢ņ Šthe€rules€of€professional€ethics€of€most€states:€€first,€withdrawal€is€required€in€all€states€whenŠ “ć Šcontinued€representation€would€assist€a€clientššs€crime€or€fraud;€second,€notification€of€thatŠ „Ō Šwithdrawal€along€with€disaffirmance€of€documents€or€representations€that€are€tainted€by€theŠ uÅ Šongoing€or€prospective€violation,€i.e.,€a€noisy€withdrawal,€is€permissible€in€virtually€all€states.Š f¶ ŠĢą é ąThe€existence€of€the€alternative€reporting€procedures€of€šš€205.3(c),€involving€aŠ H˜ Šqualified€legal€compliance€committee€of€the€board€(QLCC),€means€that€the€instances€in€whichŠ 9‰ Šnoisy€withdrawal€is€required€may€turn€out€to€be€limited.€€It€seems€highly€likely€that€many€orŠ *z Šmost€companies€will€establish€a€QLCC,€with€important€effects€on€the€reporting€and€otherŠ k Šobligations€of€inside€and€outside€lawyers.€€First,€an€attorney€would€satisfy€the€initial€reportŠ  \ Šobligation€by€reporting€the€material€violation€to€the€QLCC.€€Second,€the€reporting€attorneyŠ żM Šwould€no€longer€have€a€duty€to€make€a€š šnoisy€withdrawalšš€to€the€Commission€under€šš€205(c).€Š ī > ŠThird,€a€CLO€who€receives€a€report€of€a€material€violation€may€refer€the€report€to€the€QLCC,Š ß!/ Šshifting€the€responsibility€to€conduct€an€inquiry€to€the€QLCC.€€Fourth,€once€a€materialŠ Š"   Šviolation€has€been€reported€to€the€QLCC,€the€obligation€to€notify€the€Commission€of€theŠ Į#! Šmaterial€violation,€when€it€has€not€been€appropriately€addressed€by€the€board,€shifts€from€theŠ ²$ " Šreporting€attorney€to€the€individual€members€of€the€QLCC,€who€would€be€acting€in€a€businessŠ £%ó # Šcapacity.Š ”&ä!$ ŠĢą é ąHowever€rarely€noisy€withdrawal€will€have€to€be€used,€it€is€nonetheless€an€importantŠ v(Ę#& Špart€of€the€entire€regulatory€structure€and,€as€we€explain,€completely€consistent€with€šš€307.€Š g)·$' ŠIf€the€recent€scandals€and€those€of€the€past€have€taught€us€anything,€it€is€that€the€boards€ofŠ X*Ø%( Šsome€companies€are€either€kept€in€the€dark€by€management€or€are€reluctant€to€opposeŠ I+™&) Šmanagement€actions€that€are€or€may€be€illegal.€€In€those€situations,€illegal€conduct€will€beŠ :,Š'* Šstopped€or€rectified€if€everyone€knows€that€the€companyššs€attorneys€will€have€to€exit€noisily.€Š ° ŠOn€the€other€hand,€if€everyone€knows€that€all€an€attorney€can€do,€if€the€board€persists,€is€to€exitŠ ”ń Šquietly€without€any€signal€to€anyone,€the€illegal€conduct€may€continue€indefinitely€and€causeŠ ’ā Širreparable€harm€to€the€company,€its€shareholders€and€investors.€€Š ƒÓ Š€Ģą é ąWe€also€support€the€š špermissive€disclosurešš€allowed€by€šš€205.3(e)€and€urge€theŠ e µ ŠCommission€to€be€clear€that€nothing€it€says€in€this€provision€or€elsewhere€is€designed€toŠ V ¦ Šweaken€duties€imposed€on€attorneys€by€the€states€that€may€require€or€allow€disclosure€in€moreŠ G — Šsituations€than€contemplated€by€these€regulations.€€We€also€discuss€this€matter€in€the€nextŠ 8 ˆ Štopic,€preemption.Š ) y  ŠĢņ ņą0 é ąą ‘ ą4.€€Preemption€of€State€Ethics€Rulesó óŠ [ é8"é8" ŠĢą é ąWe€then€explain€why€it€is€necessary€and€proper€that€the€Commissionššs€rules€preemptŠ ķ=  Šstate€ethics€rules€that€may€prohibit€what€the€Commissionššs€rules€require€or€permit.€€At€theŠ Ž.  Šsame€time,€we€believe€it€is€important€that,€with€one€exception,€the€rule€not€preempt€any€stateŠ Ļ Šethics€rule€that€require€or€allow€more€reporting€or€more€action€on€the€part€of€the€lawyer€toŠ Ą Šprevent€or€rectify€client€fraud€than€the€Commission€rule€requires.€€The€exception€to€which€weŠ ± Šrefer€concerns€in„house€counsel€(see€7,€below).€€€The€comments€throughout€should€beŠ ¢ņ Šreviewed€to€eliminate€any€suggestion€that€more€rigorous€state€disclosure€rules,€mandatory€orŠ “ć Špermissive,€are€nullified€by€these€rules,€apart€from€the€one€exception€noted.Š „Ō ŠĢņ ņ5.€€€Foreign€Lawyersó óŠ f¶ ŠĢą é ąWe€support€the€approach€of€including€foreign€lawyers€within€the€ambit€of€the€rule€andŠ H˜ Šexplain€why€excluding€them€would€adversely€interfere€with€the€market€for€legal€services€andŠ 9‰ Šundermine€the€Commissionššs€rules€and€the€purposes€of€šš€307.Š *z ŠĢņ ņ6.€€€š šAppearing€and€Practicingšš€Before€the€CommissionŠ  \ ŠĢó óą é ąWe€discuss€how€important€it€is€that€the€definition€of€š šappearing€and€practicingššincludeŠ ī > Šthose€who€advise€that€information€need€not€be€disclosed€to€the€Commission€in€any€particularŠ ß!/ Šfiling€or€writing€as€well€as€those€who€advise€against€the€need€for€any€particular€filing€orŠ Š"   Šwriting.€€Further,€we€believe€it€is€important€that€those€who€advise€on€the€legality€of€statementsŠ Į#! Šby€management€to€particular€individuals€or€institutions€be€included€within€the€rulesšš€purview.Š ²$ " ŠĢą é ąOn€the€other€hand,€we€believe€that€the€Commissionššs€approach€to€lawyers€acting€asŠ ”&ä!$ Šadvocates,€instead€of€advisors,€should€be€clarified€to€ensure€no€diminution€in€appropriate€andŠ …'Õ"% Šaggressive€advocacy€due€clients€in€adversary€proceedings.€€We€suggest€clarifying€language.Š v(Ę#& ŠĢą é ąWe€criticize€the€rule€for€failing€to€address€clearly€whether€a€law€firm€š šappears€andŠ X*Ø%( Špracticesšš€before€the€Commission€and,€if€so,€when.€€€We€elaborate€on€this€problem€in€the€nextŠ I+™&) ŠPart.Š :,Š'* Šą€8"8"I8"ąˆĢņ ņ7.€€Law€Firms,€Imputation€and€Subordinates€and€their€SupervisorsŠ ”ń ŠĢą é ąó óThe€proposed€rules€suffer€from€the€failure€to€address€the€important€questions€ofŠ ƒÓ Šimputation€of€knowledge€within€a€law€firm€and€of€law€firm€censure€and€discipline.€€WeŠ tÄ Šsuggest€language€to€address€those€related€issues.€€One€consequence€of€failing€to€addressŠ e µ Šimputation€is€that€it€renders€the€definition€of€š špracticing€and€appearingšš€confusing.€€An€evenŠ V ¦ Šmore€troubling€consequence€is€that€this€failure€may€encourage€the€decentralization€of€legalŠ G — Šwork€within€law€firms,€undermining€the€Commission€rules,€the€purposes€of€šš€307,€and€theŠ 8 ˆ Šprovision€of€quality€legal€services.Š ) y  ŠĢą é ąThe€Commissionššs€rules€should€also€address€the€need€for€discipline€of€law€firms.€Š  [  ŠSpecialized€corporate€and€securities€practice€involves€the€participation€of€a€team€of€lawyersŠ üL  Šwho€bring€differing€skills€and€knowledge.€€Responsibility€for€decisions€is€often€divided€up€orŠ ķ=  Šshared€in€ways€that€are€uncertain€or€shifting.€€The€diffusion€of€responsibility€and€knowledgeŠ Ž.  Šleads€to€the€argument€that€no€one€attorney€can€be€held€responsible€for€what€was€done.€€TheŠ Ļ ŠCommission€should€add€a€rule€permitting€the€censure€or€reprimand€of€a€law€firm€andŠ Ą Šassessment€of€monetary€penalties€when€the€firm,€which€is€clearly€responsible€for€theŠ ± Šrepresentation,€has€failed€to€conform€to€responsibilities€required€by€the€Commission.ņ ņŠ ¢ņ ŠĢó óą é ąThe€Commission€is€correct€in€assuring€in„house€counsel€that€they€do€not€need€to€resignŠ „Ō Štheir€employment€when€notifying€the€Commission€that€a€reported€violation€has€not€beenŠ uÅ Šappropriately€addressed€by€their€employer.€€That€approach€is€consistent€with,€and€perhapsŠ f¶ Šrequired€by,€the€whistle„blower€protections€that€are€part€of€the€Sarbanes„Oxley€regime€(see€ššŠ W§ Š806).€€The€proposed€rule,€however,€should€make€it€clear€that€inside€attorneys€may€not€continueŠ H˜ Što€participate€in€the€reported€matter.€€Continuation€in€most,€if€not€all,€instances€would€run€afoulŠ 9‰ Šof€ethics€rules€in€every€state€that€demand€that€lawyers€not€assist€an€ongoing€crime€or€fraud.€Š *z ŠRelieving€in„house€lawyers€from€the€duty€to€withdraw€combined€with€the€prohibition€againstŠ k Šfiring€in„house€lawyers€for€having€acted€in€accordance€with€these€rules€may€otherwise€be€readŠ  \ Što€counteract€ethics€rules€or€decisions€that€rightly€state€that€all€lawyers,€including€in„houseŠ żM Šcounsel,€cannot€assist€unlawful€conduct.Š ī > ŠĢņ ņ8.€€Successor€CounselŠ Š"   ŠĢą é ąó óWe€applaud€the€Commission€for€attempting€to€deal€with€the€problem€of€successorŠ ²$ " Šcounsel€lacking€the€knowledge€necessary€to€ensure€that€the€withdrawal€of€predecessor€counselŠ £%ó # Šwas€not€in€vain.€€We€do€not,€however,€think€the€Commissionššs€proposed€solution€is€by€itselfŠ ”&ä!$ Šadequate€to€the€task€and€we€suggest€adding€a€requirement€that€successor€counsel€inquire€intoŠ …'Õ"% Špast€reports€filed€under€these€rules.Š v(Ę#& ŠĢņ ņ9.€€Professional€Duty€of€Confidentiality€and€the€Attorney„Client€PrivilegeŠ X*Ø%( ŠĢó óą é ąThe€Commissionššs€duty€under€šš€307€to€establish€š šminimum€standards€of€professionalŠ :,Š'* Šconductšš€authorizes€the€Commission€to€define€the€scope€of€and€exceptions€to€the€professionalŠ ° Šduty€of€confidentiality€applicable€to€lawyers€appearing€and€practicing€before€the€Commission.€Š ”ń ŠSection€205.3(e)€of€the€Commissionššs€proposed€rules,€which€permits€an€attorney€under€certainŠ ’ā Šcircumstances€to€disclose€confidential€information€to€the€Commission,€establishes€anŠ ƒÓ Šexception€to€the€professional€duty€of€confidentiality.€€The€rule€should€be€described€as€such€inŠ tÄ Šthe€Comments.Š e µ ŠĢą é ąOn€the€other€hand,€we€do€not€believe€that€the€Commission€has€authority€to€modify€theŠ G — Ševidence€rules€applied€in€federal€and€state€courts€under€the€rubric€of€š šattorney„clientŠ 8 ˆ Šprivilege.šš€€Nor€is€it€necessary€or€wise€to€venture€into€an€area€of€law€that€is€primarily€theŠ ) y  Šprovince€of€judges€in€federal€courts€and€judges€and€state€legislatures€in€state€courts.€€NorŠ j  Šshould€the€Commission€attempt€to€resolve€controverted€issues€of€privilege€such€as€waiver,Š  [  Šother€than€to€indicate€how€various€actions,€such€as€attorney€disclosure€or€company€report,€willŠ üL  Šbe€treated€in€the€Commissionššs€own€proceedings€and€activities.Š ķ=  ŠĢņ ņ10.€€Miscellaneous€Mattersó óŠ Ļ ŠĢą é ąA€final€part€discusses€several€other€matters€that€did€not€fit€neatly€under€the€aboveŠ ± Šheadings.Š ¢ņ ŠĢą é ąThat€concludes€our€overview.€€We€now€proceed€to€a€discussion€of€these€matters€andŠ „Ō Šour€proposal€of€specific€recommendations€that€will€improve€the€effectiveness€and€clarity€ofŠ uÅ Šthe€rules.Š f¶ ŠĢĢą@Q Q äąņ ņDISCUSSION€AND€PROPOSED€CHANGESˆŠ 9‰ ŠĢą@d d äąI.€€The€Standards€that€Trigger€the€Lawyerššs€Dutiesó óˆŠ k ŠĢą é ąTo€avoid€repetition€in€our€recommendations,€the€substitute€language€to€the€rules€thatŠ żM Šwe€propose€in€this€part€is€collected€below€under€heading€D.€€We€first€discuss€our€problemsŠ ī > Šwith€the€current€language€and€the€reasons€for€our€revisions.Š ß!/ ŠĢą é ąSection€307€dictates€that€the€Commission€adopt€a€rule€that€requires€lawyers€to€reportŠ Į#! Šš ševidence€of€a€material€violation€of€securities€lawšš€to€the€CLO€or€the€CEO€€(we€adopt€theŠ ²$ " ŠCommissionššs€abbreviations€throughout€our€comments)€and€in€some€circumstances€further€upŠ £%ó # Šthe€corporate€chain€of€command.€€Two€things€are€obvious€from€the€use€of€the€word€š ševidenceššŠ ”&ä!$ Šand€the€lack€of€any€reference€to€the€lawyerššs€subjective€state€of€mind:€€Congress€intended€theŠ …'Õ"% ŠCommission€to€use€an€objective€standard,€not€a€subjective€one;€and€it€intended€the€rule€toŠ v(Ę#& Šrequire€the€reporting€of€š ševidence€of€violations,šš€not€just€the€reporting€of€š šviolations.šš€Š g)·$' ŠĢą é ąThe€proposed€rule€muddies€both€matters,€running€the€risk€that€it€will€be€read€byŠ I+™&) Šlawyers€to€require€reporting€only€of€š šviolationsšš€of€law€that€the€lawyer€š šbelievesšš€exist€andŠ :,Š'* Šthen€only€when€the€lawyer€is€sure€that€his€š šbeliefšš€is€š šreasonable.šš€€Indeed,€we€believe€the€ruleŠ ° Šencourages€that€reading€and€thus€undermines€the€legislation€the€rule€is€designed€to€implement.€Š ”ń ŠĢĢņņA.€š šReasonably€Believesšš€Is€the€Wrong€StandardŠ tÄ ŠóóĢą é ąThe€š šreasonably€believesšš€standard,€defined€in€šš€205.2(l),€pervades€the€CommissionššsŠ V ¦ Šproposed€rule.€€The€standard€repeatedly€occurs,€not€only€directly€in€the€various€substantiveŠ G — Šprovisions€of€the€rule,€but€indirectly€as€part€of€the€definitions€of€š šappropriate€responsešš€in€ššŠ 8 ˆ Š205.2(b)€and€š ševidence€of€a€material€violationšš€in€šš€205.2(e).€€The€reasonably€believesŠ ) y  Šstandard€is€inappropriate€and€should€be€replaced€in€all€but€one€of€the€situations€in€which€it€isŠ j  Šused€(see€Part€I.C.4,€below).Š  [  Šą é ąĢą é ąAs€a€preliminary€matter,€we€note€that€the€Commission€asked€for€comment€on€whetherŠ ķ=  Šthe€rule€should€be€š šsubjectivešš€or€š šobjective.šš€€We€see€no€plausible€reading€of€šš€307€thatŠ Ž.  Šwould€support€the€adoption€of€a€š šsubjectivešš€standard.€€Congress€said€lawyers€should€reportŠ Ļ Šš ševidence.šš€€While€it€is€surely€true€that€deciding€what€is€š ševidencešš€requires€thought,€the€lawŠ Ą Šgenerally€treats€the€determination€of€what€constitutes€š ševidencešš€as€an€objective€matter,€notŠ ± Ša€function€of€a€particular€personššs€point€of€view.€Those€who€drafted€this€amendment€were€wellŠ ¢ņ Šaware€that€one€approach€was€to€require€lawyers€to€š šknowšš€or€š šbelievešš€something€as€theŠ “ć Štrigger€for€their€duty€to€report.€€That€approach€was€rejected€by€the€drafters,€the€full€Senate,€theŠ „Ō Šconferees€(to€whom€the€ABA€made€clear€its€views€and€provided€numerous€options€for€lessŠ uÅ Šrigorous€standards€than€those€incorporated€into€šš€307),€and€the€House€before€final€passage€ofŠ f¶ Šthis€legislation.€€Š W§ ŠĢą é ąWe€understand€that€the€Commission€thought€it€was€adopting€an€objective€standard.€Š 9‰ ŠThe€Commission€tried€mightily€in€šš€205.2(l)€and€its€Comments€to€stress€that€š šreasonablyŠ *z Šbelievesšš€is€€objective.€€We€note€that€the€Commissionššs€Comments€state,€for€example,€that€itsŠ k Šdefinition€was€based€on€that€included€in€š šthe€ABAššs€Model€Rules€of€Professional€Conduct,ņņŠ  \ Šmodified€to€eliminate€any€implied€subjective€element.ó󚚀(Emphasis€added.)€€The€problem€is€thatŠ żM Šthe€attempted€modification€will€not€work.Š ī > ŠĢą é ąStrive€as€the€Commission€might,€the€plain€meaning€of€words€counts,€as€it€should,€andŠ Š"   Šthe€manner€in€which€the€law€generally€employs€the€phrase€š šreasonably€believesšš€also€counts.€Š Į#! ŠAnd€the€plain€meaning€of€the€words€š šreasonably€believesšš€is€that€the€lawyer€must€subjectivelyŠ ²$ " Šš šbelievešš€something€before€the€duty€to€act€is€triggered.€€As,€or€more,€important,€the€phraseŠ £%ó # Šš šreasonably€believesšš€is€a€longstanding€one€in€the€law,€and€in€every€other€instance€in€whichŠ ”&ä!$ Šthe€law€employs€that€phrase,€e.g.,€in€criminal€and€tort€law€(at€least€any€area€of€law€in€whichŠ …'Õ"% Šany€of€the€three€of€us€is€aware,€and€that€covers€a€wide€body€of€law€as€we€teach€various€andŠ v(Ę#& Šdiverse€legal€subjects),€the€phrase€describes€a€mental€state€that€has€a€subjective€as€well€as€anŠ g)·$' Šobjective€component.€€The€Model€Rules€use€the€phrase€as€it€is€used€elsewhere€in€the€law.€€AnyŠ X*Ø%( Šattempt€to€modify€a€legal€term€of€long€usage€is€unfair€in€that€it€fails€to€give€notice€to€thoseŠ I+™&) Šrequired€to€live€by€the€term€or€risk€punishment.Š :,Š'* Їą é ąMoreover,€the€natural€and€usual€use€of€the€š šreasonably€believesšš€standard€is€when€theŠ ° Šlaw€is€trying€to€ņņdeteróó€particular€conduct.€€Consider€one€example:€the€law€of€self€defense€ofŠ ”ń Šcriminal€and€tort€law.€€It€is€a€defense€to€a€homicide€charge€that€one€killed€another€because€oneŠ ’ā Šš šreasonably€believedšš€oneššs€life€to€be€in€danger.€€In€every€jurisdiction€that€means€that€one€isŠ ƒÓ Šexcused€for€having€acted€(killed)€in€self„defense€only€when€one€ņņactually€óóbelieved€oneššs€lifeŠ tÄ Šwas€in€danger€and€then€only€if,€in€addition,€that€subjective€belief€was€objectively€reasonable.€Š e µ ŠBy€setting€up€two€hurdles,€the€law€expresses€its€desire€to€curb€action.€€The€same€thing€isŠ V ¦ Šgenerally€true€when€the€š šreasonably€believesšš€standard€is€used€in€the€ethics€rules,€for€exampleŠ G — Šin€the€Model€Rulesšš€general€provision€on€conflicts€of€interest.€€The€fear€is€that€the€lawyer,Š 8 ˆ Šacting€on€subjective€belief€alone,€will€be€too€quick€to€undertake€a€representation€resulting€inŠ ) y  Ša€conflict.€€The€additional€š šreasonablenessšš€hurdle€is€thus€added€as€a€check€on€action.Š j  ŠĢą é ąHere,€by€contrast,€the€Commission€is€not€trying€to€deter€lawyers€from€reporting€withinŠ üL  Šthe€corporation€to€higher€levels€of€authority.€€Quite€the€opposite:€it€is€trying€to€mandate€thatŠ ķ=  Šlawyers,€who€too€often€have€been€reluctant€to€do€so,€notify€a€higher€authority€if€an€appropriateŠ Ž.  Šresponse€does€not€take€place€at€a€lower€level.€€š šReasonably€believesšš€would€be€inappropriateŠ Ļ Ševen€if€all€the€Commission€was€supposed€to€do€was€to€ņņencourageóó€internal€reporting,€but€theŠ Ą ŠCommission€is€trying€(and€is€required€by€šš€307)€to€do€more€than€provide€š šencouragement.šš€Š ± ŠĢĢą é ąBeginning€with€a€š šdeterrencešš€standard€š!š€words€and€legal€usage€that€do€not€match€theŠ „Ō ŠCommissionššs€purpose€š!š€€and€then€trying€to€fix€all€that€through€Comments€and€a€line€or€twoŠ uÅ Šof€š šredefinitionšš€is€unsound€and€wonššt€work.€€Put€simply,€no€amount€of€commentary€andŠ f¶ Šcertainly€not€one€definition€in€a€list€of€definitions,€is€sufficient€to€stop€the€confusion€that€theŠ W§ ŠCommissionššs€novel€definition,€at€war€with€the€plain€meaning€of€the€words,€will€create.€€NotŠ H˜ Šonly€will€the€š šreasonably€believesšš€test€create€confusion,€it€will€increase€the€costs€of€enforcingŠ 9‰ Šthis€rule€by€encouraging€defenses,€litigation€and€appeals,€and€it€will€decrease€the€benefits€ofŠ *z Šthe€reporting€regime€Congress€mandated.€€These€increased€costs€and€diminished€benefits€areŠ k Šparticularly€unjustified€when€there€are€ready€substitutes€for€š šreasonably€believesšš€that€moreŠ  \ Šclearly€express€the€Commissionššs€and€Congressššs€intent.€€The€š šreasonably€believesšš€languageŠ żM Šmust€be€dropped.€€The€only€exception€is€šš€205.3(b)(5),€which€we€discuss€in€Part€I.C.4€below,Š ī > Šfor€which€we€argue€that€the€Commission€should€retain€the€š šreasonably€believesšš€standard,€butŠ ß!/ Šsubstitute€the€traditional€definition€for€the€Commissionššs€novel€one.€We€also€urge€theŠ Š"   ŠCommission€to€comb€the€Comments€to€remove€any€hint€that€the€lawyer,€before€being€requiredŠ Į#! Što€report,€must€š šbelievešš€that€all€elements€of€a€material€violation€are€established.Š ²$ " ŠĢą é ąA€variation€on€the€š šreasonably€believesšš€standard€occurs€in€the€definitions€ofŠ ”&ä!$ Šš šappropriate€responsešš€in€šš€205.2(b)€and€š ševidence€of€a€material€violationšš€in€šš€205.2(e).€Š …'Õ"% Šš šAppropriate€responsešš€is€defined€as€a€response€that€š šprovides€a€basis€for€an€attorneyŠ v(Ę#& Šreasonably€to€believešš€that€appropriate€action€has€been€or€will€be€taken€by€the€issuer.€Š g)·$' Šš šEvidence€of€a€material€violationšš€is€defined€as€information€š šthat€would€lead€an€attorneyŠ X*Ø%( Šreasonably€to€believe€that€a€material€violation€has€occurred,€is€occurring,€or€is€about€to€occur.šš€Š I+™&) ŠThe€language€š šreasonably€to€believešš€is€an€improvement€over€š šreasonably€believes,šš€as€theŠ :,Š'* Šformer€is€less€likely€to€be€read€by€lawyers€or€courts€as€including€a€subjective€component.€€ButŠ ° Šthe€š šsubjective€plusšš€interpretation€remains€possible.€€Even€if€š šreasonably€to€believešš€isŠ ”ń Šinterpreted€as€containing€only€an€objective€standard,€the€very€appearance€of€the€more€objectiveŠ ’ā Šš šreasonably€to€believešš€in€these€definitions,€in€contrast€to€the€normally€subjective€andŠ ƒÓ Šobjective€š šreasonably€believešš€test€of€šš€205.2(l),€only€heightens€the€probability€thatŠ tÄ Šš šreasonably€believesšš€will€be€misread,€increasing€costs€and€decreasing€benefits€from€this€rule.€Š e µ ŠĢĢą é ąFor€clarity€of€presentation€we€set€out€our€proposed€alternatives€under€heading€D€below,Š 8 ˆ Šwhich€allows€us€to€address€first€other€aspects€of€the€standards€which€our€alternatives€alsoŠ ) y  Šmodify.Š j  ŠĢņņB.€€The€Ambiguity€on€Whether€š šEvidencešš€or€š šViolationšš€Triggers€the€ReportingŠ üL  ŠRequirementsóóŠ ķ=  ŠĢą é ąThe€definition€of€š ševidence€of€a€material€violationšš€in€šš€205.2(e),€which€the€proposedŠ Ļ Šrule€also€uses€extensively,€presents€another€serious€problem.€€The€problem€is€that€šš€307€ofŠ Ą ŠSarbanes„Oxley€explicitly€uses€š ševidencešš€as€the€trigger€for€action,€but€the€CommissionššsŠ ± Šdefinition€at€best€renders€the€word€š ševidencešš€ambiguous,€and€at€worst€reads€the€word€out€ofŠ ¢ņ Šthe€rule€entirely.€€The€key€language€in€šš€205.2(e)€is€the€statement€that€the€evidence€requiredŠ “ć Što€trigger€action€is€š šinformation€that€would€lead€an€attorney€reasonably€to€believe€that€aŠ „Ō Šmaterial€ņņviolation€has€occurred,€is€occurring€or€is€about€to€occur.ó󚚀€(Emphasis€added.)€€Š uÅ ŠĢą é ąIn€every€state,€as€a€matter€of€the€ethics€rules€and€substantive€law€forbidding€aiding€andŠ W§ Šabetting€of€a€tort€or€crime,€a€lawyer€may€not€assist€a€client€in€conduct€the€lawyer€š šknowsšš€toŠ H˜ Šbe€illegal€when€€continuing€the€representation€would€further€the€illegality.€€Moreover,€all€stateŠ 9‰ Šethics€rules€require€that€the€lawyer€withdraw€when€he€or€she€š šknowsšš€of€the€clientššs€illegal€useŠ *z Šof€his€services.€€As€any€reader€of€reported€decisions€knows,€that€law€has€not€proved€asŠ k Šeffective€as€one€would€have€hoped€in€deterring€lawyers€from€recklessly€or€carelessly€aidingŠ  \ Šclient€fraud.€€Why?€€Because€any€lawyer€worth€his€salt€knows€that€assessing€whether€the€lawŠ żM Šis€actually€being€violated€is€no€simple€task.€€One€extra€fact,€one€nuance,€one€affirmativeŠ ī > Šdefense,€one€creative€ambiguity,€and€a€judgment€of€š šillegalityšš€morphs€into€something€moreŠ ß!/ Šbenign.€Š Š"   ŠĢą é ąUnfortunately,€as€lawyer€behavior€in€the€S€&€L€scandal€and€countless€other€financialŠ ²$ " Šdebacles€demonstrates,€the€inevitable€š šgraynessšš€or€uncertainty€of€all€law€š!š€a€characteristicŠ £%ó # Šof€all€just€legal€regimes€and€not€a€flaw€š!š€has€become€an€excuse€for€ignoring€evidence€ofŠ ”&ä!$ Šillegality,€no€matter€how€substantial€the€evidence€or€harm€being€wrought€has€been.€€ThatŠ …'Õ"% Šreality€is€precisely€why€šš€307€speaks€of€š ševidencešš€and€not€š šillegalityšš€or€establishedŠ v(Ę#& Šš šviolationsšš€of€law,€and€it€is€why€it€is€essential€that€the€Commission€eliminate€any€and€allŠ g)·$' Šlanguage€in€this€rule€and€its€accompanying€Comments€that€departs€from€the€evidence€standard.€Š X*Ø%( ŠThe€language€in€the€proposed€rule€that€requires€lawyers€to€think€in€terms€of€known,€clear,Š I+™&) Šestablished,€obvious€or€objective€š šviolationsšš€of€law€should€be€abandoned.€€Not€only€is€theŠ :,Š'* Šshift€away€from€š ševidencešš€to€š šviolationšš€inconsistent€with€the€plain€language€of€šš€307,€itŠ ° Šundercuts€the€rule€itself,€significantly€decreasing€the€benefits€that€this€rule€would€otherwiseŠ ”ń Šproduce.€€Š ’ā ŠĢņņC.€€The€Different€Standards€for€Different€Courses€of€ConductóóŠ tÄ ŠĢą é ąThe€Commission€uses€several€differing€triggers€for€lawyer€action€for€the€three€differentŠ V ¦ Šreporting€stages.€€The€proposals€suggest€a€graduated€approach,€i.e.,€a€higher€standard€isŠ G — Šrequired€to€justify€reporting€as€the€receiver€of€the€report€(or€the€noise)€changes.€€We€approveŠ 8 ˆ Šof€a€graduated€approach,€but€piled€on€top€of€the€š šreasonably€believesšš€and€š šlead€an€attorneyŠ ) y  Što€reasonably€believešš€and€the€shift€(at€some€points)€from€š ševidencešš€to€š šviolation,šš€theŠ j  Šseparate€triggers€proposed€by€the€Commission€add€only€more€confusion.€Our€proposal,€seeŠ  [  ŠPart€D,€below,€preserves€the€graduated€approach€while€clearing€up€the€confusion.€Š üL  ŠĢą é ąWe€consider€in€turn€the€Commissionššs€standards€for€the€initial€duty€to€report,€theŠ Ž.  Šdetermination€of€whether€there€has€been€an€appropriate€response€to€the€initial€report,€and€theŠ Ļ Šrequirement€of€a€noisy€withdrawal.Š Ą ŠĢą é ąņņ1.€€Initial€report€to€the€CLO€or€CEO€€€[šš205.3(b)(1)]Š ¢ņ ŠóóĢą é ąSection€205.3(b)€describes€the€standard€for€the€initial€report€to€the€CLO€and€CEO€thisŠ „Ō Šway:€€€an€attorneyššs€duty€is€triggered€if€the€š šattorney€ņņbecomesóó€ņņawareóó€of€evidence€of€a€materialŠ uÅ Šviolation.šš€€€The€same€standard€appears€in€the€rule€regarding€the€reporting€obligations€ofŠ f¶ Šsubordinate€lawyers,€šš€205.5(c).€€Adding€yet€another€term€to€describe€an€attorneyššs€state€ofŠ W§ Šmind,€š šbecomes€awarešš€introduces€another€level€of€uncertainty€and€again€invites€confusionŠ H˜ Šon€what€level€of€š šknowledgešš€of€evidence€the€Commission€has€in€mind.€€We€thus€eliminateŠ 9‰ Šthat€term€from€our€proposal.Š *z ŠĢą é ąIf€š šbecomes€awarešš€is€intended€to€be€no€different€than€š šreasonably€believes,šš€why€useŠ  \ Šdifferent€words?€€If€š šbecomes€awarešš€is€intended€to€equal€š šreasonably€believesšš€then€the€latterŠ żM Šterm€should€have€been€used€in€both€places.€€We€reject€that€idea,€however,€for€the€reasonsŠ ī > Šstated€above€explaining€the€problems€with€trying€to€modify€what€š šreasonably€believesšš€meansŠ ß!/ Šelsewhere€in€the€law€and€the€termššs€natural€function€of€deterring€action.€€In€addition,€the€plainŠ Š"   Šmeaning€of€š šbecomes€awarešš€seems€at€war€with€š šshould€have€known,šš€which€we€view€asŠ Į#! Šcrucial€to€any€true€objective€standard.Š ²$ " ŠĢą é ąThe€Commissionššs€proposal€also€tries€to€avoid€the€ambiguity€of€š šbecomes€awarešš€byŠ ”&ä!$ Šbuilding€the€š šreasonably€believesšš€standard€into€the€definition€of€š ševidence€of€a€materialŠ …'Õ"% Šviolation,šš€saying€that€such€evidence€is€š šinformation€that€would€lead€an€attorney€reasonablyŠ v(Ę#& Što€believešš€that€a€material€violation€š šhas€occurred,€is€occurring,€or€is€about€to€occur.šš€€WeŠ g)·$' Šhave€already€stated€our€objection€to€the€use€of€a€variation€on€the€š šreasonably€believešš€standardŠ X*Ø%( Šand€the€shift€from€š ševidencešš€to€š šviolationšš€in€the€definition€of€š ševidence€of€a€materialŠ I+™&) Šviolation.šš€€Here€our€point€about€that€definition€is€somewhat€different:€it€is€possible€and€farŠ :,Š'* Špreferable€to€replace€š šbecomes€awarešš€with€language€that€would€make€it€unnecessary€forŠ ° Šlawyers€to€refer€to€the€definition€of€š ševidencešš€to€discover€some€description€of€the€requisiteŠ ”ń Šmental€state.€€The€definition€of€š ševidencešš€is€not€where€lawyers€would€expect€to€find€theŠ ’ā Štriggering€standard€of€knowledge€requiring€action.Š ƒÓ ŠĢņņą0 é ą2.€€Report€to€a€Qualified€Legal€Compliance€Committee€(QLCC)€€[šš€205.2(j)(5),ššŠ e µ Š205.3(c)]ŠV ¦é8"é8" ŠóóĢą é ąSection€205.2(j)5)€uses€the€š šreasonably€believesšš€trigger,€and€šš€205.3(c)€uses€theŠ 8 ˆ Šš šbecomes€awarešš€trigger€for€the€alternative€reporting€system€involving€a€QLCC€of€aŠ ) y  Šcompanyššs€board€of€directors€or€the€entire€board.€€We€have€already€commented€on€theŠ j  Šproblems€with€those€triggers€and€those€criticisms€carry€over€here.€€The€point€we€want€to€stressŠ  [  Šnow€is€that€the€alternative€reporting€procedures€authorized€by€šš€205.3(c)€should€include€theŠ üL  Šsame€triggering€language€that€is€applicable€to€reports€to€the€CLO€and€CEO€under€šš€205.3(b).€Š ķ=  ŠThat€is€especially€the€case€because€many€public€companies€are€likely€to€adopt€the€QLCCŠ Ž.  Šprocedure€for€reporting€evidence€of€material€violations€because€the€use€of€this€procedureŠ Ļ Šsatisfies€the€report€obligation€of€a€reporting€attorney,€relieves€that€attorney€of€the€duty€to€effectŠ Ą Ša€š šnoisy€withdrawal,šš€and€relieves€the€CLO€of€the€duty€to€conduct€his€own€inquiry.€€HavingŠ ± Ša€higher€standard€for€the€QLCC€procedure€would€not€be€faithful€to€the€statutory€text€andŠ ¢ņ Šlegislative€history€of€šš€307€of€Sarbanes„Oxley.€€See€Part€III€below,€discussing€further€howŠ “ć Šlimited€in€scope€the€š šnoisy€withdrawalšš€provision€is.€€In€short,€a€graduated€approach€to€stateŠ „Ō Šof€mind€at€this€stage€is€not€appropriate.Š uÅ ŠĢņņą0 é ą3.€What€constitutes€a€š šresponsešš€sufficient€to€relieve€a€lawyer€of€obligations€to€takeŠ W§ Šfurther€action?€€€[óó€ņņšš€205.2(b),€šš€205.3(b)(4),€šš205.2(b)(7),€šš205.2(b)(8)]óó€ŠH˜é8"é8" ŠĢą é ą€The€next€standard€used€by€the€Commission€occurs€in€šš€205.2(b),€which€definesŠ *z Šš šappropriate€responsešš€as€š ša€response€to€evidence€of€a€material€violation€.€.€.€that€provides€aŠ k Šbasis€for€an€attorney€reasonably€to€believešš€that€no€further€action€is€necessary.€€This€definitionŠ  \ Šis€critical€€because€an€š šappropriate€responsešš€to€a€report€relieves€the€attorney€of€further€stepsŠ żM Šunder€šš€205.3(b)(7),€whereas€a€failure€to€provide€an€appropriate€response€by€the€CLO€or€CEOŠ ī > Šunder€šš€205.3(b)(4),€or€by€the€issuer€under€šš€205.3(b)(8),€triggers€further€required€action.€€AŠ ß!/ Šnew€word€is€introduced€as€part€of€the€standard€here,€š šbasis,šš€which€again€creates€uncertaintyŠ Š"   Šabout€the€degree€of€knowledge€necessary€to€activate€the€trigger.Š Į#! ŠĢą é ąWe€recommend€modifying€the€definition€of€š šappropriate€responsešš€to€eliminate€theŠ £%ó # Šš šreasonably€believesšš€problem€and€to€emphasize€again€the€objective€nature€of€the€š šappropriateŠ ”&ä!$ Šresponsešš€judgment.€€Our€substitute€definition€can€be€found€in€Part€D,€below.Š …'Õ"% ŠĢą é ąWe€also€recommend€two€modifications€to€the€Comment€to€šš€205.2(b).€€First,€weŠ g)·$' Šrecommend€deleting€the€following€sentence€from€the€Comments:€š šThe€Commissionššs€intentŠ X*Ø%( Šis€to€permit€attorneys€to€exercise€their€judgment€.€.€.€so€long€as€their€determination€of€what€isŠ I+™&) Šan€ššappropriate€responsešš€is€objectively€reasonable.šš€The€Commission€has€no€choice€but€toŠ :,Š'* Šš špermitšš€lawyers€to€š šexercise€their€judgmentšš€š!š€that€is€what€lawyers€are€paid€to€do.€€GivenŠ ° Šthat€reality,€this€sentence€runs€the€risk€of€conveying€a€comforting€enforcement€message€to€theŠ ”ń Šeffect€that€the€Commission€will€be€loathe€to€second€guess€a€lawyerššs€š šjudgmentšš€that€aŠ ’ā Šresponse€is€š šappropriate.šš€€The€Comment€to€šš€205.2(b)€may€be€taken€as€suggesting€that€theŠ ƒÓ ŠCommission€will€be€doing€precious€little€enforcement€of€any€duty€imposed€on€lawyers€beyondŠ tÄ Šthe€initial€duty€to€report.€€Later,€we€will€discuss€the€problems€we€have€with€the€enforcementŠ e µ Šagenda€detailed€in€the€Commissionššs€proposed€šš€205.6(b).€€Here€we€are€simply€pointing€outŠ V ¦ Šthat€the€Commissionššs€enforcement€policy€should€be€in€one€place,€preferably€not€in€theseŠ G — Šrules,€and€wherever€it€is,€it€should€not€be€diluted€or€muddled€by€Comments€that€suggest€subtleŠ 8 ˆ Šor€not„so„subtle€modifications€of€that€policy.Š ) y  ŠĢą é ąSecond,€while€we€applaud€the€use€of€examples€in€the€Comment€to€šš€203.2(b)€andŠ  [  Šencourage€the€Commission€to€keep€them€in€the€final€publication€of€the€rule,€we€recommendŠ üL  Šthat€the€Commission€eliminate€references€that€rely€on€the€š šreasonable€beliefšš€standard,€e.g.,Š ķ=  Šš ša€lawyer€could€ņņreasonably€believeóó€that€the€issuerššs€response€was€appropriate€.€.€.€.šš€€Here€(asŠ Ž.  Šelsewhere€in€the€Comments)€we€urge€the€Commission€to€substitute€for€the€language€quotedŠ Ļ Šabove€a€formulation€that€emphasizes€the€objective€nature€of€the€rule.€€The€language€weŠ Ą Šsubstitute€for€š šreasonably€believesšš€in€our€revisions,€designed€to€clarify€the€objectivity€of€theŠ ± Šstandards,€should€be€used€throughout€the€Comments,€except€for€the€Comment€to€šš€205.3(b)(5)Š ¢ņ Šfor€the€reasons€discussed€above€in€Part€A,€above.ņ ņó óŠ “ć ŠĢą é ąTo€demonstrate€the€approach€we€have€in€mind€for€most€of€the€Comment,€consider€theŠ uÅ ŠComment€to€šš€205.2(b)€that€deals€with€reliance€on€an€outside€law€firmššs€detailed€andŠ f¶ Šreasonable€report€as€constituting€an€š šappropriate€responsešš€satisfying€the€attorneyššs€reportŠ W§ Šobligation.€€The€Comment,€instead€of€turning€on€the€lawyerššs€š šreasonable€beliefšš€that€the€legalŠ H˜ Šopinion€was€adequate,€should€employ€language€similar€to€the€language€we€propose€for€ššŠ 9‰ Š205.3(b)(1)€in€Part€D,€below.Š *z Š€€Š k Šą é ąWe€also€recommend€that€the€Commentššs€discussion€of€that€example€should€specifyŠ  \ Šthat€among€the€factors€that€would€be€considered€by€the€Commission€in€assessing€whether€anŠ żM Šoutside€law€firmššs€response€constitutes€an€appropriate€response€are€the€following:€theŠ ī > Šdescription€in€the€report€of€the€scope€of€the€investigation€undertaken€by€the€law€firm;€and€theŠ ß!/ Šrelationship€between€the€investigating€firm€and€the€issuer€or€CLO,€particularly€whether€theŠ Š"   Šfirm€had€done€any€work€on€the€transactions€or€filings€that€had€concerned€the€reporting€lawyerŠ Į#! Šor€on€any€similar€transactions€or€related€filings.€The€Comment€should€also€make€clear€that€theŠ ²$ " Šgreater€or€more€credible€the€evidence€triggering€the€report€to€the€CLO,€the€more€detailed€andŠ £%ó # Šindependent€the€investigation€into€the€matters€must€be€to€permit€a€reasonable€lawyer€toŠ ”&ä!$ Šconclude€that€no€further€action€is€required.€Š …'Õ"% Š€Ģņņą é ą4.€Bypassing€the€CLO€and€CEO€[šš€205.3(b)(5)]óóŠ g)·$' ŠĢą é ąSection€205.3(b)(5)€provides€that€if€an€attorney€has€a€duty€to€report€under€šš205.3(b)(1),Š I+™&) Šthe€attorney€may€bypass€reporting€to€the€CLO€and€CEO,€and€report€directly€to€the€board€orŠ :,Š'* Šrelevant€board€committee€as€described€in€šš205.3(b)(4),€if€the€attorney€š šreasonably€believesŠ ° Šthat€it€would€be€futile€to€report€evidence€of€a€material€violationšš€to€the€CLO€and€CEO.€€In€thisŠ ”ń Šone€instance,€we€agree€with€the€Commission€that€š šreasonably€believesšš€is€the€appropriateŠ ’ā Šstandard,€and€we€support€retaining€the€language€of€šš205.3(b)(5)€as€written.€€As€we€argued€inŠ ƒÓ ŠPart€A,€above,€the€š šreasonably€believesšš€standard€makes€sense€when€we€want€to€deter€conductŠ tÄ Šthat€a€lawyer€may€be€overly€eager€to€engage€in.€€It€is€plausible€to€assume€that€lawyers€mightŠ e µ Šbe€too€willing€to€bypass€the€CLO€and€CEO€and€report€directly€to€the€board.€€The€š šreasonablyŠ V ¦ Šbelievesšš€standard€here€would€emphasize€to€the€attorney€that€his€subjective€belief€thatŠ G — Šreporting€to€the€CLO€and€CEO€would€be€š šfutilešš€is€a€necessary,€but€not€sufficient,€basis€forŠ 8 ˆ Šbypassing€these€officers.€€For€the€š šreasonably€believesšš€standard€to€serve€this€purpose,€theŠ ) y  Štraditional€definition€should€be€stated€in€the€Comment.€€We€suggest€the€definition€from€theŠ j  ŠModel€Rules.Š  [  ŠĢą é ąņņ5.€€Notification€to€the€Commission€(š šnoisy€withdrawalšš)€[šš€205.3(d)]óóŠ ķ=  ŠĢą é ąYet€another€reporting€standard€governs€the€controversial€requirement€that€an€attorneyŠ Ļ Šor€members€of€the€QLCC€notify€the€Commission€of€an€ongoing€or€prospective€materialŠ Ą Šviolation€under€certain€circumstances.€€(We€take€up€the€issue€of€whether€š šnoisy€withdrawalššŠ ± Šshould€remain€in€these€rules€in€part€III,€below.)€€€Section€205.3(d)€of€the€proposed€rule€requiresŠ ¢ņ Šnotice€of€withdrawal€to€the€Commission€and€disaffirmance€of€tainted€documents€(togetherŠ “ć Šconstituting€š šnoisy€withdrawalšš)€only€when€š šthe€attorney€reasonably€believes€that€a€materialŠ „Ō Šviolation€ņ ņó óis€ongoing€or€is€about€to€occur€and€is€likely€to€result€in€substantial€injury€to€theŠ uÅ Šfinancial€interest€or€property€of€the€issuer€or€of€investors.šš€€We€support,€as€we€have€said,€theŠ f¶ ŠCommissionššs€graduated€approach,€requiring€more€to€trigger€notification€to€the€CommissionŠ W§ Šwithout€the€companyššs€consent€than€to€trigger€internal€reporting€to€the€CLO€or€to€the€board.€Š H˜ ŠĢą é ąWe€thus€support€the€inclusion€of€the€š šsubstantial€injuryšš€clause.€€But,€as€we€explainedŠ *z Šabove€in€detail,€we€oppose€the€š šreasonably€believesšš€standard€as€well€as€the€shift€fromŠ k Šš ševidencešš€to€š šviolations.šš€€We€propose€an€alternative€to€this€section€that€preserves€theŠ  \ ŠCommissionššs€graduated€approach€incorporating€the€š šsubstantial€injuryšš€clause€and€increasesŠ żM Šthe€š ševidencešš€trigger€for€the€š šnoisy€withdrawalšš€step€without€moving€to€a€š šviolationsššŠ ī > Šstandard.Š ß!/ ŠĢņņą é ą6.€€Permissive€Disclosure€[šššš€205.3(d)(2),€205.5(d)]óóŠ Į#! ŠĢą é ąTwo€rules€proposed€by€the€Commission€that€permit,€but€do€not€require,€action€by€theŠ £%ó # Šlawyer€raise€a€somewhat€different€trigger€issue.€€Section€205.3(d)(2)€permits€the€lawyer€toŠ ”&ä!$ Šmake€a€noisy€withdrawal€in€response€to€past€wrongdoing€if€the€lawyer€š šreasonably€believesŠ …'Õ"% Šthat€a€material€violation€has€occurred€and€is€likely€to€have€resulted€in€substantial€injury€to€theŠ v(Ę#& Šfinancial€interest€or€property€of€the€issuer€or€of€investors€but€is€not€ongoing.šš€€Section€205.5(d)Š g)·$' Špermits€a€subordinate€lawyer€to€bypass€a€supervising€attorney€and€make€disclosures€to€theŠ X*Ø%( Šclient€if€the€subordinate€attorney€š šreasonably€believes€that€a€supervisory€attorney€to€whom€heŠ I+™&) Šor€she€has€reported€evidence€of€a€material€violation€under€šš205.3(b)€has€failed€to€comply€withŠ :,Š'* Ššš205.3.šš€€In€both€cases,€we€believe€lawyers€would€be€reluctant€to€act€in€the€permissive€way,Š ° Šso€we€conclude,€consistent€with€our€argument€in€Part€A,€that€š šreasonably€believesšš€is€not€theŠ ”ń Šappropriate€standard,€and€we€advocate€substituting€the€objective€standard€that€we€set€forth€inŠ ’ā ŠPart€D.€€But€that€does€not€mean€that€permissive€disclosure€rules€should€be€framed€exactly€asŠ ƒÓ Šmandatory€disclosure€rules€are.€€With€mandatory€disclosure€rules,€the€Commission€must€beŠ tÄ Šconcerned€not€to€define€too€broadly€the€situations€in€which€the€prohibition€applies.€€WithŠ e µ Špermissive€disclosure€rules,€by€contrast,€the€Commissionššs€concern€should€be€the€opposite:Š V ¦ Što€avoid€ņņconstrainingóó€the€lawyerššs€discretion€too€much,€for€example€by€suggesting€that€thereŠ G — Šis€only€one€possible€conclusion€that€a€reasonable€attorney€would€reach.€€(In€fact,€restrictingŠ 8 ˆ Šthe€lawyerššs€discretion€too€much€under€permissive€rules€may€be€just€another€way€of€expandingŠ ) y  Šthe€prohibition€of€conduct€that€is€ņņnotóó€permitted.€€For€a€further€discussion€of€the€permissiveŠ j  Šdisclosure€rules€and€this€problem,€see€Part€III.C.€below)€€Thus,€in€our€proposed€revisions€inŠ  [  ŠPart€D.,€we€apply€the€objective€standard€to€what€an€attorney€š šwouldšš€conclude€for€mandatoryŠ üL  Šdisclosure€rules,€but€apply€the€objective€standard€of€what€an€attorney€š šcouldšš€conclude€for€theŠ ķ=  Špermissive€disclosure€rules€in€šššš€205.3(d)(2)€and€205.5(d).€€The€š šcouldšš€standard€makes€it€lessŠ Ž.  Šlikely€that€lawyers€choosing€to€exercise€their€discretion€to€make€the€permissive€disclosure€willŠ Ļ Šbe€second„guessed.Š Ą ŠĢņņD.€€Our€Proposed€Alternative€Standards€óóŠ ¢ņ ŠĢą é ąWe€suggest€alternative€language€to€describe€the€trigger€of€a€lawyerššs€initial€obligationŠ „Ō Što€report€to€the€CLO€or€CEO,€and,€more€broadly,€we€propose€changes€to€other€parts€of€this€ruleŠ uÅ Šthat€suggest€an€unauthorized€shift€from€an€š ševidencešš€standard€to€a€š šviolationsšš€standard.€€WeŠ f¶ Šdo€not€here€provide€rewrites€for€all€the€places€in€the€rules€where€we€believe€š šreasonablyŠ W§ Šbelievesššshould€be€changed.€€Instead€we€provide€exemplars,€concentrating€on€key€sections€ofŠ H˜ Šthe€rule€and€trust€that€they€will€suffice€to€make€it€clear€how€all€similar€provisions€should€beŠ 9‰ Šchanged.Š *z ŠĢą é ąOur€recommended€revision€of€šš€205.3(b)(1),€ņņDuty€to€report€evidence€of€a€materialŠ  \ Šviolationóó,€reads€as€follows:Š żM ŠĢą0 é ą(1)€€Ō‡&»Ü%XXŌŌ‡&~Œ%%&»ÜŌIf,€in€appearing€and€practicing€before€the€Commission€in€the€representation€of€anŠ ß!/ Šissuer,€an€attorneyņņ,€confronted€with€information€that€a€prudent€and€competentŠ Š"   Šattorney,€acting€reasonably€under€the€same€circumstances,€would€conclude€wasŠ ­#ż! Šcredible€evidenceóó€of€a€material€violation€by€the€issuer€.€.€.€[remainder€of€subsectionŠ Š$Ś" Šfollows€unchanged].Šg%· #é8"é8" ŠĢą é ąŌ#†&»Ü%%&~ŒŠÕ#ŌŌ#†X[X%&»ÜkÕ#ŌThe€Comments€to€the€rule€should€state€that€the€standard€is€a€totally€objective€one€thatŠ !'q"% Šis€governed€by€a€new€definition€of€š šprudent€and€competent€attorneyšš€that€substitutes€in€theŠ (b#& Šdefinitions€section€as€a€replacement€for€the€current€definition€of€š šreasonably€believes,šš€whichŠ )S$' Šshould€be€deleted.€€The€new€definition,€repositioned€alphabetically€with€later€definitions€re„Š ō)D%( Šlabeled,€would€read€as€follows:Š å*5&) ŠŌ‡&»Ü%XX[ŌŌ‡&~Œ%%&»ÜŌŠ Ö+&'* Šą0 é ąņņņņPrudent€and€competent€attorneyóó€means€an€attorney€who€possesses€the€skill,Š ° Šknowledge€and€prudence€of€attorneys€who,€acting€in€a€reasonable€manner,€provideŠ Ż Šthe€specialized€legal€services€in€question.óóŌ#†&»Ü%%&~ŒźŁ#ŌŌ#†X[X%&»ÜĖŁ#ŌŌ‡&»Ü%XX[ŌŠjŗé8"é8" ŠĢŌ#†X[X%&»ÜiŪ#Ōą é ąComments€to€the€new€definition€should€emphasize€that€the€attorney€is€not€viewed€asŠ $t Šan€ordinary€general€practitioner,€but€as€an€attorney€who€has€experience€and€knowledge€of€theŠ  e Šsame€practice€specialty€or€specialties€which€are€involved€in€the€particular€matter.€€Any€actionŠ  V Šor€non„action€by€attorneys€covered€by€these€rules€will€be€assessed€by€asking€what€a€reasonableŠ ÷ G Šlawyer,€€exercising€the€skill,€knowledge€and€prudence€characteristic€of€attorneys€performingŠ č 8 Šthe€same€activities,€would€have€decided€to€do€in€light€of€the€information€available€to€theŠ Ł )  Šparticular€lawyer€involved.€€If€such€a€lawyer€would€have€refused€to€perform€an€assignment€forŠ Ź   Ša€client€without€access€to€a€particular€piece€of€information,€the€attorneyššs€conduct€will€beŠ »  Šassessed€as€if€he€had€the€information€required€for€his€job.€€Otherwise,€there€is€the€chance€thatŠ ¬ü  Šcorporate€managers,€intent€on€wrongdoing,€would€deny€an€attorney€access€to€information€toŠ ķ  Šavoid€these€rules.€€The€scope€of€the€lawyerššs€assignment€from€the€client€will€be€relevantŠ ŽŽ  Šinsofar€as€it€affects€the€information€an€attorney€has€or€should€have,€but€it€will€not€otherwiseŠ Ļ  Šexcuse€an€attorney€from€the€operation€of€these€rules.€€That€is€necessary€to€avoid€the€problemŠ pĄ Šof€limiting€assignments€to€circumvent€the€Commissionššs€rules.Š a± ŠĢą é ąAn€attorneyššs€conduct€will€be€assessed,€not€in€hindsight,€but€by€asking€what€a€prudentŠ C“ Šand€competent€lawyer€would€have€done€at€the€time,€with€the€information€he€had€or€would€haveŠ 4„ Šdemanded€either€to€complete€the€assignment€competently€or€to€follow€up€on€facts€orŠ %u Šcircumstances€about€which€a€prudent€and€competent€attorney€would€have€inquired€furtherŠ f Šbefore€proceeding€with€his€assignment.€€For€guidance€on€what€information€the€CommissionŠ W Šwill€consider€as€known€to€an€attorney,€attorneys€should€be€referred€to€the€American€LawŠ ųH ŠInstituteššs€ņņRestatement€(Second)€of€Agencyó󀚚€9(l),€which€defines€notice€as€follows:Š é9 ŠĢą é ąą0 A ąŌ‡&»Ü%XX[ŌŌ‡&~Œ%%&»ÜŌA€person€has€notice€of€a€fact€if€he€knows€the€fact,€has€reason€to€know€it,Š Ė Šshould€know€it,€or€has€been€given€notification€of€it.Ō#†&»Ü%%&~Œ,å#ŌŌ#†X[X%&»Ü å#ŌŠØųA 8"A 8" ŠĢThe€decisional€law€employing€that€common€law€standard€should€be€consulted€by€lawyersŠ v Ę Šseeking€guidance.€€We€encourage€the€Commission€to€consider€incorporating€the€AgencyŠ g!· ŠRestatementššs€standard€just€quoted€in€the€body€of€these€rules.€€Š X"Ø  ŠĢą é ąWe€recommend€changing€šš€205.5(c)€to€conform€to€the€standard€we€advocate€forŠ :$Š" Ššš205.3(b)(1),€as€follows:Š +%{ # ŠĢą8 é ąŌ‡XœXXX[ŌŌ‡&~Œ%XXœŌA€subordinate€attorney€complies€with€šš€205.3€if€the€subordinate€attorneyņņ,€inŠ  ']"% Šthe€course€of€appearing€and€practicing€before€the€Commission,€is€confrontedŠ ź':#& Šwith€information€that€a€prudent€and€competent€attorneyóó,€acting€reasonablyŠ Ē($' Šunder€the€same€circumstances,€would€conclude€ņņwas€credibleóó€evidence€of€aŠ ¤)ō$( Šmaterial€violation€by€the€ņņissuer,€andóó€reports€ņņthis€evidenceóó€to€his€or€herŠ *Ń%) Šsupervising€attorney€under€šš€205.3(b).ņņóó€Ō#†&»Ü%%&~Œč#ŌŌ#†X[X%&»Ü;č#ŌŠ^+®&*éąéą ŠŠ ;,‹'+ Šą é ąWe€recommend€substituting€the€word€š šcrediblešš€in€front€of€š ševidencešš€everywhere€itŠ ° Šappears€in€this€rule.€€Š ”ń ŠĢą é ąWe€would€eliminate€šš€205.2(e)€and€substitute€in€the€right€alphabetical€order:Š ƒÓ ŠĢņņ[Applying€to€the€duty€to€report€evidence€of€a€material€violation€to€the€CLO,€CEO€or€QLCC:]óóŠ e µ ŠĢņņą8 é ąņņŌ‡&»Ü%XX[ŌŌ‡&~Œ%%&»ÜŌCredible€evidenceóó€means€information€that€a€prudent€and€competent€attorneyŠ G — Šwould€consider€sufficient€to€constitute€probable€cause€that€a€material€violationŠ $ t Šmay€have€occurred,€may€be€occurring,€or€may€be€about€to€occur.€€When€aŠ  Q  Šlawyer€is€hired€to€advocate€in€connection€with€past€conduct€in€which€thatŠ Ž .  Šlawyerššs,€or€his€law€firmššs,€services€were€not€used,€credible€evidence€does€notŠ »  Šinclude€evidence€of€past€wrongdoing€that€occurred€before€the€lawyerššsŠ ˜č  Šrepresentation€and€did€not€involve€the€use€of€the€lawyerššs€services.Ō#†&»Ü%%&~Œ½ģ#ŌŌ‡&~Œ%%&»ÜŌŌ#†XœX%&~Œžģ#ŌŌ‡&~Œ%XXœŌŠuÅ éąéą ŠŌ#†&»Ü%%&~ŒŒļ#ŌŌ#†X[X%&»ÜĪļ#ŌĢóóņņ[Applying€to€the€duty€to€report€to€notify€the€Commission€of€a€noisy€withdrawal:]ņņŠ C“  ŠóóĢą8 é ąņņŌ‡&»Ü%XX[ŌŌ‡&~Œ%%&»ÜŌCredible€and€substantial€evidenceóó€means€information€that€a€prudent€andŠ %u Šcompetent€attorney€would€consider€sufficient€to€make€it€more€likely€than€notŠ R Šthat€a€material€violation€may€have€occurred,€may€be€occurring,€or€may€beŠ ß/ Šabout€to€occur.€€When€a€lawyer€is€hired€to€advocate€in€connection€with€pastŠ ¼  Šconduct€in€which€that€lawyerššs,€or€his€law€firmššs,€services€were€not€used,Š ™é Šcredible€and€substantial€evidence€does€not€include€evidence€of€pastŠ vĘ Šwrongdoing€that€occurred€before€the€lawyerššs€representation€and€did€notŠ S£ Šinvolve€the€use€of€the€lawyerššs€services.Ō#†&»Ü%%&~Œóš#ŌŌ#†X[X%&»ÜŌš#Ōóó€Š0€éąéą ŠĢThe€last€sentence€of€these€two€definitions€is€intended€to€preserve€the€lawyerššs€advocacy€role.€Š b ŠSee€Part€VI.B.Š S ŠĢą é ą€The€Comments€to€both€sections€should€emphasize€that€the€first€standard€is€intendedŠ å5 Što€be€less€rigorous€than€the€second.€€Some€may€encourage€the€Commission€to€adopt€š šmoreŠ Ö& Šlikely€than€notšš€for€reporting€to€the€CLO€and€QLCC.€€We€think€that€is€too€high€a€standard.€Š Ē  ŠA€prudent€and€competent€attorney€should€inform€the€clientššs€managing€agents€and€entitiesŠ ø!  Šwhen€he€or€she€concludes€that€there€is€probable€cause€that€material€violations€of€law€areŠ ©"ł! Šoccurring,€have€occurred€or€will€occur.€€As€we€explained€above,€we€think€the€CLO€report€stageŠ š#ź" Šand€QLCC€report€stage€should€have€the€same€standard.€€Š ‹$Ū# ŠĢą é ąSome€may€encourage€the€Commission€to€use€š šclear€and€convincing€evidencešš€for€theŠ m&½!% Šš šnoisy€withdrawalšš€stage.€€That€standard€is€too€high,€given€the€likely€adoption€of€the€QLCCŠ ^'®"& Šreporting€procedures€by€many€companies€and€the€fact€that€this€stage€only€applies€to€violationsŠ O(Ÿ#' Šlikely€to€cause€ņņsubstantialóó€injury.€€Noisy€withdrawal€is€an€option€likely€to€be€exercised€in€veryŠ @)$( Šnarrow€circumstances.€€See€Part€III,€below,€explaining€how€narrow€the€š šnoisy€withdrawalššŠ 1*%) Šprovision€is€likely€to€be€in€practice.Š "+r&* ŠŠ ,c'+ Šą é ąOur€recommended€revision€of€šš€205.3(c)(1),€consistent€with€our€proposed€revision€toŠ ° Ššš€205.3(b)(1),€reads€as€follows:Š ”ń ŠĢŌ‡XœXXX[ŌŌ‡&~Œ%XXœŌą0 é ąŌ#†&»Ü%%&~Œū#ŌŌ#†X[X%&»Ü:ū#Ō(1)€€Ō‡&»Ü%XX[ŌŌ‡&~Œ%%&»ÜŌIf,€in€appearing€and€practicing€before€the€Commission€in€the€representation€of€anŠ ƒÓ Šissuer,€an€attorneyņņ,€confronted€with€information€that€a€prudent€and€competentŠ tÄ Šattorney,€acting€reasonably€under€the€same€circumstances,€would€conclude€wasŠ Q ” Šcredible€evidenceóó€of€a€material€violation€by€the€issuer€.€.€.€[remainder€of€subsectionŠ . ~ Šfollows€unchanged].Ō#†&»Ü%%&~ŒĻū#ŌŌ‡&~Œ%%&»ÜŌŠ [é8"é8" Šą0 é ąŠ é8"é8" ŠŌ#†&»Ü%%&~Œ¾ż#ŌŌ#†X[X%&»Ü°ū#Ōą é ąThe€Comments€explaining€the€standard€for€triggering€a€duty€to€report€would€track€theŠ Å   Šsame€issues€discussed€in€connection€with€the€identical€language€in€šš€205.3(b)(1).Š ¶   ŠĢą é ąOur€recommended€revision€of€šš€205.2(b)€reads€as€follows:Š ˜č  Šą8 é ąŠ éąéą Šą8 é ąŌ‡XœXXX[ŌŌ‡&~Œ%XXœŌņņAppropriate€responseóó€means€a€response€to€ņņcredibleóó€evidence€of€a€materialŠ zŹ  Šviolation€reported€to€appropriate€officers€or€directors€of€an€issuer€that€ņņwouldŠ W§  Šprovide€a€prudent€and€competent€attorney€with€a€reasonable€basis€to€believeóó:Š4„éąéą ŠŌ#†&»Ü%%&~ŒĻ’#ŌŌ‡&»Ü%%&»ÜŌŌ#†X[X%&»Üī’#ŌĢą é ąOur€recommended€revision€of€šš€205.3(d)(1)€reads€as€follows:Š R ŠĢą8 é ąŌ#†X[XXX[n#ŌŌ‡XœXXX[Ō(1)€Where€an€attorney€who€has€reported€evidence€of€a€material€violationŠ ä4 Š[to€a€CLO€or€CEO€and€does€not€receive€an€appropriate€response].€.€.€,Š Õ% Šņņand€a€prudent€and€competent€attorney€would€conclude€that€there€isŠ Ę Šcredible€and€substantial€evidence€that€a€material€violation€of€law€isŠ · Šongoing€or€is€likely€to€occur€and€is€now€causing€or€is€likely€to€causeŠ Øų Šóósubstantial€injury€to€the€financial€interest€or€property€of€the€issuer€or€ofŠ ™é Šinvestors:€.€.€.€.Ō#†X[XXXœ@#ŌŌ‡X[XXX[ŌŠŠŚéąéą ŠĢą é ąOur€recommended€revision€of€šš€205.3(d)(2)€reads€as€follows:Š l¼ ŠĢą8 é ąŌ#†X[XXX[¼#ŌŌ‡XœXXX[ŌWhere€an€attorney€who€has€reported€[evidence€of€a€material€violationŠ N ž Što€a€CLO€or€CEO€and€does€not€receive€an€appropriate€response]€.€.€.€,Š ?! Šandņņ€a€prudent€and€competent€attorney€could€conclude€that€there€isŠ 0"€  Šcredible€and€substantial€evidence€óóthat€a€material€violation€of€law€hasŠ !#q! Šoccurred€and€is€likely€to€have€resulted€in€substantial€injury€to€theŠ $b" Šfinancial€interest€or€property€of€the€issuer€or€of€investors€but€is€notŠ %S # Šongoing:€[the€attorney€may€make€a€ššnoisy€withdrawalšš].€.€.€.Ō#†X[XXXœŠ#ŌŌ‡X[XXX[ŌŠō%D!$éąéą ŠĢą é ąIt€is€important€that€the€Commission€make€clear€throughout€the€proposed€rules€thatŠ Ö'&#& Šš šongoingšš€injury€does€not€require€current€activity€by€the€issuer.€€For€example,€if€the€issuerŠ Ē($' Šprepared€and€submitted€in€the€past€a€prospectus€upon€which€current€investors€are€relying€toŠ ø)%( Šmake€investment€decisions,€every€day€that€the€prospectus€is€extant€and€investors€rely€on€it€isŠ ©*ł%) Ša€day€in€which€new€frauds€are€occurring.€€That€is€what€ongoing€fraud€has€always€meant€in€theŠ š+ź&* Šlaw€and€what€it€should€mean€here.€€For€example,€perjury€or€the€presentation€of€falseŠ ° Šdocuments€constitute€ongoing€fraud€on€the€tribunal€until€the€proceedings€are€complete€becauseŠ ”ń Šthe€court€and€the€jury€are€relying€on€that€material€to€assess€other€evidence€until€that€time.€€ForŠ ’ā Špurposes€of€the€Commissionššs€rules,€ongoing€material€violations€should€include€past€materialŠ ƒÓ Šviolations€that€invite€continuing€and€new€reliance€and€which€thus€involve€the€issuer€in€newŠ tÄ Šacts€of€fraud.€€Our€revision€of€šš€205.3(d)(1),€above,€reflects€that€understanding€of€š šongoingššŠ e µ Šand€that€understanding€should€be€uniform€throughout€the€rules€and€their€Comments.€€Š V ¦ ŠĢą é ąThis€sense€of€š šongoingšš€should€be€familiar€to€securities€lawyers€given€the€substanceŠ 8 ˆ Šof€the€law€of€securities€fraud,€and€these€rules€should€reflect€that€substantive€law,€not€contradictŠ ) y  Šit.€€Moreover,€this€understanding€of€the€ongoing€effects€of€past€wrong€should€be€familiar€toŠ j  Šall€lawyers.€€It€arises€whenever€a€crime,€such€as€the€possession€of€stolen€property,€isŠ  [  Šformulated€as€continuing€until€the€stolen€property€is€returned€to€the€its€rightful€owner€or€whenŠ üL  Ša€fugitive€from€justice€remains€at€large.€As€alluded€to€above,€trial€lawyers€encounter€aŠ ķ=  Šcontinuing€obligation€when€they€have€presented€evidence€that€they€later€come€to€know€is€false.€Š Ž.  ŠSee€ABA€Model€Rule€3.3(a)(3)€(requiring€a€lawyer€to€take€reasonable€remedial€measures,Š Ļ Šincluding€disclosure€to€the€tribunal,€to€correct€prior€submission€of€false€evidence).€€The€latterŠ Ą Šrule€includes€a€very€high€triggering€standard,€i.e.,€that€the€lawyer€comes€to€"know"€that€theŠ ± Ševidence€is€false,€but€the€rule€operates€only€in€the€advocacy€setting,€not€when€lawyers€areŠ ¢ņ Šacting€as€advisors€(see€part€VI.A,€below,€on€the€difference€between€the€two€roles).ą ±! ąŠ “ć Šą8 é ąą8A éąéąąŠ A ˆA ˆ Š€Ģą é ąFinally,€our€recommended€revision€of€šš€205.5(d)€reads€as€follows:Š f¶ ŠŠ Šą8 é ąŌ#†X[XXX[-#ŌŌ‡XœXXX[ŌņņA€subordinate€attorney€may€take€the€steps€.€.€.€if€a€prudent€andŠ H˜ Šcompetent€subordinate€attorney€could€conclude€that€a€supervisoryŠ 9‰ Šattorney€to€whom€he€or€she€has€reported€evidence€of€a€materialŠ *z Šviolation€under€šš€205.3(b)€has€failed€to€comply€with€šš205.3.óóŠkéąéą ŠŌ#†X[XXXœž#Ōņ ņó ó€Š  \ Šņ ņą@  äąII.€ó ó€ņ ņEnforcement€Policy€(Sanctions)ˆŠ żM ŠĢó óą é ąSection€205.6€is€entitled€Sanctions.€€Section€(b)€of€that€provision€is€not€about€sanctions.€Š ß!/ ŠRather,€it€is€a€restatement€of€the€SECššs€current€enforcement€policy.€€As€long€as€the€SECššsŠ Š"   Šenforcement€policy€remains€unchanged,€there€is€no€need€to€restate€it€here.€€If€it€does€change,Š Į#! Šas€the€Comments€to€this€rule€remind€people€it€might,€the€Commission€would€have€to€reviseŠ ²$ " Ššš€205.6,€which€would€create€unnecessary€paperwork€and€be€a€waste€of€staff,€time€andŠ £%ó # Šresources.€€Moreover,€unless€the€Commission€intends€to€revise€all€its€rules€to€include€anŠ ”&ä!$ Šenforcement€section,€it€signals€a€unique€attitude€toward€this€rule€to€include€an€enforcementŠ …'Õ"% Šstatement€here.€€Š v(Ę#& ŠĢą é ąIn€general,€neither€laws€nor€regulations€include€provisions€detailing€the€vigor€withŠ X*Ø%( Šwhich€the€state€will€enforce€the€substantive€legal€provision€laid€out€in€the€law€or€regulation.€Š I+™&) ŠAnd€for€good€reasons.€€First,€enforcement€policies€often€change,€not€rule€by€rule,€but€over€aŠ :,Š'* Šbroad€range€of€rules.€€Second,€few€laws€or€rules€are€enforced€to€their€full€extent;€resourceŠ ° Šlimitations€as€well€as€policy€considerations€dictate€that.€€Nonetheless,€including€a€rule€aŠ ”ń Šstatement€that€only€š šhighly€unreasonablešš€violations€will€be€the€subject€of€SEC€proceedingsŠ ’ā Šconfuses€and€undercuts€any€higher€standard€of€conduct€articulated€in€the€body€of€the€rule.€€ToŠ ƒÓ Šsay€throughout€these€rules€that€a€lawyer€is€required€to€do€š šxšš€when€some€objective€test€ofŠ tÄ Šreasonableness€has€been€met€and€to€end€with€a€rule€that€seems€to€require€something,€not€ofŠ e µ Šlawyers€but€of€the€Commission,€namely,€to€require€toleration€of€single€instances€ofŠ V ¦ Šunreasonable€conduct,€is€to€suggest€that€the€earlier€provisions€of€the€rule€do€not€mean€whatŠ G — Šthey€say.Š 8 ˆ ŠĢą é ąIn€addition,€we€believe€the€Commission€should€revisit€its€enforcement€policy€in€lightŠ j  Šof€šš€307€and€these€new€rules.€€The€policy€may€not€be€appropriate€in€this€particular€regulatoryŠ  [  Šcontext€nor€for€that€matter€in€related€contexts,€given€the€Sarbanes„Oxley€legislation€and€theŠ üL  Šrevelations€of€the€last€year.€€The€Commission,€as€its€Commissioners€and€staff€know€all€tooŠ ķ=  Šwell,€has€limited€resources.€€Enforcing€rules€designed€to€deter€violations€of€the€securities€laws,Š Ž.  Šlike€the€rules€mandated€by€šš€307,€may€be€one€of€the€most€cost€effective€means€for€your€agencyŠ Ļ Što€carry€out€its€broader€responsibilities.€€Indeed,€we€believe€that€is€so.€€At€the€least,€however,Š Ą Šthe€Commission€should€take€the€time€to€review€its€enforcement€policies€in€this€post„EnronŠ ± Šworld.€€The€Commissionššs€enforcement€policy,€we€repeat,€is€a€matter€of€record.€€It€needs€noŠ ¢ņ Šrepeating€here,€particularly€given€the€costs€of€doing€so,€not€the€least€of€which€is€to€muddy€theŠ “ć Šmeaning€of€the€standards€articulated€elsewhere€in€these€rules.Š „Ō ŠĢą é ąOne€issue€relevant€to€sanctions€and€enforcement€policy€š!š€the€desirability€of€a€ruleŠ f¶ Šauthorizing€disciplinary€proceedings€against€a€law€firm€as€distinct€from€individual€attorneysŠ W§ Šš!š€is€discussed€in€Part€VII,€below.Š H˜ ŠĢą é ąWe€therefore€urge€the€Commission€to€eliminate€all€of€the€language€of€proposed€ššŠ *z Š205.6(b)(2).€€The€following€should€be€substituted€in€its€place:Š k ŠĢą0 é ąŌ‡&»Ü%XX[ŌŌ‡&~Œ%%&»ÜŌ(b)€ņņNothing€in€this€rule€limits€the€Commissionššs€authority€to€proceed€against€attorneysŠ żM Šunder€any€other€law,€regulation€or€enforcement€authority.€€No€other€CommissionŠ Ś * Šaction€is€necessary€as€a€prerequisite€of€action€under€the€provisions€of€šš€205.€€Nor€isŠ ·! Šaction€under€this€rule€necessary€as€a€prerequisite€for€any€other€form€of€enforcementŠ ”"ä  Šauthorized€by€any€other€Commission€authority€or€law.óóŌ#†&»Ü%%&~ŒN%#ŌŌ#†X[X%&»Ü/%#ŌŠq#Į!é8"é8" ŠĢą é ąWe€recommend€you€adopt€the€above€new€paragraph€(b)€along€with€explanatoryŠ ?% # Šcomments€to€make€it€clear€that€the€provision€of€disciplinary€proceedings€brought€under€theŠ 0&€!$ Šrules€implementing€šš€307€of€Sarbanes„Oxley€not€be€taken€as€restricting€the€CommissionššsŠ !'q"% Šauthority€to€proceed€against€attorneys€for€the€violation€of€other€SEC€regulations,€e.g.,€anŠ (b#& Šaiding€and€abetting€proceeding€or€an€injunction€proceeding.€€The€creation€of€new€sanctionsŠ )S$' Šshould€not€affect,€or€be€a€predicate€to,€the€use€of€other€enforcement€power€of€the€Commission.€Š ō)D%( ŠAlternatively,€this€could€be€expressed€in€a€new€paragraph€(d)€of€šš€205.6€stating:€š šNothing€inŠ å*5&) Šthis€part€alters€or€affects€the€Commissionššs€authority€to€proceed€against€attorneys€or€otherŠ Ö+&'* Šagents€of€issuers€under€other€regulations,€law€or€authority.šš€€We€believe€that€paragraph€(c)€of€Š ° Ššš€205.6€should€remain€unchanged.€Š ”ń ŠĢņ ņą@„„äąIII.€€Noisy€Withdrawal€and€Discretion€to€Disclose€Confidences€to€the€SECó óˆŠ ƒÓ Š€Ģą é ąSeveral€major€issues€are€raised€in€connection€with€š šnoisy€withdrawalšš€and€disclosureŠ e µ Šof€confidential€information€without€the€companyššs€consent.€€First,€what€standard€shouldŠ V ¦ Štrigger€an€attorneyššs€required€withdrawal,€require€the€attorney€to€signal€the€withdrawal€by€aŠ G — Šstatement€to€the€Commission€that€the€withdrawal€was€for€professional€considerations,€andŠ 8 ˆ Špermit€the€attorney€to€disclose€confidential€information€to€the€Commission€or€to€third€parties?€Š ) y  ŠSecond,€should€the€Commissionššs€rule€deal€with€each€of€these€actions€or€be€limited€to€š šnoisyŠ j  Šwithdrawalšš€(withdrawal€accompanied€by€a€notice€to€the€Commission€that€withdrawal€was€forŠ  [  Šprofessional€considerations€and€disaffirmance€of€any€tainted€filings€or€documents)?€€Third,Š üL  Šshould€the€attorneyššs€action€be€permissive€or€mandatory?€€And€fourth,€what€effect€should€theŠ ķ=  ŠCommissionššs€rule€have€on€state€ethics€rules€which€require€withdrawal€in€the€relevantŠ Ž.  Šcircumstance,€but€either€permit,€require€or€forbid€further€action€that€may€or€does€have€theŠ Ļ Šeffect€of€revealing€client€confidential€information?Š Ą ŠĢą é ąWe€dealt€in€the€prior€section€of€these€comments€with€the€standard€triggering€a€lawyerššsŠ ¢ņ Šduty€to€take€action€without€a€clientššs€consent€that€may€have€the€collateral€effect€of€signalingŠ “ć Šor€disclosing€confidential€information.€€We€deal€here€with€the€second€and€third€issues€and€inŠ „Ō Šthe€next€part€with€the€fourth€issue,€preemption€of€state€ethics€rules.€Š uÅ ŠĢņņA.€Noisy€Withdrawal€€[šš€205.3(d)]Š W§ ŠóóĢą é ąSection€205.3(d)€requires€a€reporting€attorney€who€has€not€received€an€appropriateŠ 9‰ Šresponse€in€a€reasonable€time€and€who€concludes€that€the€reported€violation€is€either€ongoingŠ *z Šor€is€about€to€occur€and€is€likely€to€result€in€substantial€injury€to€the€company€or€investors,€toŠ k Štake€three€actions:€(1)€withdraw€from€the€representation€(if€the€attorney€is€not€an€insideŠ  \ Šlawyer);€(2)€notify€the€SEC,€within€one€business€day,€that€the€withdrawal€is€based€onŠ żM Šprofessional€considerations;€and€(3)€disaffirm€any€false€or€materially€misleading€submissionŠ ī > Što€the€SEC€that€the€attorney€has€participated€in€preparing.€€If€the€violation€has€previouslyŠ ß!/ Šoccurred,€but€has€no€ongoing€effect,€a€reporting€attorney€would€be€permitted,€but€not€required,Š Š"   Što€withdraw,€notify€the€SEC€and€disaffirm€tainted€filings€under€šš€205.3(d)(2).Š Į#! Šņ ņĢó óą é ąWe€support€the€proposed€rulesšš€narrowly„circumscribed€rule€requiring€outside€lawyersŠ £%ó # Što€make€noisy€withdrawal€to€the€Commission€in€circumstances€that€will,€as€the€CommissionŠ ”&ä!$ Šrightly€notes,€be€rare.Š …'Õ"% ŠĢņņą0 é ą1.€€History€of€withdrawal€and€disclosure€in€client€fraud€situationsŠg)·$'é8"é8" ŠĢą é ąóóNoisy€withdrawal€is€permitted€under€the€ethics€rules€of€almost€every€state.€€TheŠ I+™&) Šcomments€by€the€Commission€mention€the€ABAššs€Canons€of€Professional€Ethics€(1908„1969),Š :,Š'* Šwhich€required€lawyers€to€disclose€ongoing€client€fraud,€at€least€when€the€lawyerššs€servicesŠ ° Šhad€been€used€to€perpetrate€the€fraud.€€That€continued€to€be€the€ABAššs€position€after€1969,Š ”ń Šwhen€the€ABAššs€next€rendition€of€model€ethics€rules€was€adopted.€€€The€ABAššs€Model€CodeŠ ’ā Šof€Professional€Responsibility,€DR€7„102(B)(1),€as€originally€drafted€and€adopted€by€the€ABAŠ ƒÓ Šin€1969,€not€only€allowed,€it€required,€lawyers€to€disclose€their€clientsšš€frauds€in€which€theŠ tÄ Šlawyersšš€services€had€been€used.€€Moreover,€that€provision€with€its€requirement€of€disclosureŠ e µ Šwas€the€law€in€almost€every€state€in€the€country€until€1974€and€in€all€but€about€a€dozen€or€soŠ V ¦ Šstates€until€the€late€1980s.€€Š G — ŠĢą é ąIn€1974,€the€ABA€amended€DR€7„102(B)(1)€to€add€the€words€š šexcept€if€privilegedššŠ ) y  Što€the€end€of€the€rule€and€proceeded€in€short€order€to€interpret€the€word€š šprivilegešš€to€includeŠ j  Šall€confidential€information,€not€just€material€covered€by€the€attorney„client€privilege.€SeeŠ  [  ŠABA€Formal€Op.€341€(1975).€€The€combination€of€the€amendment€and€the€opinion€interpretingŠ üL  Šit€rendered€DR€7„102(B)(1)€a€rule€whose€meaning€was€at€war€with€its€text.€€A€š šshall€discloseššŠ ķ=  Šrule€was€transformed€in€this€circuitous€manner€to€a€š šshall€not€disclosešš€provision.€€The€historyŠ Ž.  Šis€important€because€the€transformation€by€the€ABA€of€DR€7„102(B)(1)€was€motivated€by€theŠ Ļ Šbarššs€resistance€to€the€SECššs€actions€in€the€ņņNational€Student€Marketingóó€case,€457€F.€Supp.€682Š Ą Š(D.D.C.1978),€in€which€the€Commissionššs€enforcement€division€argued€that€the€securities€lawsŠ ± Šdemanded€precisely€what€the€ethics€rules€of€most€states€and€the€ABA€required:€disclosure€ofŠ ¢ņ Šclient€fraud€when€efforts€to€get€the€client€to€rectify€ongoing€fraud€failed.€€The€ABA€wasŠ “ć Šapparently€comfortable€with€DR€7„102(B)(1)ššs€required€disclosure€as€long€as€no€one€inŠ „Ō Šauthority€sought€to€sanction€lawyers€who€did€not€do€what€the€rule€insisted€they€must€do.€Š uÅ ŠWhen€the€Commission€demanded,€in€effect,€that€lawyers€live€up€to€the€principles€articulatedŠ f¶ Šin€ABA€rules€and€in€state€law,€the€ABA€abandoned€the€principle€it€had€long€articulated.Š W§ ŠĢą é ąBut€the€states€were€not€quick€to€follow€the€ABAššs€departure€from€the€traditionalŠ 9‰ Šunderstanding.€€Of€the€over€40€states€that€had€adopted€DR€7„102(B)(1)€in€its€original€form,Š *z Šonly€14€were€persuaded€by€the€ABA€to€change€to€a€š šshall€not€disclosešš€rule.€€The€ABA,Š k Šhowever,€fought€on€in€1983,€adopting€Model€Rule€1.6€in€1983,€which€is€a€š šshall€not€discloseššŠ  \ Šrule€insofar€as€client€fraud€is€concerned.€This€despite€the€fact€that€the€states€hadŠ żM Šoverwhelmingly€rejected€the€ABAššs€rewriting€of€DR€7„102(B)(1)€to€the€same€effect.€€TheŠ ī > ŠABA€should€not€have€been€surprised€that€most€states€rejected€its€new€position€on€client€fraud:Š ß!/ Šsilent€withdrawal€as€the€only€permitted€response€to€client€fraud€situations,€softened€by€theŠ Š"   Šš šnoisy€withdrawalšš€comment.€€The€high€courts€of€the€states,€charged€with€primaryŠ Į#! Šresponsibility€for€the€maintenance€of€an€independent,€vigorous€and€trustworthy€legalŠ ²$ " Šprofession,€could€not€be€persuaded€by€arguments€that€the€bar€should€€abandon€its€longstandingŠ £%ó # Šposition€that€a€lawyer€should€disclose€confidential€information€to€prevent€or€rectify€a€clientššsŠ ”&ä!$ Šongoing€or€prospective€fraud.Š …'Õ"% ŠĢą é ąThe€Commissionššs€proposed€rules€do€not€ņņrequire€óódisclosure€of€confidentialŠ g)·$' Šinformation€to€the€Commission€or€to€third€parties.€€š šNoisy€withdrawalšš€is€required€only€inŠ X*Ø%( Šlimited€circumstances;€and€neither€the€ABA€nor€the€Commission€treat€notice€of€withdrawalŠ I+™&) Šand€disaffirmance€of€tainted€documents€as€a€disclosure€of€confidential€information.€€TheŠ :,Š'* ŠŃ—-Ńā āŲŲā āŃ  ŃCommissionššs€rule€do€not€go€as€far€as€the€ABA€itself€went€for€most€of€that€organizationššsŠ ° Šhistory.€€Nothing€in€the€ABAššs€own€Model€Rules€prohibits€lawyers€from€complying€with€theŠ ”ń ŠCommissionššs€rule.€€Indeed,€the€Comment€to€Model€Rule€1.6,€adopted€by€the€ABA€House€ofŠ ’ā ŠDelegates€in€1984€and€still€in€force,€either€requires€or€permit€lawyers€to€withdraw€noisily€inŠ ƒÓ Šmore€situations€than€those€contemplated€by€the€SECššs€proposed€rule.€€Comment€[14]€to€RuleŠ tÄ Š1.6€of€the€ABA€Model€Rules€as€amended€in€February€2002€provides:Š e µ ŠĢą0 é ąą A ąIf€the€lawyerššs€services€will€be€used€by€the€client€in€materially€furthering€aŠ G — Šcourse€of€criminal€or€fraudulent€conduct,€the€lawyer€must€withdraw,€as€stated€in€RuleŠ 8 ˆ Š1.16(a)(1).€€After€withdrawal€the€lawyer€is€required€to€refrain€from€making€disclosuresŠ ) y  Šof€the€clientššs€confidences,€except€as€otherwise€permitted€in€Rule€1.6.€€Neither€thisŠ j  ŠRule€nor€Rule€1.8(b)€nor€Rule€1.16(d)€prevents€the€lawyer€from€giving€notice€of€theŠ  [  Šfact€of€withdrawal,€and€the€lawyer€may€also€withdraw€or€disaffirm€any€opinion,Š üL  Šdocument,€affirmation€or€the€like.€.€.€.Šķ= é8"é8" ŠĢSee€also€ABA€Formal€Op.€92„366€(1992)€(amplifying€and€explaining€the€ABAššs€š šnoisyŠ Ļ Šwithdrawalšš€comment€and€justifying€notice€of€withdrawal€and€disaffirmance€as€implied€fromŠ Ą Šthe€lawyerššs€duty€to€avoid€assisting€a€clientššs€crime€or€fraud,€prohibited€by€Rule€1.2(d)).€€Š ± ŠĢą é ąThe€Commissionššs€noisy€withdrawal€provision,€like€the€ABA€view€of€its€Model€Rules,Š “ć Škicks€in€after€the€lawyer€has€been€ņņrequiredóó€to€resign€in€an€ongoing€or€prospective€client€fraudŠ „Ō Šsituation.€€The€Commissionššs€rule€goes€further€in€only€one€respect:€the€proposed€CommissionŠ uÅ Šrule€is€explicit€in€requiring€all€of€the€actions€in€question€š!š€withdrawal,€notice€of€withdrawal,Š f¶ Šand€disaffirmance€of€any€filing€or€document€tainted€by€the€clientššs€prior€filings€orŠ W§ Šrepresentations€š!š€€actions€that€the€ABA€ethics€opinion€says€are€sometimes€required€to€avoidŠ H˜ Ša€violation€of€Rule€1.2(d).Š 9‰ ŠĢņņą0 é ą2.€€Noisy€withdrawal€is€consistent€with€šš€307Šké8"é8" ŠóóĢą é ąThe€noisy€withdrawal€provision€does€not€overstep€the€SECššs€legislative€mandate.€Š żM ŠSection€301€ņņrequires€óóthe€Commission€to€š šissue€rules€setting€forth€the€minimum€standards€ofŠ ī > Šprofessional€conduct€for€attorneysššņņ€includingóó€a€rule€requiring€lawyers€to€report€illegal€conductŠ ß!/ Šup€the€corporate€chain€of€command.€€Yes,€Congress€could€have€required€noisy€withdrawal€toŠ Š"   Šthe€Commission€or€disclosure,€but€it€is€significant€that€the€statute€does€not€remove€disclosureŠ Į#! Što€the€Commission,€no€less€noisy€withdrawal,€from€the€regulatory€options€open€to€the€SEC.€Š ²$ " ŠCongress€surely€understood€that€šš€307€gave€the€agency€discretion€to€expand€on€the€up„the„Š £%ó # Šladder€rule:€€the€conferees€were€lobbied€on€these€matters€by€the€ABA.Š ”&ä!$ ŠĢą é ąSome€have€argued€that€at€least€one€of€the€sponsors€of€šš€307€said€that€š šdisclosurešš€toŠ v(Ę#& Šthe€Commission€was€not€his€aim.€€Whatever€their€aim,€the€amendment€passed€by€both€housesŠ g)·$' Šof€Congress€does€nothing€to€prevent€the€Commission€from€requiring€outright€disclosure€to€itŠ X*Ø%( Šof€client€fraud,€and€the€Commission€has€stopped€far€short€of€that€by€only€requiring€notificationŠ I+™&) Što€the€Commission€of€the€fact€that€the€attorney€has€withdrawn,€an€action€that€is€not€treated€asŠ :,Š'* Ša€disclosure€of€confidences.€€Š ° ŠĢņņą0 é ą3.€€Why€noisy€withdrawal€is€necessary€for€the€proper€working€of€the€up„the„ladderŠ ’ā ŠrequirementóóŠƒÓé8"é8" ŠĢą é ąSome€take€€the€position€that€mandating€noisy€withdrawal€is€not€necessary€and€thatŠ e µ Šsilent€withdrawal€without€any€signal€to€the€Commission€should€suffice,€at€least€for€thoseŠ V ¦ Šlawyers€who€have€not€been€in€recent€contact€with€the€agency.€€We€disagree.€€We€believe€theŠ G — Šš šnoisy€withdrawalšš€provision€is€an€important,€necessary,€and€well„advised€proposal.€€In€thoseŠ 8 ˆ Šrare€instances€when€the€highest€authority€with€power€to€act€on€behalf€of€a€client€insists€onŠ ) y  Šcontinuing€an€ongoing€fraud€or€pursuing€plans€to€commit€a€fraud€in€the€future,€requiringŠ j  Šnothing€more€than€the€resignation€of€the€lawyer€who€has€tried€in€vain€to€stop€this€activity€doesŠ  [  Šnothing€to€protect€shareholders€and€investors.€€The€fraud„doing€company€is€free€to€continueŠ üL  Šbilking€investors€until€the€next€lawyer€has€to€withdraw€silently€and€then€the€game€beginsŠ ķ=  Šagain.€€In€contrast,€imposing€a€duty€on€the€first€lawyer€to€make€noisy€withdrawal€to€theŠ Ž.  ŠCommission€gives€the€fraud„doing€client„board€every€incentive€to€comply€with€the€law€toŠ Ļ Šavoid€the€noise.€€In€the€hands€of€lawyers€dedicated€to€following€the€law,€including,€of€courseŠ Ą Šthe€regulations€of€this€agency,€we€find€it€difficult€to€imagine€a€circumstance€in€which€a€boardŠ ± Šwould€choose€noise€over€voluntary€compliance.€€Š ¢ņ ŠĢņņą0 é ą4.€€Why€all€the€controversy?óóŠ„Ōé8"é8" ŠĢą 9 ąą ‘ ąą é ąGiven€how€rarely€noisy€withdrawal€would€even€need€to€be€threatened,€no€less€used,Š f¶ Šit€is€worth€addressing€just€what€has€gotten€the€ABA€and€many€securities€lawyers€so€exercised.€Š W§ ŠArguments€are€made€that€the€noisy€withdrawal€requirement€(or€the€minimum€report„within„Š H˜ Šthe„organization€rule€mandated€by€Congress)€will€come€between€lawyers€and€clients,€makingŠ 9‰ Šit€less€likely€that€clients€will€confide€in€securities€lawyers.€€These€arguments€are€unpersuasive.€Š *z ŠThe€ethics€rules€of€most€states€permit€(and€four€require)€lawyers€to€disclose€confidentialŠ k Šinformation€to€prevent€or€rectify€a€clientššs€fraud.€€No€lawyer€is€arguing€that€the€existence€ofŠ  \ Šthis€option€has€ruined€lawyer„client€communication€or€that€the€attorney„client€relationship€hasŠ żM Šbeen€destroyed€in€the€four€states,€including€Florida,€New€Jersey€and€Virginia,€that€ņņrequireŠ ī > Šdisclosureóó,€not€mere€noisy€withdrawal,€in€these€client€fraud€situations.€€The€attorney„clientŠ ß!/ Šprivilege€in€every€jurisdiction€provides€that€conversations€between€clients€and€lawyersŠ Š"   Š(including€communications€between€boards€of€directors€and€corporate€counsel)€are€notŠ Į#! Šprotected€by€the€privilege€when€the€client€(or€its€agents,€the€board)€is€using€the€lawyer€toŠ ²$ " Šcommit€a€crime€or€fraud.€€If€lawyer„client€communications€can€withstand€all€of€that,€theŠ £%ó # Šargument€that€they€will€be€destroyed€or€seriously€impaired€by€the€SECššs€very€limited€noisyŠ ”&ä!$ Šwithdrawal€provision€is€nothing€more€than€hyperbole.Š …'Õ"% ŠĢą é ąThe€Commissionššs€graduated€approach,€requiring€more€evidence€to€trigger€noisyŠ g)·$' Šwithdrawal€than€internal€reporting€by€the€lawyer,€shows€just€how€moderate€the€CommissionššsŠ X*Ø%( Šapproach€is€in€this€rule.€€The€Commission€could€have€gone€further.€€We€are€not€sure,€however,Š I+™&) Šthat€going€further€is€necessary:€only€time€will€tell.€€That€the€Commission€has€begun€soŠ :,Š'* Šconservatively€demonstrates€just€how€much€care€the€agency€is€taking€to€be€sensitive€to€theŠ ° Šexaggerated€concerns€of€some€members€of€the€securities€bar€and€the€ABA.€€Lawyers€whoŠ ”ń Šoppose€this€provision€purport€to€be€acting€in€their€clientsšš€best€interest,€out€of€loyalty€and€inŠ ’ā Škeeping€with€the€highest€traditions€of€the€bar.€€We€respectfully€remind€our€colleagues€of€theŠ ƒÓ Šbar€that€our€highest€traditions€required€us€to€expose€clients€who€use€our€services€to€break€theŠ tÄ Šlaw.€€Managers€and€directors€are€not€the€clients€of€corporate€entities;€€their€shareholders€andŠ e µ Šinvestor€organizations€are€not€complaining€about€the€noisy€withdrawal€rule.€€The€clients€areŠ V ¦ Šcompanies€like€Enron,€Adelphia,€Global€Crossing,€Tyco,€etc.,€whose€lawyersšš€made€no€noiseŠ G — Šand€did€not€withdraw.€€Those€clients€are€now€bankrupt€and€the€shareholdersšš€investmentŠ 8 ˆ Šlargely€worthless.Š ) y  ŠĢņņB.€€Use€of€the€Alternative€Reporting€Procedures€(QLCC)€Is€Likely€to€Limit€the€Number€ofŠ  [  ŠSituations€in€Which€Attorneys€Will€Be€Required€to€Make€a€š šNoisy€Withdrawalšš€[šš€205.3(c)]óóŠ üL  ŠĢą é ąThe€heated€reaction€of€some€members€of€the€bar€to€the€noisy€withdrawal€provision€ofŠ Ž.  Ššš€205.3(d)€has€ignored€the€practical€reality€that€many€or€most€large€public€companies€willŠ Ļ Šadopt€the€alternative€reporting€procedures€provided€in€šš€205.3(c).€€The€latter€section€permitsŠ Ą Ša€company€to€establish€a€qualified€legal€compliance€committee€(QLCC)€composed€of€at€leastŠ ± Šone€member€of€the€companyššs€audit€committee€and€two€or€more€independent€directors€toŠ ¢ņ Šinvestigate€reports€of€material€violations.€€Š “ć ŠĢą é ąThe€creation€of€a€QLCC€has€important€effects€on€the€reporting€and€other€obligationsŠ uÅ Šof€inside€and€outside€lawyers.€€First,€an€attorney€satisfies€the€initial€report€obligation€byŠ f¶ Šreporting€the€material€violation€to€the€QLCC.€€Second,€the€reporting€attorney€no€longer€hasŠ W§ Ša€duty€to€make€a€š šnoisy€withdrawalšš€under€šš€205.3(c).€€Third,€a€CLO€who€receives€a€reportŠ H˜ Šof€a€material€violation€may€refer€the€report€to€the€QLCC,€shifting€the€responsibility€to€conductŠ 9‰ Šan€inquiry€to€the€QLCC.€€Fourth,€once€a€material€violation€has€been€reported€to€the€QLCC,€theŠ *z Šobligation€to€notify€the€Commission€of€the€material€violation,€when€it€has€not€beenŠ k Šappropriately€addressed€by€the€board,€shifts€to€the€members€of€the€QLCC;€the€reporting€lawyerŠ  \ Š(other€than€the€CLO)€no€longer€has€an€obligation€to€report€up€the€ladder€or€to€make€a€noisyŠ żM Šwithdrawal.€€Although€a€member€of€the€QLCC€may€be€a€practicing€attorney,€he€or€she€wouldŠ ī > Šbe€acting€in€a€business€capacity€as€a€corporate€director€in€making€the€required€notification€andŠ ß!/ Šnot€as€a€lawyer.Š Š"   ŠĢą é ąIt€is€difficult€to€estimate€at€this€time€whether€some,€many€or€most€public€companiesŠ ²$ " Šwill€adopt€the€alternative€reporting€procedures,€but€many€experienced€practitioners€believe€itŠ £%ó # Šwill€be€adopted€by€many€or€most€large€companies.€€To€the€extent€that€companies€do€followŠ ”&ä!$ Šthis€course,€a€lawyer€employed€or€retained€by€the€company€would€not€have€an€obligation€toŠ …'Õ"% Šnotify€the€Commission€that€the€reported€violation€has€not€been€appropriately€addressed.€€TheŠ v(Ę#& Šobligations€of€that€lawyer€would€continue€to€be€determined€by€the€applicable€stateššs€ethicsŠ g)·$' Šrules.€€Because€at€least€four„fifths€of€the€states€now€permit€or€require€such€disclosure,€theŠ X*Ø%( Šeffects€of€šš€205.3(e)(2)€would€be€primarily€in€the€minority€of€states€that€may€or€do€prohibitŠ I+™&) Šany€action€by€a€lawyer€in€client€fraud€situations€other€than€silent€withdrawal.€Despite€theŠ :,Š'* Šuncertainty€about€the€law€on€this€subject€in€some€jurisdictions,€we€do€now€that€forty€statesŠ ° Šeither€permit€(and€four€of€them€require)€disclosure€of€confidential€information€to€prevent€orŠ ”ń Šrectify€an€ongoing€or€prospective€client€criminal€fraud€in€which€the€lawyerššs€services€haveŠ ’ā Šbeen€used.€€And€an€uncertain€number€of€additional€jurisdictions€permit€noisy€withdrawal€inŠ ƒÓ Šthose€situations.Š tÄ ŠĢą é ąSection€205.3(d)(2)€of€the€Commissionššs€rules€would€in€some€circumstances€permitŠ V ¦ Š(but€not€require)€the€lawyer€to€disclose€confidential€information€necessary€to€prevent€anŠ G — Šongoing€crime€or€fraud.€€That€is€hardly€a€major€interference€with€existing€state€rules€nor€aŠ 8 ˆ Šsubstantial€change€in€the€current€responsibilities€of€most€lawyers.€€If,€as€some€practitionersŠ ) y  Šexpect,€many€companies€adopt€the€alternative€reporting€procedures,€the€frequency€ofŠ j  Šnotification€required€of€attorneys€by€Commission€rule€will€be€dramatically€reduced.Š  [  ŠĢą é ąSecurities€lawyers€and€public€companies€are€given€new€options€under€šš€205.3(c).€€IfŠ ķ=  Šan€attorney€or€a€law€firm€wants€to€avoid€the€potential€obligation€of€reporting€to€the€SEC,€it€canŠ Ž.  Šcondition€acceptance€of€employment€or€representation€on€the€companyššs€willingness€toŠ Ļ Šestablish€a€QLCC.€€On€the€other€hand,€if€a€company€prefers€to€retain€attorneys€who€are€subjectŠ Ą Što€all€possible€obligations€arising€under€the€Commissionššs€implementation€of€šš€307€ofŠ ± ŠSarbanes„Oxley,€the€company€will€hire€and€retain€attorneys€who€are€comfortable€with€thoseŠ ¢ņ Šresponsibilities.€€Some€companies€may€prefer€to€have€the€ultimate€judgments€of€whether€thereŠ “ć Šis€a€š šmaterial€violationšš€and,€if€so,€whether€it€has€been€appropriately€addressed,€made€byŠ „Ō Šlawyers;€others€may€reasonably€take€the€contrary€view€that€the€QLCC,€a€special€committeeŠ uÅ Šof€the€board,€should€make€those€decisions.€€The€provision€of€choice€on€the€part€of€both€lawyerŠ f¶ Šand€client,€with€the€solution€flowing€from€their€agreement€on€where€the€ultimate€responsibilityŠ W§ Šshould€be€placed,€strikes€us€as€a€desirable€innovation€of€the€type€has€been€urged€by€RichardŠ H˜ ŠPainter.€€See€Painter,€Rules€Lawyers€Play€By,€76€N.Y.U.€L.€Rev.716„722€(2001)€(urging€SECŠ 9‰ Šrules€that€would€allow€issuers€to€direct€up„the„ladder€reporting€by€attorneys€to€an€independentŠ *z Šcompliance€committee€instead€of€to€the€full€board€of€directors,€providing€the€companyššsŠ k Šchoice€is€disclosed€to€shareholders).€€Section€205.3(c)€is€a€promising€development€that€mayŠ  \ Šprovide€a€laboratory€for€determining€whether€giving€lawyers€and€clients€an€opportunity€toŠ żM Šagree€on€the€allocation€of€legal€responsibilities€offers€greater€promise€than€the€usual€š šone€sizeŠ ī > Šfits€allšš€regulatory€approach.Š ß!/ ŠĢą é ąThe€large€role€that€QLCCs€may€play€requires€that€the€rule€permitting€them€incorporateŠ Į#! Šsound€principles.€€We€think€that€is€generally€the€case€under€the€proposed€rule,€but€that€someŠ ²$ " Šimprovements€are€necessary.€€First,€the€rule€should€make€it€clear€that€all€QLCC€members,Š £%ó # Šincluding€the€one€from€the€audit€committee,€must€be€independent€members€of€the€board.€Š ”&ä!$ ŠSecond,€the€establishment€of€the€QLCC€should€be€an€independent€choice€that€is€made€inŠ …'Õ"% Šadvance€of€a€report€of€a€material€violation.€€Thus€the€rule€should€provide€that€the€QLCC€mustŠ v(Ę#& Šbe€in€place€before€a€material€violation€has€been€reported€rather€than€after€the€events€inŠ g)·$' Šquestion€have€become€known€to€the€CEO€and€the€board.€€Third,€the€Commission€shouldŠ X*Ø%( Šrequire€that€an€issuer€notify€shareholders€of€the€establishment€of€a€QLCC€by€including€thatŠ I+™&) Šdisclosure€requirement€in€one€of€the€Commissionššs€disclosure€rules,€such€as€Regulation€S„K.Š :,Š'* ЇņņC.€€Discretion€to€Disclose€Confidences€€€[šš€205.3(e)]óó€Š ° ŠĢą é ąAs€we€have€just€said,€we€believe€the€Commission€could€have€mandated€that€lawyersŠ ’ā Šmake€disclosures€to€it€when€the€highest€authority€that€can€act€for€the€entity€client€insists€onŠ ƒÓ Šcontinuing€fraud€or€pursuing€future€illegal€conduct.€€Indeed,€the€ABAššs€Kutak€Commission,Š tÄ Šwhich€drafted€the€ABA€Model€Rules€of€Professional€Conduct€of€1983,€as€well€as€the€EthicsŠ e µ Š2000€Commissionššs€report€in€2002,€recommended€rules€that€would€have€given€lawyersŠ V ¦ Šdiscretion€to€make€that€kind€of€disclosure,€a€provision€rejected€on€those€and€another€occasionŠ G — Šby€the€ABA€House€of€Delegates.€€More€recently,€the€Preliminary€Report€of€the€ABA€TaskŠ 8 ˆ ŠForce€on€Corporate€Responsibility,€58€Bus.Law.€189€(Nov.€2002),€has€gone€further€than€theŠ ) y  ŠEthics€2000€Commission,€recommending€that€disclosure€under€Model€Rule€1.6€beŠ j  ŠĢą0 é ąņņmandatory,€rather€than€permissiveóó,€in€order€to€prevent€client€conduct€known€to€theŠ üL  Šlawyer€to€involve€a€crime,€including€violations€of€federal€securities€laws€andŠ ķ=  Šregulation,€in€furtherance€of€which€the€client€has€used€or€is€using€the€lawyerššs€services,Š Ž.  Šand€which€is€reasonably€certain€to€result€in€substantial€injury€to€the€financial€interestsŠ Ļ Šor€property€of€another.€[Id.,€at€206€(emphasis€added).]ŠĄé8"é8" ŠĢThe€Commissionššs€disclosure€proposal,€šš€205.3(e),€is€modeled€on€the€Task€ForceššsŠ ¢ņ Špreliminary€recommendation€and,€because€it€is€permissive€rather€than€mandatory,€even€lessŠ “ć Šof€a€threat€to€lawyer„client€communication.Š „Ō ŠĢą é ąThe€use€of€a€š šmayšš€formulation€in€the€Commissionššs€rules€does,€however,€raise€aŠ f¶ Špotentially€serious€problem.€A€rule€prescribing€when€a€lawyer€š šmayšš€disclose€could€naturallyŠ W§ Šbe€read€to€prescribe€when€a€lawyer€š šmay€notšš€disclose.€€The€problem€is€that€the€vast€majorityŠ H˜ Šof€state€ethics€rules€have€permissive€disclosure€provision€and€there€is€no€legitimate€reason€forŠ 9‰ Šthis€Commission€to€narrow€extant€ethics€rules€that€may€be€more€protective€of€investors.€€ButŠ *z Šthat€is€how€a€š šmayšš€rule€with€its€pregnant€š šmay€notšš€may€well€be€read.€€Moreover,€the€implicitŠ k Šš šmay€notšš€could€also€be€read€as€superceding€rules€in€those€few€states€that€require€disclosure,Š  \ Šrules€that€again€are€more€protective€of€investors€and€which€this€Commission,€in€our€opinion,Š żM Šhas€no€legitimate€reason€or€authority€to€override,€as€we€explain€further€in€Part€IV€below.€Š ī > ŠĢ€ą é ąWe€do€not€think€the€Commission€intended€to€override€more€rigorous€state€ethics€rules,Š Š"   Šand€the€Commission€needs€to€make€that€absolutely€clear.€€Unlike€the€ethics€rules,€whichŠ Į#! Špurport€to€cover€all€lawyer€behavior,€the€Commission€has€chosen€(wisely€in€our€view)€to€limitŠ ²$ " Šits€regulatory€rule€to€a€narrow€subset€of€lawyer€conduct€that€was€the€particular€concern€ofŠ £%ó # ŠCongress.€€A€š šmayšš€formulation€makes€sense,€as€it€appears€in€state€ethics€rules,€as€anŠ ”&ä!$ Šexception€to€the€duty€of€confidentiality€that€those€rules€set€forth.€€The€Commission€is€notŠ …'Õ"% Šsetting€forth€and€should€not€set€forth€any€overarching€definition€of€lawyer€confidentiality€andŠ v(Ę#& Šthus€the€š šmayšš€disclose€formulation€is€not€well„suited€to€the€structure€of€the€CommissionššsŠ g)·$' Šrule.€Š X*Ø%( ŠĢą é ąTo€avoid€this€problem,€we€believe€it€is€wiser€for€the€Commission€to€avoid€describingŠ :,Š'* Šwhat€a€lawyer€š šmayšš€disclose.€€Instead,€the€Commission€should€formulate€the€š šdiscretionaryššŠ ° Špart€of€this€rule€as€preempting€any€state€ethics€rule€to€the€contrary.€€And,€we€believe€theŠ ”ń ŠCommission€rightly€limits€that€preemption€to€a€carefully€described€set€of€circumstances.€€InŠ ’ā Šshort,€we€believe€that€the€Commission€should€rewrite€šš€205.3(e)€to€state€that€any€state€ethicsŠ ƒÓ Šrule€to€the€contrary€notwithstanding,€an€attorney€may€make€the€disclosures€permitted€by€theŠ tÄ Šsection.€€We€take€up€the€broader€question€of€preemption€in€Part€IV,€which€follows.Š e µ ŠĢą@« « äąņ ņIV.€€Preemption€of€State€Ethics€Rulesó óˆŠ G — ŠĢą é ąThe€federal€governmentššs€power€to€regulate€the€securities€industry€under€theŠ ) y  ŠCommerce€Clause€is€indisputable,€as€is€its€power€to€do€so€through€the€SEC.€€In€pursuit€of€thatŠ j  Šlegitimate€goal,€the€Commissionššs€authority€to€regulate,€for€example,€accountants€and€analystsŠ  [  Šengaged€in€securities€work,€is€also,€one€would€think,€beyond€cavil.€€Yet,€although€theŠ üL  ŠCommission€has€long€asserted€and€exercised€the€power€to€regulate€lawyers€practicing€andŠ ķ=  Šappearing€before€the€commission,€the€ABA,€segments€of€the€securities€bar€and€now,€weŠ Ž.  Šunderstand,€a€group€of€state€court€judges,€maintain€that€the€Commission€should€slow€down,Š Ļ Šrethink€many€or€all€of€these€rules€(šš€307's€mandate€notwithstanding),€and€write€rules€thatŠ Ą Šacknowledge€their€subordinate€status€to€state€ethics€rules.€€Š ± ŠĢņņA.€€Federalism€Arguments€Do€Not€Trump€the€Federal€MandateŠ “ć ŠóóĢą é ą€Federalism,€a€principle€that€most€of€us€revere€as€a€bulwark€of€freedom€and€a€pillar€ofŠ uÅ Šour€constitutional€structure,€is€not€violated,€offended€or€even€weakened€by€šš€307€or€the€SECššsŠ f¶ Šproposed€rules.€€First,€we€note€that€the€amendment€that€became€šš€307€passed€the€Senate,Š W§ Ševenly€divided€between€the€two€major€political€parties,€ņņunanimouslyóó€and€was€accepted€by€theŠ H˜ Šleadership€of€the€House,€by€House€and€Senate€conferees,€and€then€by€the€House€ofŠ 9‰ ŠRepresentatives€before€being€signed€by€the€President.€€Sometimes€all€that€may€happen€withoutŠ *z Šanyone€considering€serious€problems€with€a€bill,€but€that€is€not€what€happened€here.Š k ŠĢą é ąPrior€to€the€Senate€vote€on€šš€307,€the€Senate€considered€the€question€of€preemptionŠ żM Šbecause€it€was€raised€by€opponents€of€the€amendment.€€The€arguments€were€rejected.€€WhileŠ ī > Šthe€bill€was€in€conference,€the€ABA€sent€a€letter€to€the€conferees€arguing,€inter€alia,€thatŠ ß!/ Šfederalism€either€mandated€or€counseled€the€legislators€to€declare€that€any€Commission€rulesŠ Š"   Šissued€under€šš€307€would€yield€to€state€ethics€codes.€€The€conferees€rejected€the€ABAššs€pleas.€Š Į#! ŠNow,€the€same€arguments€are€being€presented€to€the€Commission,€which€has€no€authority€toŠ ²$ " Šrewrite,€ignore€or€modify€šš€307's€mandate.€€Moreover,€the€arguments€are€not€meritorious.€€InŠ £%ó # Šthe€past,€€even€before€the€Commission€had€a€specific€legislative€mandate€to€regulate€theŠ ”&ä!$ Šconduct€of€lawyers€appearing€or€practicing€before€it,€similar€arguments€against€theŠ …'Õ"% ŠCommissionššs€discipline€of€lawyers€were€rejected€by€federal€courts.Š v(Ę#& ŠĢą é ąAs€long€as€the€federal€government€has€authority€under€the€Constitution€to€regulate€inŠ X*Ø%( Ša€particular€area,€the€Supremacy€Clause€of€the€Constitution€makes€it€clear€that€state€law€thatŠ I+™&) Šconflicts€or€interferes€with€federal€regulation€must€yield.€€We€have€already€asserted€that€theŠ :,Š'* Šgeneral€power€of€the€federal€government€to€regulate€securities€is€indisputable,€so€the€questionŠ ° Šis€whether€there€is€something€about€lawyer€regulation€that€forces€a€different€conclusion.Š ”ń ŠĢą é ąAnti„preemption€arguments€emphasize€the€traditional€role€of€the€states€in€the€regulationŠ ƒÓ Šof€the€bar.€€It€is€true€that€lawyer€regulation€has€traditionally€been€the€province€of€the€states,€butŠ tÄ Šso€has€the€regulation€of€corporations€and€accountants.€€Yet,€in€furtherance€of€the€regulationŠ e µ Šof€securities€that€trade€in€interstate€commerce,€the€Commission€regulates€some€aspects€ofŠ V ¦ Šcorporate€governance€and€the€accounting€profession€and€no€one€would€seriously€argue€thatŠ G — Šstate€law€in€conflict€with€those€regulations€should€somehow€trump€those€regulatory€effortsŠ 8 ˆ Šbecause€š štraditionallyšš€states,€not€the€federal€government,€have€been€the€primary€regulatorsŠ ) y  Šof€those€groups.€Š j  ŠĢą é ąAnti„preemption€arguments€emphasize€the€important€role€an€independent€bar€plays€inŠ üL  Šour€constitutional€system.€€We€agree,€but€rhetoric€about€lawyer€independence€is€no€substituteŠ ķ=  Šfor€reasoned€argument.€€If€the€federal€governmentššs€power€under€the€Interstate€CommerceŠ Ž.  ŠClause€to€regulate€lawyers€(and€thus,€the€Commissionššs€power)€is€more€limited€than€its€powerŠ Ļ Što€regulate€other€groups€traditionally€regulated€by€the€states€that€are€involved€in€the€issuanceŠ Ą Šand€trading€of€securities,€it€can€only€be€due€to€some€other€language€in€the€Constitution€thatŠ ± Šprovides€that€singular€status€for€lawyers.€€The€Sixth€Amendment€is€often€invoked€for€thatŠ ¢ņ Špurpose,€but€the€Supreme€Court€has€long€held€that€the€Sixth€Amendmentššs€guarantee€ofŠ “ć Šcounsel€does€not€generally€extend€beyond€criminal€prosecutions.€€The€Supreme€Court€hasŠ „Ō Šnever€held€that€the€Sixth€Amendment€extends€to€the€provision€of€legal€advice€to€companiesŠ uÅ Šrelating€to€compliance€with€the€securities€laws€or€to€regulating€the€conduct€of€attorneys€inŠ f¶ Šadministrative€proceedings€before€the€SEC.€€€And€no€court,€of€which€we€are€aware,€hasŠ W§ Šsuggested€that€any€other€clause€of€the€Constitution,€including€the€Due€Process€Clauses€of€theŠ H˜ ŠFifth€and€Fourteenth€Amendments,€performs€the€function€that€some€try€to€attribute€to€the€SixthŠ 9‰ ŠAmendment.€Š *z ŠĢą é ąAssertions€that€the€Commission€is€going€where€no€arm€of€the€federal€government€hasŠ  \ Šgone€before,€and€that€the€federal€regulation€of€any€lawyer€is€some€novel,€alien€and€dangerousŠ żM Šconcept€are€false.€€The€IRS€regulates€tax€lawyers€in€some€respects,€the€Patent€Office€regulatesŠ ī > Špatent€and€copyright€lawyers,€federal€bankruptcy€judges€regulate€bankruptcy€lawyers€(withŠ ß!/ Šrules,€by€the€way,€that€conflict€with€the€conflict€of€interest€rules€in€virtually€every€state),€toŠ Š"   Šprovide€three€prominent€examples.€€The€federal€government€rightly€exercises€the€right€toŠ Į#! Šregulate€lawyers€in€those€areas€because€all€involve€areas€where€the€governmentššs€power€toŠ ²$ " Šlegislate€and€regulate€are€beyond€question,€just€as€it€is€in€the€area€of€securities€law.€€There€isŠ £%ó # Šno€argument€for€singling€out€the€securities€bar,€among€all€lawyers€engaged€in€federal€practiceŠ ”&ä!$ Šareas,€as€being€entitled€to€immunity€from€federal€regulation.Š …'Õ"% ŠĢņņB.€€Effective€Regulation€Is€the€IssueóóŠ g)·$' ŠĢą é ąWhy€do€many€lawyers€argue€for€state€regulation€of€the€securities€bar,€an€approach€thatŠ I+™&) Šwould€involve€differing€standards€and€multiple€regulatory€bodies€š!š€an€outcome€that€would€beŠ :,Š'* Ša€nightmare€for€multi„state€and€multi„national€law€firms?€€To€speak€plainly,€bar€organizationsŠ ° Šare€not€arguing€for€state€or€self„regulation€in€lieu€of€federal€rules€because€those€are€not€theŠ ”ń Šchoices.€€They€are€arguing€for€no€effective€regulation€of€corporate€lawyers€handling€complexŠ ’ā Šsecurities„related€matters€versus€effective€regulation.€Viewed€in€that€light,€the€pleas€of€someŠ ƒÓ Šsegments€of€the€bar€are€understandable.€€Everyone€would€prefer€being€free€of€the€lawššs€grasp,Š tÄ Šalthough€that€argument€is€fraught€with€irony€in€the€mouths€of€lawyers€and€distressing€inŠ e µ Šdemonstrating€how€little€faith€in€law€those€dedicated€to€it€are€willing€to€display.€€Š V ¦ ŠĢą é ąWe€say€the€choices€are€no€regulation€versus€regulation€for€two€reasons.€€First,€the€ABAŠ 8 ˆ Šand€other€voluntary€associations€of€lawyers€have€no€power€to€regulate€anyone.€Š ) y  ŠNotwithstanding€complaints€about€the€barššs€independence€from€the€government,€it€is€the€statesŠ j  Šthrough€rules,€procedures€and€proceedings€promulgated€or€supervised€by€the€highest€court€inŠ  [  Šeach€state€that€are€empowered€to€regulate€the€bar€(with€some€state€legislative€participation€inŠ üL  Ša€few€states).€€Second,€the€states€have€never€made€any€effort€to€regulate€the€securities€bar€andŠ ķ=  Šare€unlikely€to€do€so€in€the€future.€€This€is€not€because€they€are€unconcerned€with€lawyerŠ Ž.  Šmisconduct€or€the€securities€laws€but€because€bar€counselššs€offices€lack€(and€will€continue€toŠ Ļ Šlack)€the€expertise,€resources€and€political€clout€to€take€on€a€major€law€firm€for€misconductŠ Ą Šconnected€to€that€firmsšš€securities€practice.€€We€are€experts€in€this€field€and€none€of€us€knowsŠ ± Šof€a€single€instance€in€which€bar€counsel€has€successfully€prosecuted€(or€even€brought€chargesŠ ¢ņ Šagainst)€a€major€law€firm€relating€to€securities€law€practice.€€Š “ć ŠĢą é ąThis€absence€of€state€enforcement€cannot€be€attributed€to€an€absence€of€evidence€ofŠ uÅ Šserious€misconduct€by€securities€lawyers€in€major€law€firms.€€Published€cases€detail,€in€manyŠ f¶ Šcases€through€the€internal€memoranda€and€testimony€of€lawyers€within€a€firm,€what€can€onlyŠ W§ Šbe€described€as€compelling€evidence€of€misconduct€connected€to€securities€work€at€aŠ H˜ Šsubstantial€number€of€successful€and€venerable€law€firms.€€The€bulk€of€lawyers€in€those€firmsŠ 9‰ Šand€elsewhere€are€decent,€dedicated€and€highly€competent€people.€€Nevertheless,€solidŠ *z Ševidence€exists€that€lawyers€within€many€firms€at€one€time€or€another€did€things€that€in€anyŠ k Šeffective€regulatory€regime€would,€at€a€minimum,€justify€the€filing€of€charges.€€But€there€isŠ  \ Šnothing€in€the€way€of€formal€state€€proceedings.€€Š żM Šą é ąWe€are€not€blaming€the€states.€€Bar€counselššs€offices€do€not€usually€pay€enough€toŠ ī > Šattract€and€keep€lawyers€with€securities€expertise€and€lawyers€are€unwilling€to€support€theŠ ß!/ Šincreases€in€bar€dues€that€would€finance€higher€pay€and€larger€staffs.€€€Moreover,€unlike€theŠ Š"   ŠSEC,€which€needs€more€funds€to€attract€and€retain€top„notch€securities€lawyers,€bar€counselŠ Į#! Šemployment€does€not€offer€as€€promising€a€route€to€a€prestigious€career€in€private€practiceŠ ²$ " Šfollowing€government€service.€€Lawyers€with€considerable€expertise€in€securities€law€wouldŠ £%ó # Šbe€required€to€prosecute€disciplinary€violations€involving€lawyer€conduct€in€connection€withŠ ”&ä!$ Šcomplex€corporate€fraud€situations,€and€such€lawyers€are€lacking€in€bar€counsel€offices.€€TheŠ …'Õ"% Šattorneys€they€would€be€prosecuting€would€almost€always€be€from€large€law€firms€that€haveŠ v(Ę#& Šsuch€expertise,€not€to€mention€the€money€and€the€incentive€to€fight€such€charges€tooth€andŠ g)·$' Šnail.€€Hiring€outside€counsel€to€bring€disciplinary€charges€is€not€a€viable€option.€€ContingencyŠ X*Ø%( Šfee€arrangements€are€not€and€should€not€be€available€to€tempt€such€lawyers€to€take€thoseŠ I+™&) Šassignments.€€Ethical€and€legal€prohibitions€constrain€public€prosecutors,€even€in€disciplinaryŠ :,Š'* Šas€opposed€to€criminal€proceedings,€from€working€for€personal€profit.Š ° ŠĢą é ąIt€is€unrealistic€to€suggest€that€bar€counselsšš€offices€will€suddenly€be€transformed€š!šŠ ’ā Šinfused€with€enough€cash€and€prestige€š!š€to€do€the€regulatory€job€that€the€ABA€and€some€stateŠ ƒÓ Šjudges€would€have€the€Commission€leave€entirely€to€the€states.€€Nor€does€šš€307€permit€thatŠ tÄ Šapproach:€€the€statutory€mandate€says€that€€š šrulesšš€must€be€promulgated,€š šincluding,šš€notŠ e µ Šš šlimited€to,šš€the€up„the„ladder€rule€embodied€in€the€legislation€itself.€€The€choice€is€regulationŠ V ¦ Šby€the€Commission€or€no€effective€regulation.€The€Commissionššs€duty€under€šš€307€is€to€adoptŠ G — Šappropriate€š šrulesšš€to€protect€investors€and€in€the€public€interest.€€The€Commissionššs€mandateŠ 8 ˆ Šneither€assumes€nor€allows€the€Commission€to€yield€to€state€regulatory€regimes€that€have€notŠ ) y  Šand€cannot€do€the€job.Š j  ŠĢņņC.€€Waiting€for€the€ABA€and€the€States€to€Change€Their€Rulesņ ņóóŠ üL  ŠĢą é ąó óDoes€it€make€sense€for€the€Commission€to€wait€for€the€ABA€to€act€before€doing€moreŠ Ž.  Šthan€adopting€a€simple€up„the„ladder€internal€reporting€rule,€the€one€rule€specified€in€šš€307?€Š Ļ ŠAs€we€have€said,€we€do€not€believe€šš€307€gives€the€Commission€the€option€of€adopting€theŠ Ą Šreport€rule€and€no€other€š šminimum€standards€of€professional€conduct.šš€€But,€assuming€for€theŠ ± Šsake€of€argument€it€did,€waiting€would€be€a€huge€mistake.Š ¢ņ ŠĢą é ąThe€ABA€and€state€bar€associations€do€not€issue€binding€rules.€€Let€us€assume€theŠ „Ō ŠABA,€after€years€of€resistance,€now€does€what€it€should€have€done€years€ago:€€adopt€moreŠ uÅ Šresponsible€rules€to€govern€the€conduct€of€corporate/securities€lawyers.€€Those€recommendedŠ f¶ Šrules€would€then€have€to€be€considered€by€that€stateššs€local€bar,€then€by€a€committee€appointedŠ W§ Šby€the€stateššs€high€court,€and€then€adopted€by€action€of€that€court.€€Past€experience€indicatesŠ H˜ Šthat€this€process€takes€a€lot€of€time€and€produces€results€that€are€neither€consistent€norŠ 9‰ Šuniform.€€The€delay€would€be€costly€and€given€the€jumble€of€state€rules€likely€to€emerge,€notŠ *z Šworth€the€wait.€€Congress€was€right€to€forego€that€route.Š k ŠĢą é ąLetting€the€ABA€act€first€is€a€bad€idea€for€other€reasons.€€The€vast€majority€of€statesŠ żM Šnow€have€ethics€rules€that€demand€more€of€securities€(and€other€lawyers)€than€the€ABAššsŠ ī > Šcurrent€rules€(most€permit€an€attorney€to€disclose€confidential€information€to€prevent€a€clientššsŠ ß!/ Šongoing€or€prospective€crime€or€fraud€and€all€require€withdrawal€in€ongoing€fraud€situations).Š Š"   ŠThe€problem€is€that€the€states€have€not€enforced€those€current€rules€against€securities€lawyersŠ Į#! Šand€appear€not€to€be€in€a€position€to€do€much€more€in€the€future.€€Second,€some€states€withŠ ²$ " Šweak€rules€might€adopt€more€stringent€ones,€but€again€absent€the€means€of€enforcement€thoseŠ £%ó # Šrules€cannot€be€expected€to€have€much€of€an€effect.€€€In€the€meantime,€investors€are€no€betterŠ ”&ä!$ Šprotected€than€they€were€before€Enronššs€demise.€€That€would€defy€Congressššs€intent€andŠ …'Õ"% Šwould€be€an€irresponsible€stance€for€the€Commission€to€take.Š v(Ę#& ŠĢņņD.€€State€Rules€that€Require€More€of€Securities€Lawyers€than€the€Commissionššs€Rules€ShouldŠ X*Ø%( ŠNot€Be€PreemptedŠ I+™&) Šņ ņóóŠ :,Š'* Šą é ąó óA€number€of€states€already€have€ethics€rules€that€require€more€of€securities€lawyersŠ ° Šthan€the€Commissionššs€proposed€rules.€€Those€rules€should€not€be€preempted.€€Preemption€inŠ ”ń Šthis€situation€is€not€justified€under€šš€307€and€is€inconsistent€with€the€broader€regulatory€regimeŠ ’ā Šset€forth€in€Sarbanes„Oxley€and€federal€securities€legislation.€€The€Commission€should€takeŠ ƒÓ Šcare€to€eliminate€any€references€or€suggestions€in€the€final€rules€and€comments€that€assert€orŠ tÄ Šimply€that€state€ethics€rules€requiring€(or€allowing)€more€disclosure€than€that€prescribed€byŠ e µ Šthe€Commissionššs€rules€are€preempted€in€favor€of€the€Commissionššs€more€limitedŠ V ¦ Šrequirements.Š G — ŠĢą é ąSection€307€requires€the€Commission€to€adopt€š šminimumšš€standards€to€govern€theŠ ) y  Šconduct€of€securities€lawyers,€not€š šmaximumšš€standards.€€That€is€why€we€recommended€inŠ j  ŠPart€III,€above,€€that€šš€205.3(e)€be€amended€to€provide€that€any€state€ethics€rule€to€the€contraryŠ  [  Šnotwithstanding,€an€attorney€may€make€the€disclosures€permitted€by€the€section.€€ThisŠ üL  Šlanguage€would€preempt€the€ethics€rules€of€the€small€minority€of€states€(e.g.,€California€andŠ ķ=  Šthe€District€of€Columbia)€that€may€or€do€prohibit€a€lawyer€from€disclosing€confidentialŠ Ž.  Šinformation€in€the€situations€contemplated€by€the€disclosure€provision€of€šš€205.3(e).€Š Ļ ŠAttorneys€in€those€states€should€be€permitted€by€federal€law€to€make€such€disclosures.€€TheŠ Ą Šprovision€should€be€phrased€as€a€federal€rule€that€preempts€state€rules€that€conflict€with€orŠ ± Šinterfere€with€the€ruleššs€purpose€of€protecting€companies€and€investors.€€Alternatively,€theŠ ¢ņ Šprovision€could€be€placed€in€šš€205.3(d).Š “ć ŠĢą é ąThe€Commission€is€not€charged€with€general€responsibility€for€regulating€the€practiceŠ uÅ Šof€law.€€It€is€charged€with€regulating€lawyers€only€as€a€necessary€adjunct€to€its€authority€toŠ f¶ Šregulate€the€securities€markets.€€It€is€not€plausible€to€maintain€that€giving€lawyers€lessŠ W§ Šauthority€(discretionary€or€mandatory)€to€disclose€securities€fraud€or€connected€violations€ofŠ H˜ Šlaw€than€state€regulators€allow€or€require€furthers€any€legitimate€federal€regulatory€goal.€Š 9‰ ŠIndeed,€it€would€impede€the€Commissionššs€mission.€ņ ņŠ *z ŠĢą@||!äąV.ó ó€ņ ņ€Foreign€LawyersˆŠ  \ ŠĢó óą é ąWe€support€the€Commissionššs€proposal€to€regulate€all€lawyers€who€š špractice€andŠ ī > Šappearšš€before€the€Commission€on€an€equal€basis,€whether€licensed€here€or€abroad.€Š ß!/ ŠExempting€foreign€lawyers€can€only€have€harmful€effects€for€investors€and€either€domesticŠ Š"   Šor€foreign€lawyers,€if€not€for€all€three.€€To€exempt€foreign€lawyers€from€these€rules€but€allowŠ Į#! Šthem€to€practice€and€appear€before€the€Commission€would€undermine€šš€307€by€providingŠ ²$ " Šmany€corporations,€and€all€large€ones,€with€an€easy€route€around€the€Commissionššs€rules.€Š £%ó # ŠThat€in€turn€would€result€in€violence€to€the€legislative€scheme,€harm€to€investors,€and€harmŠ ”&ä!$ Što€the€domestic€securities€bar€who€would€be€placed€at€a€competitive€disadvantage€vis„a„visŠ …'Õ"% Štheir€foreign€counterparts.€€Š v(Ę#& ŠĢą é ąOn€the€other€hand,€to€exempt€foreign€lawyers€and€also€preclude€them€from€practicingŠ X*Ø%( Šbefore€the€Commission,€assuming€it€is€legal€under€other€law€and€treaties€for€the€federalŠ I+™&) Šgovernment€to€do€this,€would€unfairly€and€unduly€restrict€multi„national€corporations€toŠ :,Š'* Šdomestic€lawyers€for€their€securities€work,€which€might€well€drive€up€corporate€legal€costs€andŠ ° Šresult€in€less€competent€legal€representation€on€securities„related€matters€that€foreign€lawyersŠ ”ń Šare€more€competent€to€handle.Š ’ā ŠĢą é ąThat€leaves,€as€an€alternative€to€the€Commissionššs€proposed€approach,€granting€foreignŠ tÄ Šlawyers€or€bars€the€discretion€to€practice€before€the€Commission€by€opting€in€or€opting€out€ofŠ e µ Šrules€promulgated€under€šš€307,€coupled€with€a€requirement€that€corporations€who€choose€aŠ V ¦ Šnon„participating€lawyer€would€have€to€alert€the€Commission€and€investors€to€that€fact€andŠ G — Šrisk€greater€scrutiny€by€this€agency.€€But€Congress€did€not€choose€š štransparencyšš€as€theŠ 8 ˆ Šsolution€to€the€problems€it€saw€with€the€securities€bar.€€It€chose€regulation.€€To€have€aŠ ) y  Šbifurcated€system€in€which€š štransparencyšš€is€available€to€corporations€as€long€as€they€chooseŠ j  Šforeign€lawyers€would€be€to€alter€the€legislative€scheme.€€Further,€it€too€would€put€domesticŠ  [  Šlawyers€at€an€unfair€disadvantage€in€competing€with€their€foreign€counterparts.€€Š üL  ŠĢą é ąAn€opt„in€system€for€foreign€lawyers€preferable€to€the€Commissionššs€proposal€in€thatŠ Ž.  Šit€could€be€seen€as€demonstrating€more€respect€for€foreign€countries€and€their€own€systems€forŠ Ļ Šregulating€lawyers.€€But€it€does€not€demonstrate€more€respect€than€the€Commissionššs€proposal.€Š Ą ŠThe€path€the€Commission€has€recommended€gives€foreign€nations€and€foreign€bars€anŠ ± Šopportunity€to€decide€to€forego€securities€practice€in€the€United€States€or,€if€necessary,€toŠ ¢ņ Šamend€their€rules€for€lawyers€practicing€before€the€Commission.€€No€foreign€country,€lawyerŠ “ć Šor€corporation€has€a€š šrightšš€to€participate€in€our€securities€markets€on€their€own€terms.€€TheyŠ „Ō Šhave€a€choice:€to€play€by€our€rules€or€not.€€Š uÅ ŠĢą é ąTo€cede€to€arguments€that€foreign€rules€or€laws€merit€an€exemption€from€securitiesŠ W§ Šregulation€would€be€to€invite€foreign€nations,€foreign€accounting€enterprises,€foreign€investorsŠ H˜ Šand€foreign€investment€bankers€to€lobby€for€legislation€or€regulation€at€home€that€would€meritŠ 9‰ Šfurther€exemptions.€€Pe