ÿWPC¹ õøÜ‹ìð^Q¦IüòÖ†{nˆ¾âº„…Ä\#š‚MI«TíœÝPÆÞ¯åÅa8[žxµ`ôÅ7HÙ!j˜e™Íz–NŒ¤lÑnmÂr +K‡Ðvù’b2íaÙÑ 1CÐ[jZ{0³l@ÔzÔW`,â¯)d3Ý_q"18È\pGTœ.¥+éñYbýEÍ›ƒNwfÜG¥A^µKĸV©|΄¨ üŒ}âý~ž*Óµ¦9'] é´?#/ÖâKn‡ö…=ˆ÷ ù` 5u&æU4Ñl3I˜Uä.¤U´¾=ã*0¡â|ï:Í Ú“eSÂC¡â˜Ã8:±Q=™t£tÕòÜ#ÿ'pF ”½ÂšŸ•*³2n,œ“ÖŽ²FÆP'™S—쯒6$+ÊC§lžv¸  T¾;_æãæÅÛh¼qÜ\/¦GÓð§ƒH‹®qÁ‰ÄçqÑç̪\Ví¢ÒRá(JˆÕ*F $ú›#pØÓî¸ÁPШK66¿ •Þ)è•éðEvŒ€mÒ´‹ª¬ eŽ|€àº·vpŸê„q ”‚"Ô;þ8Pga=#ÁÏDTuÏs ^:M°‘;ïqÀâϯÓǶð›ÜY{ÔŠºklŽuºƒ¾‚ϾŽ6%V#É´UN} %Ë 0:Ñ ^ w 4 / > m@ 0cW 1uº 72/ 0 wa 0ŠØ 0 b 0´ 0Ƕ 0Û} 0ïX 0DG 1‰‹ 72 1_F 72¥U,ס 0~¤ 0D"NfU>hS¦iùbLbU:®U@è( 0N@2Ž6À4ör******************************************* Bœ˜HP LaserJet 4L,ü,,,,,ü0(ÖÃ9 Z‹6Times New Roman RegularX(üœ$¡¡ÔUSUS.,ÔQ‡.— VT4-ê:i¢×+003|xÿU‹ÿÀÀÀ(;3£$´´Ô2#ÔÚ  Ú0Ú  Ú.Ô3  Ôà0  à3#37=CIQYag­­1.a.i.(1)(a)(i)1)a) i)(Oé;$µµà0  àÔ2#ÔÚ  ÚaÚ  Ú.Ô3  Ôà0` (#(#à(b·¤$¶¶à0  àà0` (#(#àÔ2#ÔÚ  ÚÚ  Ú.Ô3  Ôà0¸ ` (#` (#à(xir$··à0  àà0` (#(#àà0¸ ` (#` (#àÔ2#Ô(Ú  Ú0Ú  Ú)Ô3  Ôà0¸ (#¸ (#à(ŒÜ$¸¸à0  àà0` (#(#àà0¸ ` (#` (#àà0¸ (#¸ (#àÔ2#Ô(Ú  ÚaÚ  Ú)Ô3  Ôà0h(#(#à(ŸF$¹¹à0  àà0` (#(#àà0¸ ` (#` (#àà0¸ (#¸ (#àà0h(#(#àÔ2#Ô(Ú  ÚÚ  Ú)Ô3  Ôà0Àh(#h(#à(³Àô$ººà0  àà0` (#(#àà0¸ ` (#` (#àà0¸ (#¸ (#àà0h(#(#àà0Àh(#h(#àÔ2#ÔÚ  Ú0Ú  Ú)Ô3  Ôà0À(#À(#à(ǵ{$»»à0  àà0` (#(#àà0¸ ` (#` (#àà0¸ (#¸ (#àà0h(#(#àà0Àh(#h(#àà0À(#À(#àÔ2#ÔÚ  ÚaÚ  Ú)Ô3  Ôà0p(#(#à(F$ïïà0  àà0` (#(#àà0¸ ` (#` (#àà0¸ (#¸ (#àà0h(#(#àà0Àh(#h(#àà0À(#À(#àà0p(#(#àÔ2#ÔÙ ÙÚ  ÚÚ  ÚÙ Ù)Ô3  Ôà0Èp(#p(#àÙ Ù xð–Gaeimquy}Bullet ListBullets List sþë37;?CGKOS°°-*+x ,†r‰AZ‹Arial  —Ý ƒÄ($ÝÔUSUS.,Ôà  àòòÚ  Ú2Ú  ÚóóÝ  ÝÔ_Ô€From€the€perspective€of€encouraging€responsible€behavior€by€lawyers,€it€might€well€beÐ ° Ðbetter€to€require€lawyers€to€report,€instead€of€issuers,€because€lawyer€reporting€would€reinforce€anÐ œì Ðidea€that€needs€reinforcement,€i.e.,€that€the€superior€interests€of€third€parties€and€the€public€justifyÐ ˆØ Ðexceptions€to€the€lawyerððs€general€duty€of€confidentiality.€€The€client€who€has€abused€the€lawyerððsÐ tÄ Ðservice€by€using€the€lawyer€to€perpetrate€a€fraud€on€third€persons€surely€presents€a€situation€inÐ `° Ðwhich€the€clientððs€interest€in€confidentiality€is€trumped€by€the€public€interest€and€those€of€theÐ L œ Ðpersons€harmed.€€However,€it€is€not€the€Commissionððs€job€to€promulgate€rules€that€best€educateÐ 8 ˆ Ðlawyers€about€their€responsibilities;€rather,€the€choice€between€the€two€alternatives€should€turn€onÐ $ t Ðwhich€approach€will€give€the€greater€protection€to€investors.€€Even€if€the€Commission€adopts€the€Ð  ` Ðalternative€of€company€reporting,€the€Commission€should€strengthen€that€rule€by€including€aÐ ü L  Ðprovision€requiring€the€lawyer€to€report€if€the€company€has€failed€to€fulfill€its€obligation€to€do€so,Ð è 8  Ðas€we€discuss€below.(.(3Ä($¤¤Ý ƒüœ!ÝÔUSUS.,ÔÝ  Ýà  àòòÚ  Ú0Ú  Úóó(#Ã$òòÚ  Ú0Ú  Úóó2 F‚AZ‹&Verdana Regular IÝ ƒÄ($ÝÔUSUS.,Ôà  àòòÚ  Ú1Ú  ÚóóÝ  ÝÔ_Ô€See€Comments€of€Susan€P.€Koniak,€Roger€C.€Cramton,€George€M.€Cohen€and€others€onÐ ° Ðthe€Proposed€Rules€Implementing€Standards€of€Professional€Conduct€for€Attorneys€20„32€(Dec.Ð œì  Ð17,€2002). _Ý ƒÄ($ÝÔUSUS.,Ôà  àòòÚ  Ú3Ú  ÚóóÝ  ÝÔ_ÔSee€the€detailed€discussion€in€Comments€of€Susan€P.€Koniak,€Roger€C.€Cramton,€GeorgeÐ ° ÐM.€Cohen€and€others€on€the€Proposed€Rules€Implementing€Standards€of€Professional€Conduct€forÐ œì ÐAttorneys€40„42€(Dec.€17,€2002).Koniak, Cramton, and Cohen Comments ù,†r‰AZ‹"Arial Regular(ÖÃ9 Z‹(Times New Roman  colorableOxleyEnron OPMrulemakingi SPESarbanesdisaffirmF.Supp cmtnonprivileged CFRKoniakCramton(ÍO$——ÔÿÔòòóóÔÿÔmailto:<spkoniak@bu.edu>mailto:<rcc10@cornell.edu>mailto:<gmc3y@viginia.edu hÝ ƒÄ($ÝÔUSUS.,Ôà  àòòÚ  Ú4Ú  ÚóóÝ  ÝÔ_ÔId. dÝ ƒüœ!ÝÔUSUS.,ÔÝ  ÝÔ_ÔÑ€"ÑÑ8€ÿXXdìdÈ8ÑÑ  Ñò òó óJonathan€G.€Katz,€Secretaryà  àà h àà À àà  àò òó óÐ ° ÐSecurities€and€Exchange€CommissionÐ œì Ð450€Fifth€Street,€NWÐ ˆØ ÐWashington,€D.C.€€20549„0609Ð tÄ ÐÌà  àà ` àà ¸ àà  àà h àà À àà  àà p àà È àà  àApril€7,€2003Ð L œ ÐÌò òÔ€XÇuXXXÔFile€No.€S7„45„02ó óÐ $ t ÐÌò òRe:€òòFinal€and€Proposed€Rule:€Implementation€of€Standards€ofÐ  T  ÐProfessional€Conduct€for€Attorneys,€17€CFR€205:€Comments€of€SusanÐ ô D  ÐP.€Koniak,€Roger€C.€Cramton€and€George€M.€Cohen€€(with€List€ofÐ ä4  ÐAcademics€Who€Are€in€General€Agreement)ó óóóÐ Ô$  ÐÌÓ33ÓÔ€XÿXXXÇuÔDear€Mr.€Katz:Ð ´  ÐÌWe€are€writing€to€comment€on€the€Final€and€Proposed€Rules€on€the€Implementation€of€StandardsÐ ê: Ðof€Professional€Conduct€for€Attorneys,€codified€or€proposed€to€be€codified€in€17€CFR€Part€205.€Ð U ÐOur€comments€can€be€summarized€as€follows:Ð  p ÐÓ€  (þës3 ÓÔ€#X×áXXXÿÔÔ€#&ü%X#X×áÔÌÝ"‚ 3£"ÝÝ  ÝÝ‚ 3£ñÝÔ2þëÔððÔ3  Ôà0  àÝ  ÝThe€triggering€standard€of€ðð205.2(e)€should€be€changed,€as€should€the€definitions€inÐ >Ž Ððððð205.2(l),€(m),€to€eliminate€double€negative€formulations€in€the€reasonablenessÐ A‘ Ðstandard.݃ 3£ñÝŒÐD”(#(# ÐŒÝ  ÝÌÝ"‚ 3£"ÝÝ  ÝÝ‚ 3£ˆÝÔ2þëÔððÔ3  Ôà0  àÝ  ÝThe€definition€of€ð ðappropriate€responseðð€to€a€report€should€eliminate€as€one€suchÐ Jš Ðresponse€€the€option€in€ðð205.2(b)(3)(ii)€of€retaining€or€directing€a€lawyer€who€may€assertÐ M Ða€ð ðcolorable€defenseðð€to€any€material€violation€that€is€the€subject€of€a€report.€€Ýƒ 3£ˆµÝŒÐP (#(# ÐŒÝ  ÝÌÝ"‚ 3£"ÝÝ  ÝÝ‚ 3£u ÝÔ2þëÔððÔ3  Ôà0  àÝ  ÝLawyers€hired€as€advocates€or€to€investigate€reports€of€material€violations€should€notÐ V ¦ Ðreceive€blanket€exemptions€from€reporting€duties.€€Sections€205.3(b)(6)€and€205.3(b)(7)Ð Y!© Ðshould€be€revised€to€provide€more€limited€exemptions€to€lawyers€in€these€roles.݃ 3£u ¢ ÝŒÐ\"¬(#(# ÐŒÝ  ÝÌÝ"‚ 3£"ÝÝ  ÝÝ‚ 3£R ÝÔ2þëÔððÔ3  Ôà0  àÝ  ÝSections€205.1€and€205.6(c)€should€be€revised€to€make€clear€that€compliance€withÐ b$²  Ðthese€rules€does€not€ensure€that€the€lawyer€has€complied€with€all€requirements€of€theÐ e%µ ! Ðsecurities€laws.݃ 3£R  ÝŒÐh&¸!"(#(# ÐŒÝ  ÝÌÝ"‚ 3£"ÝÝ  ÝÝ‚ 3£è ÝÔ2þëÔððÔ3  Ôà0  àÝ  ÝThe€alternative€proposed€rule,€ðð205.3(d)„(f),€which€requires€issuers€to€report€attorneyÐ n(¾#$ Ðresignations€instead€of€requiring€lawyers€to€report€themselves,€is€an€acceptableÐ q)Á$% Ðalternative€to€the€noisy€withdrawal€proposal,€subject€to€several€qualifications:€Ýƒ 3£è  ÝŒÐt*Ä%&(#(# ÐŒÝ  ÝÌÝ"‚é;"ÝÝ  ÝÝ‚é;ÄÝà0  àÔ2þëÔððÔ3  Ôà0` (#(#àÝ  ÝCompanies€should€be€required€to€report€the€circumstances€related€to€theÐ z,Ê'( Ðattorneyððs€resignation€(proposed€ðð205.3(e)).݃é;ÄñÝŒÐ#}-Í()` (#` (#ÿ #ÐŒÝ  ÝÌÝ"‚é;"ÝÝ  ÝÝ‚é;!Ýà0  àÔ2þëÔððÔ3  Ôà0` (#(#àÝ  ÝReporting€lawyers€should€be€required€to€inform€the€SEC€if€the€issuer€does€not,Ð ³ Ðrather€than€merely€permitted€as€in€proposed€ðð205.3(f).݃é;!N݌ж` (#` (# ÐŒÝ  ÝÌÝ"‚ 3£"ÝÝ  ÝÝ‚ 3£ˆÝÔ2þëÔððÔ3  Ôà0  àÝ  ÝThe€Commission€should€make€it€clear€that€these€new€rules,€like€Rule€2(e),€areÐ ¼  Ðenforceable€against€law€firms€as€well€as€against€individual€lawyers.݃ 3£ˆµÝŒÐ¿ (#(# ÐŒÝ  ÝÔ€&÷b%%#&üÔÔ€XÇuX%&÷bÔÌà@’’%ìàò òDiscussionó óˆÐ á 1 ÐÌI.€The€Triggering€StandardÐ o  ÐÌÔ€XÿXXXÇuÔà  àIn€assessing€how€faithfully€and€well€the€Commission€has€fulfilled€its€duty€under€ðð307€ofÐ ]­  Ðthe€Sarbanes„Oxley€Act€to€issue€rules€prescribing€minimum€standards€of€professional€conduct€forÐ xÈ  Ðattorneys€appearing€and€practicing€before€it,€including€a€rule€ð ðrequiringðð€an€attorney€to€reportÐ “ã  Ðevidence€of€material€violations€of,€inter€alia,€the€securities€laws,€one€question€is€central.€€Will€theÐ ®þ ÐCommissionððs€rules€help€ensure€that€the€ð ðsee€no€evil,€report€no€evilðð€behavior€of€Ô_ÔEnronÔ_Ôððs€lawyers,Ð É Ðof€Global€Crossingððs€lawyers,€and€of€the€lawyers€at€many€other€companies€changes?Ð ä4 ÐÌà  àThe€Commissionððs€Final€Rule€fails€that€test.€€€It€fails€because€the€triggering€standardÐ j Ðadopted€by€the€Commission€is€weak€and€convoluted.€€Law€is€intended€to€guide€action€in€theÐ 5… Ðworld.€€When€must€a€lawyer€report€evidence€of€illegality,€according€to€the€Commission?€€WhenÐ P  Ðthe€lawyer€ð ðbecomes€aware€of€evidence€of€a€material€violation,ðð€ðð205.3(b)(1),€defined€as€ð ðcredibleÐ k» Ðevidence,€based€upon€which€it€would€be€unreasonable,€under€the€circumstances,€for€a€prudent€andÐ †Ö Ðcompetent€lawyer€not€to€conclude€that€it€is€reasonably€likely€that€a€material€violation€hasÐ ¡ñ Ðoccurred,€is€ongoing€or€is€about€to€occur,ðð€ðð205.2(e).€€In€deciding€whether€to€act€ð!ð€whether€toÐ ¼  Ðreport€what€Congress€wanted€to€encourage€lawyers€to€report€up€the€corporate€ladder€ð!ð€the€lawyerÐ ×' Ðis€to€ask€herself€whether€it€would€be€unreasonable€not€to€conclude€that€the€evidence€before€herÐ ò B Ðdemonstrates€a€reasonable€likelihood€of€a€material€violation€of€law.Ð  "] ÐÌà  àAny€lawyer€worth€her€salt€will€ò òó óalmost€always€be€able€to€conclude€that€it€is€notÐ C$“ Ðð ðunreasonableðð€to€conclude€that€the€evidence€before€her€demonstrates€legal€conduct.€€Why?€Ð ^%®  ÐBecause€lawyers€are€trained€to€Ô_ÔreimagineÔ_Ô€evidence€of€illegality€as€evidence€of€legality.€€BecauseÐ y&É! Ðthe€ethos€of€lawyers€is€not€to€report€up€the€corporate€ladder,€as€amply€demonstrated€by€theÐ ”'ä"  Ðpassivity€of€all€the€lawyers€who€remained€inactive€despite€considerable€evidence€of€illegality€in€theÐ ¯(ÿ#! Ðscandals€of€the€recent€past,€as€well€as€in€the€scandals€of€the€savings€and€loan€crisis€and€the€fraudsÐ Ê)%" Ðin€all€the€years€before€then,€such€as€the€for„its„time€massive€fraud€of€OPM.€€Because€the€veryÐ å*5&# Ðphrasing€of€the€Commissionððs€rule€with€its€double€negative€will€be€read€by€many€lawyers€asÐ ,P'$ Ðencouraging€them€to€hide€in€the€folds€that€the€double€negative€creates.€€If€the€Commission€meantÐ ° Ðto€adopt€a€rule€that€the€lawyer€must€report€ð ðwhen€a€reasonable€lawyer€would€concludeðð€or€whenÐ Ë Ðð ðit€is€reasonable€to€conclude,ðð€the€Commission€would€not€have€used€the€double€negative.€€EveryÐ æ6 Ðlawyer€understands€that.€The€Commissionððs€standard€is€an€invitation€to€inaction.€€The€bar€needsÐ Q Ðno€such€invitation€and€Congress€surely€did€not€intend€the€Commission€to€offer€one.€Ð  l ÐÌà  àNot€only€does€the€Commissionððs€standard€invite€inaction,€it€fails€another€critical€test€ofÐ R ¢ Ðsound€rulemaking.€€It€would€be€a€nightmare€to€enforce.€€The€Commission€has€asked€its€staff€toÐ m ½ Ðassume€the€burden€of€proving€not€just€one€negative,€but€two.€€To€enforce€this€rule,€theÐ ˆ Ø ÐCommission€would€have€to€show€that€it€was€òòunreasonableóó€for€a€lawyer€òònotóó€to€conclude€that€aÐ £ó  Ðviolation€was€reasonably€likely.€€€We€do€not€believe€that€this€burden€is€a€realistic€one€to€ask€theÐ ¾  Ðstaff€to€meet.Ð Ù)  ÐÌà  àIn€our€last€set€of€comments€we€suggested€a€simple€objective€standard€to€cure€the€problemÐ _  Ðwith€the€Commissionððs€original€proposed€standard,€which€included€the€phrase€ð ðreasonablyÐ *z Ðbelieves,ðð€and€thus€suggested€a€subjective€test€contrary€to€the€Commissionððs€announced€intentionÐ E• Ðto€adopt€an€objective€rule.€€The€triggering€standard€we€proposed€then€and€still€support€is:Ð `° ÐÌà8  àÔ‡X×áXXXÿÔÔ‡&ü%XX×áÔIf,€in€appearing€and€practicing€before€the€Commission€in€the€representation€ofÐ –æ Ðan€issuer,€an€attorney,€òòconfronted€with€information€that€a€prudent€andÐ ™é Ðcompetent€attorney,€acting€reasonably€under€the€same€circumstances,€wouldÐ œì Ðconclude€was€credible€evidenceóó€.€.€.€Ô#†&î< %%&üˆ%#ÔÔ#†XÿX %&î<§%#ÔПïÐ Ð  Ðà  àÌThe€Commissionððs€sole€rationale€for€its€definition€is€that€it€ð ðrecognizes€that€there€is€a€range€ofÐ ½  Ðconduct€in€which€an€attorney€may€engage€without€being€unreasonable.ðð€€We€believe€that€aÐ Ø( Ðstraightforward€standard€of€reasonableness,€which€appears€throughout€the€law,€alreadyÐ óC Ðincorporates€ample€recognition€of€the€need€for€discretion.€€See,€e.g.,€Restatement€(Third)€LawÐ !^ ÐGoverning€Lawyers€ðð52€cmt.€b€(interpreting€a€Ô_ÔlawyerððsÔ_Ô€duty€of€competence€as€one€ofÐ )"y Ðð ðreasonableness€in€the€circumstances,ðð€which€ð ðdoes€not€require€a€lawyer,€in€a€situation€involvingÐ D#” Ðthe€exercise€of€professional€judgment,€to€employ€the€same€measures€or€select€the€same€options€asÐ _$¯ Ðwould€other€competent€lawyers€in€the€many€different€situations€in€which€competent€lawyersÐ z%Ê  Ðreasonably€exercise€professional€judgment€in€different€waysðð).€€Moreover,€our€proposedÐ •&å! Ðreasonableness€standard,€by€using€the€word€ð ðwouldðð€rather€than€ð ðcould,ðð€ensures€the€recognitionÐ °'#  Ðof€sufficient€lawyer€discretion€without€undermining€the€rule.Ð Ë($! ÐÌà  àThe€problems€with€the€triggering€standard€exist€as€well€in€the€Commissionððs€definitions€ofÐ +Q&# Ðð ðreasonableðð€in€ðð205.2(l)€and€ð ðreasonably€believesðð€in€ðð205.2(m),€both€of€which€use€a€doubleÐ ,l'$ ÐÔ_Ônegative€(ð ðnot€unreasonableðð)€formulation.€€These€definitions€are€not€only€incorporated€in€theÐ ° Ðdefinition€of€ð ðevidence€of€a€material€violationðð€(compounding€the€double€negative€problem€alreadyÐ Ë Ðpresent€in€that€definition),€but€are€used€throughout€the€rules.€€For€the€reasons€already€discussed,Ð æ6 Ðthese€definitions€should€be€changed€to€eliminate€the€double€negative€formulation.Ð Q ÐÌÔ‡XÇuXXXÿÔII.€€ð ðColorable€Defenseðð€and€Related€ProblemsÔ#†XÿXXXÇu]/#ÔÐ 7 ‡ ÐÌà  àAdding€to€the€substantial€problems€presented€by€the€triggering€standard,€the€CommissionððsÐ q Á ÐFinal€Rule€in€several€sections€refers€to€the€possibility€that€a€lawyer€may€assert€a€ð ðcolorableÐ Œ Ü Ðdefenseðð€to€a€material€violation€of€law.€€The€effect€of€the€assertion€or€potential€assertion€of€aÐ §÷  Ðcolorable€defense€in€the€Final€Rule€is€invariably€to€diminish€the€responsibilities€of€either€theÐ Â  Ðreporting€lawyer€or€the€lawyer€asserting€the€colorable€defense.€€We€find€this€reduction€inÐ Ý-  Ðresponsibility€based€on€the€assertion€of€a€colorable€defense€to€be€inconsistent€with€the€purposes€ofÐ øH  Ððð307€as€well€as€with€the€general€requirements€of€the€securities€laws€and€the€law€of€lawyering.€€WeÐ c  Ðtherefore€recommend€changes€to€all€of€the€sections€in€which€ð ðcolorable€defenseðð€is€nowÐ .~ Ðmentioned.Ð I™ ÐÌà  àFirst,€the€Final€Rule€defines€an€ð ðappropriate€responseðð€to€a€lawyerððs€report€to€include€theÐ Ï Ðcompanyððs€informing€the€reporting„lawyer€that€the€issuerððs€board€of€directors€(or€qualified€legalÐ šê Ðcompliance€committee€or€other€relevant€committee€of€the€board)€has€ð ðretained€or€directedðð€aÐ µ Ðlawyer€to€review€the€report,€and€that€the€reviewing„lawyer:Ð Ð  ÐÌà8  àÔ€#X×áXXXÿÔÔ€#&ü%X#X×áÔmay,€consistent€with€his€or€her€professional€obligations,€assert€a€colorableÐ V Ðdefense€on€behalf€of€the€issuer€(or€[an€agent€of€the€issuer])€in€any€investigationÐ  Y Ðor€judicial€or€administrative€proceeding€relating€to€the€reported€evidence€of€aÐ  \ Ðmaterial€violation.Ð _Ð Ð  ÐÌÔ€&î< %%#&üÔÔ€XÿX %&î<Ôðð205.2(b)(3)(ii).Ð "e ÐÌà  àThis€response€is€presented€as€an€alternative€to€the€companyððs€taking€steps€(with€or€withoutÐ K$› Ða€reviewing€lawyerððs€advice)€to€rectify€an€ongoing€fraud€(or€other€material€violation€of€law)€orÐ f%¶  Ðabandon€plans€to€commit€a€contemplated€fraud,€given€that€the€response€section€of€the€final€ruleÐ &Ñ! Ðapplies€to€past,€ongoing,€and€future€violations€of€law.€€Thus€the€rule€as€adopted€suggests€that€oneÐ œ'ì"  Ðalternative€to€stopping€an€ongoing€fraud€or€abandoning€plans€to€commit€a€new€fraud€is€to€get€anÐ ·($! Ðopinion€from€a€lawyer€that€should€the€issuer€be€investigated€for€the€illegal€conduct€(there€is€noÐ Ò)"%" Ðrequirement€in€the€definition€that€the€investigation€be€underway,€pending,€or€even€likely€to€occur),Ð í*=&# Ða€colorable€defense€would€be€available.€€The€Commission€should€not€be€suggesting€to€anyone€thatÐ ,X'$ Ðthe€fact€that€a€lawyer€can€(in€good€faith€and/or€reasonably)€state€that€a€ð ðcolorableðð€defense€wouldÐ ° Ðbe€available,€if€the€action€is€ever€challenged,€gives€an€issuer€license€to€engage€in€activity€that€mayÐ Ë Ðwell€be€illegal.€ð ðColorable€defensesðð€are€a€dime€a€dozen.€€€And€a€dozen€may€not€even€be€necessaryÐ æ6 Ðð!ð€a€literal€reading€of€the€rule€suggests€that€ð ðaðð€colorable€defense€to€ð ðanyðð€proceeding€ð ðrelating€toððÐ Q Ðthe€reported€evidence€constitutes€an€appropriate€response;€thus,€for€example,€if€there€were€aÐ  l Ðcolorable€defense€to€a€federal€securities€claim€but€not€to€a€state€law€breach€of€fiduciary€duty€claim,Ð 7 ‡ Ðthe€lawyerððs€duty€to€report€would€arguably€end€anyway.Ð R ¢ ÐÌà  àThe€fact€that€a€lawyer€can€concoct€arguments€that€would€meet€a€minimum€level€ofÐ ˆ Ø Ðplausibility€sufficient€to€avoid€sanction€in€an€adversary€proceeding€does€not€mean€that€the€conductÐ £ó  Ðis€likely€legal.€€A€public€company€subject€to€SEC€regulation€is€guilty€of€a€civil€violation€of€theÐ ¾  Ðsecurities€laws€when€the€preponderance€of€evidence€supports€a€finding€of€a€violation.€€A€lawyerÐ Ù)  Ðacting€as€an€adviser€in€transactions€and€filings€subject€to€SEC€disclosure€requirements€must€adviseÐ ôD  Ðthe€company€on€the€basis€of€whether€the€available€evidence€indicates€that€a€violation€is€more€likelyÐ _  Ðthan€not.Ð *z ÐÌà  àThe€Commission€states€that€the€ð ðcolorable€defenseðð€language€is€there€to€address€a€problemÐ `° Ðthat€we,€among€others,€raised€in€our€initial€comments,€i.e.,€that€advocates€not€be€chilled€inÐ {Ë Ðchallenging€the€SEC€in€fora€in€which€the€SEC€appears€as€a€party.€€But€the€rule€the€CommissionÐ –æ Ðhas€adopted€sweeps€far€broader€than€that.€€€The€existence€of€a€colorable€defense€allows€a€lawyerÐ ± Ðwhen€he€is€acting€as€an€advocate,€i.e.,€once€conduct€is€subject€to€challenge€in€a€forum€in€whichÐ Ì Ðanother€party€is€arguing€that€the€conduct€is€not€legal,€to€argue€that€conduct,€even€if€very€likelyÐ ç7 Ðillegal,€is€legal.€€It€has€no€other€relevance.€€The€colorable€defense€standard€certainly€should€not€beÐ R Ðused€to€permit€lawyers€to€advise€clients,€particularly€corporate€clients€with€fiduciary€obligations€toÐ m Ðtheir€owner„shareholders,€to€proceed€with€conduct€that€is€very€likely€illegal.€€Yet€that€is€preciselyÐ 8ˆ Ðwhat€the€SECððs€formulation€invites.€€This€error€needs€to€be€corrected€to€avoid€any€suggestion€thatÐ S £ Ða€ð ðcolorable€defenseðð€is€an€alternative€to€further€investigation€or€rectification€of€conduct€likely€toÐ n!¾ Ðbe€judged€illegal.€€Ð ‰"Ù ÐÌà  àEven€when€an€investigation€is€pending€or€a€prosecution€or€civil€suit€is€in€progress,€andÐ ¿$  Ðeven€if€the€lawyer€is€specifically€hired€or€directed€to€act€as€an€advocate€in€such€proceeding,€theÐ Ú%*! Ðexistence€of€a€ð ðcolorable€defenseðð€is€not€a€substitute€for€the€lawyerððs€duty€to€report€materialÐ õ&E" Ðevidence€of€illegal€conduct.€€The€fact€that€the€board€has€consented€to€the€hiring€of€an€advocateÐ (`#  Ðdoes€not,€contrary€to€the€suggestion€in€the€Commissionððs€comments,€provide€equivalentÐ +){$! Ðprotection€for€shareholders.€€There€is€no€requirement€that€the€boardððs€consent€be€conditioned€onÐ F*–%" Ðfull€knowledge€of€the€evidence€of€the€material€violation,€nor€is€there€a€requirement€that€the€boardÐ a+±&# Ðtake€steps€to€prevent€or€rectify€any€violation.€€The€ð ðcolorable€defenseðð€alternative€should€beÐ ° Ðeliminated€from€the€definition€of€ð ðappropriate€responseðð€in€ðð€205.2(b)(3)(ii).€€To€ensure€thatÐ Ë Ðadvocates€proceed€with€sufficient€zeal,€all€that€is€necessary€is€for€the€SEC€to€adopt€a€provisionÐ æ6 Ðthat€states:Ð Q ÐÌà8  àÔ€#X×áXXXÿÔÔ€#&ü%X#X×áÔNothing€in€these€rules€prevents€a€lawyer€who€is€acting€as€an€advocate€in€anyÐ 7 ‡ Ðproceeding€or€formal€or€informal€investigation€by€the€government€fromÐ : Š Ðpresenting€any€and€all€colorable€defenses€available€to€the€issuer€or€its€agents.€Ð= Ð Ð  ÐÌÔ€&î< %%#&üÔÔ€XÿX %&î<Ôà  àAdvocates€should€be€free€to€present€colorable€defenses€in€any€ongoing€investigation€orÐ C“  Ðproceeding€and€lawyers€should€be€free€to€formulate€them€in€contemplation€of€any€suchÐ ^®  Ðproceeding,€but€neither€advocating€nor€formulating€such€a€defense€excuses€a€lawyer,€under€theÐ yÉ  Ðsecurities€laws€or€the€law€of€lawyering€more€generally,€from€advising€a€client€to€stop€or€refrainÐ ”ä  Ðfrom€likely€illegal€conduct,€simply€because€the€lawyer€can€imagine€a€colorable€defense.Ð ¯ÿ  ÐÌà  àNor€should€the€advocacy€role€exempt€that€lawyer€from€the€duty€to€report€and€followupÐ å5 Ðobligations€under€the€Final€Rule.€€Yet€the€Final€Rule€relieves€advocates€from€the€reportingÐ P Ðrequirements€of€the€rule.€€Under€ðð205.3(b)(6)(ii),€a€lawyer€retained€or€directed€by€a€chief€legalÐ k Ðofficer€to€assert€a€colorable€defense€in€a€proceeding€or€investigation€has€no€reporting€duties€withÐ 6† Ðrespect€to€new€evidence€of€illegalities€that€she€might€discover€as€part€of€her€work,€so€long€as€theÐ Q¡ Ðchief€legal€officer€provides€reports€on€the€progress€of€the€proceeding€to€the€board€or€relevantÐ l¼ Ðboard€committee.€€And€under€ðð205.3(b)(7)(ii),€a€lawyer€retained€or€directed€by€a€qualified€legalÐ ‡× Ðcommittee€to€assert€a€colorable€defense€in€a€proceeding€has€no€reporting€duties€with€respect€toÐ ¢ò Ðnew€evidence€either.€€€Why€not?€€If€the€Commission€meant€only€to€relieve€such€advocate€€lawyersÐ ½  Ðfrom€reporting€evidence€already€reported€to€or€otherwise€known€by€the€board,€the€provisions€areÐ Ø( Ðwritten€too€broadly.€€If,€on€the€other€hand,€the€Commission€meant€to€exempt€these€advocatesÐ óC Ðfrom€reporting€new€evidence€of€illegality,€that€is€completely€contrary€to€the€point€of€ðð307,€and€weÐ !^ Ðcan€see€no€legitimate€justification€for€such€an€exemption.€€There€is€no€blanket€exemption€forÐ )"y Ðð ðadvocatesðð€in€Model€Rule€1.13(b),€for€example.€€Nor€should€there€be€one€here.Ð D#” ÐÌà  àThe€problem€of€an€excessively€broad€exemption€for€particular€classes€of€lawyers,€such€asÐ z%Ê  Ðadvocates€asserting€colorable€defenses,€plagues€several€other€provisions€in€the€rules.€€SectionsÐ •&å! Ð205.3(b)(6)(i)€and€205.3(b)(7)(i)€say€lawyers€hired€or€directed€by€the€chief€legal€officer€or€aÐ °'#  Ðqualified€legal€compliance€committee€to€investigate€reports€have€no€duty€to€report,€so€long€as€inÐ Ë($! Ðthe€case€of€the€chief€legal€officer€the€results€of€the€lawyerððs€investigation€are€reported€to€theÐ æ)6%" Ðboard.€€As€with€advocates,€there€is€no€basis€in€ðð307,€the€securities€laws,€or€the€law€of€lawyeringÐ +Q&# Ðfor€creating€a€blanket€reporting€exemption€for€ð ðinvestigating€lawyers.ðð€€And€as€with€advocates,Ð ,l'$ Ðthe€Commission€could€have€drafted€a€narrow€exemption€for€investigating€lawyers€to€relieve€themÐ ° Ðof€reporting€duties€when€the€evidence€was€already€known,€without€extending€the€exemption€to€theÐ Ë Ðdiscovery€by€those€lawyers€of€new€evidence.€€And€the€problems€with€the€Final€Ruleððs€exemptionÐ æ6 Ðfor€investigating€lawyers€is€not€limited€to€the€question€of€newly€discovered€evidence.€€ConsiderÐ Q Ðthat€an€initially€reporting€lawyer€is€deemed€not€to€have€received€an€ð ðappropriate€responseðð€if€aÐ  l Ðsubsequently€retained€investigating€lawyer€makes€recommendations€that€the€issuer€does€notÐ 7 ‡ Ðð ðsubstantially€implement,ðð€see€ðð205.2(b)(3)(i);€by€contrast,€the€investigating€lawyer€has€no€furtherÐ R ¢ Ðobligations€if€the€issuer€ignores€her€recommendations,€under€ðð205.3(b)(6)(Ô_ÔiÔ_Ô)(B).€€Again,€why€not?€Ð m ½ ÐÌà  àA€final€example€of€an€excessively€broad€exemption€in€the€Final€Rule€occurs€inÐ £ó  Ððð205.2(a)(2)(i),€in€which€the€Commission€attempted€to€exempt€lawyers€who€are€not€functioningÐ ¾  Ðas€lawyers€from€the€requirements€of€these€rules.€€This€section€can€perform€its€function€by€placing€aÐ Ù)  Ðperiod€after€the€word€ð ðissuer.ðð€€In€other€words,€the€Commission€should€delete€the€words€ð ðwithÐ ôD  Ðwhom€the€attorney€has€an€attorney„client€relationshipðð€from€this€subsection.€€Section€205.2(g)Ð _  Ðhandles€a€similar€problem€much€better.€€Ð *z ÐÌà  àThe€reason€it€is€important€to€delete€the€last€phrase€from€ðð205.2(a)(2)(i)€is€that€as€nowÐ `° Ðwritten,€the€rule€exempts€those€lawyers€for€a€related€corporate€entity€(such€as€a€subsidiary€orÐ {Ë ÐSPE)€or€an€agent€for€the€issuer€(such€as€the€CFO)€who€provide€legal€advice€to€the€issuer,€althoughÐ –æ Ðnot€technically€in€an€attorney„client€relationship€with€the€issuer.€€Judge€Harmonððs€opinion€in€òòÔ_ÔInÔ_Ô€reÐ ± ÐEnron€Corp.€Securities,€Derivative€&€Ô_ÔERISAÔ_Ô€Litigationóó,€235€F.€Supp.2d€549€(S.D.€Texas€2002),Ð Ì Ðdemonstrates€how€a€law€firm,€in€that€case€Kirkland€&€Ellis,€may€provide€substantial€legal€adviceÐ ç7 Ðto€an€issuer€without€being€in€an€ð ðattorney„client€relationshipðð€with€that€issuer.€€We€do€not€see€anyÐ R Ðreason€for€the€SEC€to€exempt€any€lawyer€who€provides€legal€advice€to€an€issuer€from€any€of€theseÐ m Ðrules.Ð 8ˆ ÐÌÔ‡XÇuXXXÿÔIII.€The€ð ðNoisy€Withdrawalðð€Proposal€and€the€Alternative€of€CompanyÐ n!¾ ÐReportingÔ#†XÿXXXÇu£c#ÔÐ "Ý ÐÌà  àOur€comments€on€the€Commissionððs€initial€set€of€rules€strongly€supported€theÐ Ç$  ÐCommissionððs€noisy€withdrawal€proposal€as€consistent€with€a€long€professional€tradition,Ð â%2! Ðauthorized€by€ðð307€of€Sarbanes„Oxley,€and€essential€to€the€proper€working€of€the€up„the„ladderÐ ý&M" Ðreporting€requirement.׃ ×Ý ƒ#ÃÝòòÚ  Ú1Ú  ÚóóÝ  Ý×  ×€€Some€mechanism€must€be€put€in€place€to€prevent€a€public€company€fromÐ (h#  Ðignoring€its€lawyerððs€report€of€a€material€violation,€leaving€the€interest€of€the€public€and€investorsÐ ° Ðto€the€lawyerððs€discretionary€decision€whether€to€report€the€matter€to€the€SEC€under€ðð205.3(d)(2)Ð Ë Ðof€Part€205.€€The€purposes€of€Ô_ÔSarbanesÔ_Ô„Oxley€are€endangered€if€no€mechanism€is€included,Ð æ6 Ðwhether€that€be€noisy€withdrawal€by€the€lawyer€or€a€report€from€the€company€to€the€SEC.Ð Q ÐÌà  àIt€seems€to€us€that€as€a€means€of€protecting€investors,€which€is€the€Commissionððs€mandate,Ð 7 ‡ Ðit€matters€not€whether€the€company€or€the€lawyer€is€required€to€inform€the€Commission€of€the€factÐ R ¢ Ðthat€a€lawyer€has€withdrawn€because€the€clientððs€response€to€a€report€under€these€regulations€isÐ m ½ Ðinadequate.׃|×Ý ƒ#ÃÝòòÚ  Ú2Ú  ÚóóÝ  Ý×  ×€€The€Commissionððs€proposed€alternative€of€mandatory€withdrawal€by€the€lawyer,Ð ˆ Ø Ðfollowed€by€mandatory€reporting€of€such€withdrawal€by€the€issuer€to€the€Commission,€is€in€ourÐ £ó  Ðview€an€adequate€„„€and€in€one€respect,€superior€„„€alternative€to€mandatory€noisy€withdrawal€byÐ ¾  Ðthe€lawyer.€€Nonetheless,€the€alternative€is€inadequate€in€two€respects.€€First,€whatever€proposalÐ Ù)  Ðthe€Commission€adopts€must€make€clear€that€the€standard€being€set€is€not€lower€than€that€alreadyÐ ôD  Ðembedded€in€the€securities€laws.€€Second,€the€lawyer€should€be€required€to€take€some€action€if€theÐ _  Ðcompany€does€not€fulfill€its€obligations€under€the€alternative€rule.€€We€will€discuss€not€only€theseÐ *z Ðproblems€but€the€attractive€features€of€the€Commissionððs€alternative€proposal,€as€well€asÐ E• Ðaddressing€some€of€the€questions€the€Commission€poses€in€its€comments.€Ð `° ÐÌà  àBefore€discussing€the€Commissionððs€alternative,€however,€we€want€to€clarify€an€importantÐ –æ Ðpoint€about€the€relationship€between€these€rules€and€lawyerððs€general€obligations€under€theÐ ± Ðsecurities€laws€and€the€law€of€lawyering,€a€point€related€to€a€point€we€made€above€concerningÐ Ì Ðoverly€broad€exemptions.€€We€understand€that€the€Commissionððs€original€noisy€withdrawalÐ ç7 Ðproposal€would€have€relieved€the€lawyer€of€the€duty€to€make€noisy€withdrawal€if€the€companyÐ R Ðcreated€a€qualified€legal€compliance€committee€to€which€the€lawyer€had€reported.€€Although€weÐ ° Ðdid€not€make€this€point€clear€in€our€first€set€of€comments,€we€do€not€see€how€the€existence€ofÐ Ë Ðsuch€a€committee€relieves€a€lawyer€from€any€responsibility€already€existing€under€the€securitiesÐ æ6 Ðlaws€not€to€make€material€misrepresentations€in€documents€authored€or€coauthored€by€thatÐ Q Ðlawyer,€see€òòIn€re€Enronóó,€235€Ô_ÔF.SuppÔ_Ô.2d€at€588.€€These€responsibilities€may€well€necessitate€theÐ  l Ðlawyerððs€withdrawing€or€Ô_ÔdisaffirmingÔ_Ô€documents€previously€authored€or€coauthored€by€a€lawyerÐ 7 ‡ Ðthat€the€lawyer€now€understands€to€be€part€of€a€fraud,€see€Model€Rules€1.2€cmt.€[10],€4.1€cmt.€[3]Ð R ¢ Ð(August€2002€version).€€The€next€investor€who€relies€on€such€documents€will€have€been€defraudedÐ m ½ Ðwith€the€lawyerððs€help€and€aiding€and€abetting€securities€fraud€is,€of€course,€still€a€civil€wrong€thatÐ ˆ Ø Ðthe€SEC€might€prosecute,€as€well€as€a€crime.€€Ð £ó  ÐÌà  àThus,€under€either€version€of€the€rule€adopted€by€the€SEC,€we€think€it€important€that€theÐ Ù)  ÐSEC€make€clear,€at€least€in€comments,€if€not€in€the€text€itself,€that€a€lawyer€may€thus€have€a€dutyÐ ôD  Ðto€withdraw€or€disaffirm€statements€or€documents€apart€from€the€provisions€of€this€rule.€€And€theÐ _  ÐSEC€should€revise€ðð205.1€and€€ðð205.6(c)€to€make€clear€that€compliance€with€these€rules€does€notÐ *z Ðensure€that€the€lawyer€has€complied€with€all€requirements€of€the€securities€laws.€€The€SEC,€ofÐ E• Ðcourse,€should€not€be€adopting€minimum€standards€for€lawyers€that€are€lower€than€theÐ `° Ðprohibitions€against€securities€fraud€that€are€part€of€the€larger€regulatory€scheme.Ð {Ë ÐÌà  àThe€Commissionððs€proposed€alternative,€ðð205.3(e),€would€require€issuers€to€report€theÐ ± Ðfact€of€attorney€withdrawal€and€the€ð ðcircumstances€related€thereto.ðð€€This€standard€improves€onÐ Ì Ðthe€original€proposalððs€so„called€noisy€withdrawal€provision,€which€would€have€indicated€theÐ ç7 Ðcircumstances€related€to€the€withdrawal,€if€at€all,€through€the€indirect€means€of€Ô_ÔdisaffirmingÔ_ÔÐ R Ðdocuments€„„€assuming€such€documents€existed€„„€that€the€lawyer€had€prepared€or€assisted€inÐ m Ðpreparing,€and€that€had€been€submitted€in€connection€with€a€matter€that€the€lawyer€subsequentlyÐ 8ˆ Ðdetermined€was€reasonably€likely€to€have€been€part€of€a€material€violation€of€law.€€Thus,€under€theÐ S £ Ðoriginal€proposal€the€SEC€and,€in€turn,€investors€would,€at€best,€have€had€only€general€notice€ofÐ n!¾ Ðthe€nature€of€the€alleged€illegality€and€the€SEC€and€investors€might€not€even€have€that.€€The€SECÐ ‰"Ù Ðand€investors€might,€if€there€were€no€relevant€documents,€have€no€more€information€than€that€aÐ ¤#ô Ðlawyer€at€some€global€company€had€resigned€over€something€the€lawyer€determined€that€aÐ ¿$  Ðreasonable€lawyer€would€think€signaled€possible€material€illegality.€€In€contrast,€under€theÐ Ú%*! Ðalternative,€the€company€would€have€to€describe€the€circumstances€related€to€the€resignation,Ð õ&E" Ðwhich€at€a€minimum€we€would€think€would€include€a€description€of€the€matter€that€was€theÐ (`#  Ðsubject€of€the€lawyerððs€initial€report.€€Ð +){$! ÐÌà  àWe€are,€however,€troubled€by€the€fact€Ô_ÔthatÔ_Ô€one€of€the€variations€on€the€alternativeÐ a+±&# Ðsuggested€in€the€Commissionððs€release€would€relieve€issuers€of€the€responsibility€to€report€theÐ ° Ðcircumstances,€presumably€based€on€concerns€about€the€effect€on€the€attorney„client€privilege,€aÐ Ë Ðmatter€we€will€address€in€a€moment.€€First,€however,€we€want€to€be€clear€that€eliminating€theÐ æ6 Ðrequirement€that€issuers€describe€the€circumstances€attending€withdrawal€would€make€theÐ Q Ðalternative€òòlessóó€protective€of€investors€than€the€original€proposal,€which€at€least€provided€indirectÐ  l Ðinformation€on€the€matter€with€its€requirement€that€lawyers€disaffirm€affected€documents€orÐ 7 ‡ Ðstatements.€€The€Commission€should€not€adopt€any€alternative€less€protective€than€its€originalÐ R ¢ Ðproposal.€€Thus,€if€the€Commission€decides€to€eliminate€the€ð ðcircumstancesðð€requirement,€weÐ m ½ Ðwould€withdraw€our€support€for€the€alternative€and€instead€urge€the€Commission€to€adopt€itsÐ ˆ Ø Ðoriginal€proposal€on€noisy€withdrawal.Ð £ó  ÐÌà  àWe€anticipate€that€lawyers€and€some€clients€will€argue€that€the€Commission€should€dropÐ Ù)  Ðthe€ð ðcircumstancesðð€requirement€and€not€return€to€the€noisy€withdrawal€provision€in€its€steadÐ ôD  Ðbecause€of€supposed€infringements€of€the€attorney„client€privilege€or€more€general€concerns€aboutÐ _  Ðclient€confidentiality.€€To€take€those€matters€in€turn,€the€attorney„client€privilege€applies€only€toÐ *z Ðcommunications€between€lawyers€and€clients.€€It€does€not€privilege€the€underlying€facts.€€To€putÐ E• Ðthat€point€more€plainly,€the€attorney„client€privilege€allows€a€client€(or€its€lawyer)€to€refuse€toÐ `° Ðanswer€a€question€in€this€form:€What€did€your€lawyer€tell€you?€€Or,€what€did€you€tell€your€lawyer?€Ð {Ë ÐIt€does€not€allow€a€client€to€refuse€to€answer€questions€about€a€matter€simply€because€the€matterÐ –æ Ðwas€discussed€between€lawyer€and€client.€€That€is€what€courts€mean€when€they€say€that€theÐ ± Ðprivilege€ð ðdoes€not€protect€disclosure€of€the€underlying€facts€by€those€who€communicated€withÐ Ì Ðthe€attorney.ðð€€òòUpjohn€v.€United€Statesóó,€449€U.S.€383,€395€(1981).€Ð ç7 ÐÌà  àThe€Commission€is€not€asking€issuers€to€hand€over€any€written€reports€provided€byÐ m Ðlawyers€in€connection€with€this€rule€(if€indeed€there€are€written€reports,€as€ðð205.2(n)€no€longerÐ 8ˆ Ðrequires€them).€€The€Commission€is€not€asking€issuers€to€describe€the€back€and€forth€betweenÐ S £ Ðlawyer€and€client€on€the€matter€that€was€the€subject€of€the€report.€€And,€if€others€have€any€doubtÐ n!¾ Ðabout€those€two€propositions,€the€comments€to€the€rule€could€make€those€propositions€plain,€andÐ ‰"Ù Ðcould€make€clear€that€what€the€Commission€wants€from€issuers€is€two€things:€One,€a€statementÐ ¤#ô Ðthat€the€lawyer€has€resigned,€whenever€a€resignation€is€received€in€connection€with€this€rule;€andÐ ¿$  Ðtwo,€a€statement€that€the€lawyerððs€resignation€was€in€connection€with€the€following€matter,Ð Ú%*! Ðincluding€a€brief€description€of€the€matter,€with€no€requirement€that€the€issuer€repeat€or€discloseÐ õ&E" Ðany€of€what€the€lawyer€actually€said€about€the€matter.€€Ð (`#  ÐÌà  àSome€may€argue€that€this€disclosure€nonetheless€threatens€the€attorney„client€privilege€asÐ F*–%" Ðit€amounts€to€requiring€the€issuer€to€make€this€implicit€statement:€ð ðMy€lawyer€said€that€there€isÐ a+±&# Ðevidence€that€a€material€violation€of€law€occurred€(is€occurring€or€will€occur)€in€connection€withÐ ° Ðthis€matter.ðð€€€Courts€do€not,€however,€treat€the€privilege€so€lightly€as€to€find€waiver€based€onÐ Ë Ðð ðimplicitðð€references€to€lawyer„client€communications.€€The€ð ðcircumstancesðð€portion€of€theÐ æ6 ÐCommissionððs€proposed€alternative€should€not€be€changed€in€the€absence€of€a€convincing€showingÐ Q Ðthat€the€current€law€of€attorney„client€privilege€adopts€the€proposition€that€ð ðimplicitðð€statementsÐ  l Ðamount€to€waiver€of€the€privilege.€€We€know€of€no€such€authority€and€do€not€believe€that€anyÐ 7 ‡ Ðoutlier€authority€that€might€exist€for€such€a€proposition€would€be€followed€by€other€courts.€€SeeÐ R ¢ ÐRestatement€(Third)€Law€Governing€Lawyers€ðð79€cmt.€e€(ð ðKnowledge€by€the€nonprivilegedÐ m ½ Ðperson€that€the€client€consulted€a€lawyer€does€not€result€in€waiver,€nor€does€disclosure€ofÐ ˆ Ø Ðnonprivileged€portions€of€a€communication€òòor€its€general€subject€matteróó.€€Public€disclosure€ofÐ £ó  Ðfacts€that€were€discussed€in€confidence€with€a€lawyer€does€not€waive€the€privilege€if€the€disclosureÐ ¾  Ðdoes€not€also€reveal€that€they€were€communicated€to€the€lawyer.ðð)€(emphasis€added).Ð Ù)  ÐÌà  àAs€to€more€general€concerns€about€confidentiality€that€might€be€urged,€similar€to€theÐ _  Ðconcerns€raised€about€the€noisy€withdrawal€proposal,€despite€the€fact€that€the€CommissionÐ *z Ðapparently€took€concerns€that€ð ðour€clients€will€not€confide€in€us€anymoreðð€seriously€enough€toÐ E• Ðlead€it€to€change€from€its€original€proposal€to€its€alternatives,€we€think€that€these€concerns€areÐ `° Ðmakeweights€ð!ð€rhetoric€without€substance.€€Why?€€The€people€who€might€be€engaged€inÐ {Ë Ðwrongdoing€(as€the€issuer€is€a€creation€of€law€and€thus€has€no€ð ðrealðð€counterpart)€have€noÐ –æ Ðprivilege€now€and€no€legitimate€claim€of€confidentiality€either.€€The€privilege€and€the€duty€to€keepÐ ± Ðconfidences€belong€to€the€entity,€not€the€managers€or€the€directors.€€Either€can€be€waived€byÐ Ì Ðfuture€managers€or€trustees€in€bankruptcy.€€Lawyers€can€disclose€confidences€in€every€state€toÐ ç7 Ðdefend€themselves€when€necessary,€even€before€the€filing€of€actual€charges€or€a€complaint.Ð R ÐLawyers€can€disclose€confidences€to€collect€a€fee,€when€necessary.€€The€crime„fraud€exception€toÐ m Ðthe€privilege€leaves€unprivileged€all€communications€by€the€client€or€its€agents€in€furtherance€ofÐ 8ˆ Ðillegality.€€And€in€most€states,€lawyers€are€already€permitted,€and€in€some€cases€required,€toÐ S £ Ðdisclose€client€fraud.€€With€all€these€exceptions€to€confidentiality€and€the€privilege€extant,€the€ideaÐ n!¾ Ðthat€ð ðnoisy€withdrawalðð€or€the€alternativeððs€ð ðcircumstancesðð€provision€would€suddenly€result€inÐ ‰"Ù Ðclients€not€talking€to€their€lawyers€seems€untenable.€€Corporate€clients€(through€their€agents)Ð ¤#ô Ðconfide€in€corporate€lawyers€(to€the€extent€they€do,€which€is€now€imperfect€and€always€will€be)Ð ¿$  Ðbecause€corporations€need€legal€advice.€€Period.€€There€is€no€evidence€whatsoever€that€corporateÐ Ú%*! Ðclients€have€avoided€lawyers€in€those€few€states€that€now€òòrequireóó€disclosure€of€client€illegality€orÐ õ&E" Ðthose€states€that€permit€such€disclosure.€€There€is€no€evidence€that€lawyers€in€such€states€are€toldÐ (`#  Ðless€than€lawyers€in€other€states.€€Corporate€clients€that€function€across€state€lines,€as€so€many€do,Ð +){$! Ðhave€a€fairly€wide€choice€of€states€from€which€they€may€secure€lawyers.€€No€evidence€exists€thatÐ F*–%" Ðlawyers€in€disclosure€states€have€suffered€at€all€or€that€the€quality€of€representation€or€complianceÐ a+±&# Ðwith€law€in€those€states€has€been€reduced.€€Ð ° ÐÌà  àFinally,€the€securities€laws€now€require€issuers€to€disclose€a€contingent€liability€when€thatÐ æ6 Ðliability€is€likely€to€be€significant€enough€to€be€of€concern€to€investors.€€We€submit€that€any€suchÐ Q Ðdisclosure€involves€as€much€of€an€implicit€statement€about€what€a€lawyer€told€the€issuer€as€theÐ  l Ðð ðcircumstancesðð€provision€of€the€alternative€would€require.€€In€sum,€eliminating€theÐ 7 ‡ Ðð ðcircumstancesðð€provision€would€render€the€alternative€less€protective€than€the€original€proposal.€Ð R ¢ ÐIt€should€not€be€eliminated.€€If€it€is,€the€original€proposal€should€be€adopted€instead€with€ourÐ m ½ Ðcaveat€that€lawyers€may€be€required€to€disaffirm€statements€or€documents€in€certain€circumstancesÐ ˆ Ø Ðeven€when€the€company€has€adopted€a€qualified€legal€compliance€committee.€€Moreover,€thatÐ £ó  Ðcaveat€needs€to€be€included,€whatever€version€of€this€rule€is€adopted,€to€ensure€that€theseÐ ¾  Ðð ðminimumðð€standards€are€not€lower€than€the€fraud€provisions€of€the€securities€laws.Ð Ù)  ÐÌà  àThe€other€respect€in€which€the€alternative€is€not€sufficiently€protective€of€investors€is€thatÐ _  Ðit,€permits,€but€does€not€òòrequireóó€lawyers€to€notify€the€Commission€of€the€fact€of€withdrawal€inÐ *z Ðthose€instances€in€which€the€issuer€fails€to€fulfill€its€obligation€under€this€rule.€€See€Proposed€RuleÐ E• Ððð205.3(f).€€We€can€think€of€no€good€reason€to€relieve€lawyers€of€that€responsibility.€€If€theÐ `° Ðconcern€is€that€lawyers€will€not€be€able€to€monitor€whether€the€issuer€has€made€the€requiredÐ {Ë Ðdisclosure,€all€that€would€be€necessary€would€be€a€provision€requiring€an€issuer€to€copy€theÐ –æ Ðreporting€(departed)€lawyer€on€its€disclosure€to€the€Commission.€€Ð ± Ðà  àÌÔ‡XÇuXXXÿÔIV.€Law€Firm€Discipline€and€Imputation€of€Knowledge€Within€a€FirmÔ#†XÿXXXÇuS¦#ÔÐ ç7 ÐÌà  àThe€Commissionððs€rules€should€address€the€need€for€discipline€of€law€firms.׃!×Ý ƒ#ÃÝòòÚ  Ú3Ú  ÚóóÝ  Ý×  ×€€IncludingÐ !q Ðlaw€firms€would€be€consistent€with€the€approach€the€Commission€has€taken€in€the€past€inÐ <Œ Ðexercising€its€authority€under€Rule€2(e).€€See€òòIn€re€Keating,€Ô_ÔMuethingÔ_Ô€&€Ô_ÔKlekampÔ_Ôóó,€Release€No.Ð W § Ð34„15982,€1979€WL€186370€(July€2,€1979)€(finding€that€a€ð ðlaw€firm€has€a€duty€to€make€sure€thatÐ r! Ðdisclosure€documents€filed€with€the€Commission€include€all€material€facts€about€a€client€of€whichÐ "Ý Ðit€has€knowledge€as€a€result€of€its€legal€representation€of€that€client,ðð€and€imposing€sanctions€onÐ ¨#ø Ðlaw€firm€for€ð ðÔ_Ôfail[ingÔ_Ô]€to€carry€out€its€professional€responsibilitiesðð).€€Specialized€corporate€andÐ Ã$  Ðsecurities€practice€involves€the€participation€of€a€team€of€lawyers€who€bring€differing€skills€andÐ Þ%.! Ðknowledge.€€Responsibility€for€decisions€is€often€divided€up€or€shared€in€ways€that€are€uncertainÐ ù&I" Ðor€shifting.€€The€diffusion€of€responsibility€and€knowledge€leads€to€the€possibility€that€no€oneÐ ° Ðlawyer€(or€identified€group€of€lawyers)€will€be€held€responsible€for€what€was€done.€€TheÐ Ë ÐCommission€should€add€a€rule€permitting€the€censure€or€reprimand€of€a€law€firm€and€assessmentÐ æ6 Ðof€monetary€penalties€when€the€firm,€which€is€clearly€responsible€for€the€representation,€has€failedÐ Q Ðto€conform€to€responsibilities€required€by€the€Commission.ò òÐ  l ÐÌó óà  àIn€addition€to€failing€to€address€law€firm€censure€and€discipline,€the€proposed€rules€alsoÐ R ¢ Ðsuffer€from€the€failure€to€address€the€important€questions€of€imputation€of€knowledge€within€a€lawÐ m ½ Ðfirm.€€In€our€initial€comments€in€December€2002€we€suggested€language€to€address€those€relatedÐ ˆ Ø Ðissues.׃*×Ý ƒ#ÃÝòòÚ  Ú4Ú  ÚóóÝ  Ý×  ×€€One€consequence€of€failing€to€address€imputation€is€that€it€renders€the€definition€ofÐ £ó  Ðð ðappearing€and€practicingðð€confusing,€since€issuers€are€often€understood€to€be€represented€byÐ ¾  Ðfirms€rather€than€by€individual€lawyers.€€An€even€more€troubling€consequence€is€that€the€failure€toÐ Ù)  Ðapply€the€rule€to€law€firms€may€encourage€the€decentralization€of€legal€work€within€law€firms,Ð ôD  Ðundermining€the€Commission€rules,€the€purposes€of€ðð307,€and€the€provision€of€quality€legalÐ _  Ðservices.ò ò€€ó óThe€òòIn€re€Keating,€Ô_ÔMuethingÔ_Ô€&€Ô_ÔKlekampÔ_Ôóó€opinion,€cited€above,€demonstrates€thisÐ *z Ðproblem€and€the€Commissionððs€prior€determination€to€address€it.€€In€that€case,€the€CommissionÐ I™ Ðfound€that€the€firm€ð ðcollectively€had€knowledgeðð€of€questionable€transactions,€but€had€imposed€ð ðaÐ d´ Ðdivision€of€authority€among€the€partners€within€the€firm€concerning€client€matters€whichÐ Ï Ðsignificantly€impaired€communications€within€the€firm.€.€.€.€due€in€part€to€the€lack€ofÐ šê Ðcomprehensive€internal€procedures€within€the€firm€to€gather€and€evaluate€such€information€inÐ µ Ðconnection€with€the€preparation€of€[the€clientððs]€filings€with€the€Commission.ðð€€The€CommissionÐ Ð  Ðfaulted€the€firm€for€failure€to€have€in€place€ð ða€system€which€assured€that€the€knowledge€of€theÐ ë; Ðmembers€of€the€firm€was€communicated€to€the€persons€responsible€for€preparing€disclosureÐ V Ðdocuments€so€that€adequate€disclosure€of€€material€information€ð!ð€which€was€within€the€firmððsÐ !q Ðknowledge€ð!ð€was€made.ðð€€The€Commission€should€take€a€similar€position€in€these€rules.ò òÐ <Œ Ðó óÌÔ‡XÇuXXXÿÔV.€ConclusionÔ#†XÿXXXÇu6·#ÔÐ r! ÐÌà  àWe€appreciate€the€great€effort€that€the€Commission€has€put€into€revising€its€previous€draftÐ ¬#ü Ðrules,€and€in€many€respects€the€current€rules€represent€a€significant€improvement.€€We€have€triedÐ Ç$  Ðto€focus€on€the€areas€we€believe€still€need€work€and€have€tried€to€state€our€concerns€as€succinctlyÐ â%2! Ðand€helpfully€as€possible.€€In€particular,€we€emphasize€that€nothing€the€Commission€does€aboutÐ ý&M" Ðnoisy€withdrawal€or€its€alternative€will€matter€unless€the€Commission€fixes€the€triggering€standardÐ (h#  Ðand€the€ð ðcolorable€defenseðð€provisions€that€now€threaten€the€regime€of€internal€reporting€thatÐ 3)ƒ$! ÐCongress€intended€the€SEC€to€put€in€place.€€Ð ° ÐÌà  àIf€members€of€the€Commission€staff€want€more€information€or€would€like€to€talk€with€anyÐ æ6 Ðof€us€about€our€comments,€we€would€be€pleased€to€be€of€assistance.€Ð Q ÐÌà@ìì*ìàˆÌà  àà ` àà ¸ àà  àà h àà À àà  àSusan€P.€KoniakÐ R ¢ Ðà  àà ` àà ¸ àà  àà h àà À àà  àProfessor€of€LawÐ m ½ Ðà  àà ` àà ¸ àà  àà h àà À àà  àBoston€University€School€of€LawÐ ˆ Ø Ðà  àà ` àà ¸ àà  àà h àà À àà  àà p à<Ô4‚'CoàÔÝ‚&ÍOÝÔÿÔòòÝ  ÝÔ5  Ôspkoniak@bu.edu>Ô6j½ÔÝ‚&ÍO~½issiÝóóÔÿÔÝ  ÝÔ7Co䬽ÔÐ £ó  Ðà  àà ` àà ¸ àà  àà h àà À àà  àà p àTel:€617.491.3038Ð ¾  ÐÌà  àà ` àà ¸ àà  àà h àà À àà  àRoger€C.€CramtonÐ ôD  Ðà  àà ` àà ¸ àà  àà h àà À àà  àStevens€Professor€of€Law€EmeritusÐ _  Ðà  àà ` àà ¸ àà  àà h àà À àà  àCornell€Law€SchoolÐ *z Ðà  àà ` àà ¸ àà  àà h àà À àà  àà p à<Ô4‚(CoàÔÝ‚&ÍOÝÔÿÔòòÝ  ÝÔ5  Ôrcc10@cornell.edu>Ô6šÀÔÝ‚&ÍO®Àet€tÝóóÔÿÔÝ  ÝÔ7t€0ÜÀÔÐ E• Ðà  àà ` àà ¸ àà  àà h àà À àà  àà p àTel:€607.255.3379Ð `° ÐÌà  àà ` àà ¸ àà  àà h àà À àà  àGeorge€M.€CohenÐ –æ Ðà0  àà0` (#(#àà0¸ ` (#` (#àà0¸ (#¸ (#àà0h(#(#àà0Àh(#h(#àà0À(#À(#àà0p(#(#àà  àEdward€F.€Ô_ÔHowreyÔ_Ô€Research€Professor€Ð±p(#p(# Ðà  àà ` àà ¸ àà  àà h àà À àà  àUniversity€of€Virginia€School€of€LawÐ Ì Ðà  àà ` àà ¸ àà  àà h àà À àà  àà p à<Ô4‚)t€àÔÝ‚&ÍOÝÔÿÔòòÝ  ÝÔ5  Ôgmc3y@viginia.eduÔ6ZÄÔÝ‚&ÍOnÄet€tÝóóÔÿÔÝ  ÝÔ7t€œÄÔ>Ð ç7 Ðà  àà ` àà ¸ àà  àà h àà À àà  àà p àTel:€434.924.3814Ð R Ðà  àÐ  m ÐÔ‡$XÿXXXÿÔà@¢ ¢ ìàLIST€OF€ACADEMICS€WHO€SUPPORT€THESE€COMMENTSˆÐ ° Ðà  àÌà0  à[The€co„authors€of€these€comments€circulated€a€draft€of€them€to€a€number€of€academicÐ æ6 Ðcolleagues,€inviting€them€to€endorse€these€comments.€€Here€we€list€the€names€andÐ Q Ðaffiliations€of€those€who€are€in€òògeneral€agreement€with€our€comments€andÐ  l Ðrecommendationsóó.€€Because€time€did€not€permit€consideration€of€each€individualððsÐ 7 ‡ Ðsuggestions,€the€signers€are€òònotóó€endorsing€the€specific€language€or€details€of€eachÐ R ¢ Ðcomment€or€recommendation.€€They€have€authorized€us€to€attach€their€names€and€to€sayÐ m ½ Ðthat€òòthey€agree€generally€with€the€substance€and€tone€of€this€letteróó.]Ј Ø(#(# ÐÌÒ(€X€°(#°(#(ÒòòóóThomas€R.€AndrewsÐ ¾  ÐUniversity€of€WashingtonÐ Ù)  ÐÌStephen€M.€BainbridgeÐ _  ÐUniversity€of€California€(Los€Angeles)Ð *z ÐÌRichard€Ô_ÔBalnaveÔ_ÔÐ `° ÐUniversity€of€VirginiaÐ {Ë ÐÌDebra€Lyn€Ô_ÔBassettÔ_ÔÐ ± ÐMichigan€State€UniversityÐ Ì ÐÌEdward€C.€BrewerÐ R ÐNorthern€Kentucky€UniversityÐ m ÐÌLester€Ô_ÔBrickmanÔ_ÔÐ S £ ÐYeshiva€UniversityÐ n!¾ ÐÌStephen€M.€BundyÐ ¤#ô ÐUniversity€of€California€(Berkeley)€Ð ¿$  ÐÌRichard€M.€Ô_ÔBuxbaumÔ_ÔÐ õ&E" ÐUniversity€of€California€Ô_Ô(Berkeley)Ô_ÔÐ (`#  ÐÌPaul€D.€CarringtonÐ F*–%" ÐDuke€UniversityÐ a+±&# ЇRobert€F.€Ô_ÔCochranÔ_ÔÐ ¾ # ÐÔ_ÔPepperdineÔ_Ô€UniversityÐ Ù) $ ÐÌJames€D.€CoxÐ _& ÐDuke€UniversityÐ *z' ÐÌDavid€A.€DanaÐ `°) ÐNorthwestern€UniversityÐ {Ë* ÐÌJoshua€Paul€DavisÐ ±, ÐUniversity€of€San€FranciscoÐ Ì- ÐÌMelvin€A.€Ô_ÔEisenbergÔ_ÔÐ R/ ÐUniversity€of€California€(Berkeley)Ð m0 ÐÌRobert€W.€GordonÐ S £2 ÐYale€UniversityÐ n!¾3 ÐÌRobert€W.€HamiltonÐ ¤#ô5 ÐUniversity€of€TexasÐ ¿$ 6 ÐÌJ.€Gordon€Ô_ÔHyltonÔ_ÔÐ õ&E"8 ÐÔ_ÔMarquetteÔ_Ô€UniversityÐ (`#9 ÐÌDouglas€Austin€Ô_ÔKysarÔ_ÔÐ F*–%; ÐCornell€UniversityÐ a+±&< ЇDonald€C.€Ô_ÔLangevoortÔ_ÔÐ ° ÐGeorgetown€UniversityÐ Ë ÐÌJohn€Ô_ÔLeubsdorfÔ_ÔÐ Q ÐRutgers€University€(Newark)Ð  l ÐÌDavid€Ô_ÔLubanÔ_ÔÐ R ¢ ÐGeorgetown€UniversityÐ m ½ ÐÌJudith€L.€Ô_ÔMauteÔ_ÔÐ £ó  ÐUniversity€of€OklahomaÐ ¾  ÐÌNancy€J.€MooreÐ ôD  ÐBoston€University€Ð _  ÐÌCarol€A.€NeedhamÐ E• ÐSaint€Louis€UniversityÐ `° ÐÌDale€Ô_ÔOesterleÔ_ÔÐ –æ ÐUniversity€of€ColoradoÐ ± ÐÌRichard€W.€PainterÐ ç7 ÐUniversity€of€Illinois€Ð R ÐÌRex€R.€Ô_ÔPerschbacherÔ_ÔÐ 8ˆ ÐUniversity€of€California€(Davis)Ð S £ ÐÌMilton€C.€Regan,€Jr.Ð ‰"Ù ÐGeorgetown€UniversityÐ ¤#ô ÐÌDeborah€RhodeÐ Ú%*! ÐStanford€UniversityÐ õ&E" ÐÌHarriet€Rubin€RobertsÐ +){$! ÐUniversity€of€Miami€Ð F*–%" ÐÐ a+±&# ÐThomas€RossÐ °# ÐUniversity€of€Pittsburgh€Ð Ë$ ÐÌÔ_ÔTaninaÔ_Ô€Ô_ÔRostainÔ_ÔÐ Q& ÐNew€York€Law€SchoolÐ  l' ÐÌIrma€S.€RussellÐ R ¢) ÐUniversity€of€MemphisÐ m ½* ÐÌGeorge€A.€Ô_ÔRutherglenÔ_ÔÐ £ó , ÐUniversity€of€VirginiaÐ ¾ - ÐÔ_ÔÔ_ÔÌTheodore€J.€Ô_ÔSchneyerÔ_ÔÐ ôD / ÐUniversity€of€ArizonaÐ _0 ÐÌMarc€SteinbergÐ E•2 ÐSouthern€Methodist€UniversityÐ `°3 ÐÌEli€WaldÐ –æ5 ÐUniversity€of€DenverÐ ±6 ÐÌW.€Bradley€Ô_ÔWendelÔ_ÔÐ ç78 ÐWashington€and€Lee€UniversityÐ R9 ÐÔ#†XÿXX$XÿÍÅ#ÔÌÓ€  (þëss Ó