From: Jeff Schultz [jeff_schultz@ksg04.harvard.edu]
Sent: Wednesday, December 18, 2002 2:32 PM
To: rule-comments@sec.gov
Subject: File No. S7-45-02

December 18, 2002

VIA E-MAIL TO RULE-COMMENTS@SEC.GOV

Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549-0609
Attn: Jonathan G. Katz, Secretary

Re:	Sarbanes-Oxley Act 307  Implementation of Standards of Professional
Conduct for Attorneys  SEC Release Nos. 33-8150; 34-46868; IC-25829;
Proposed Part 205 to Title 17, Chapter II, C.F.R. (Rule) (File No.
S7-45-02)

Ladies and Gentlemen:

I applaud the Commissions Staff for proposing far-reaching measures that,
if and when implemented, have the potential to redraw the contours of lawyer
regulation in this country in a positive way.  I believe I speak for many
counsel when I say that the rules of legal ethics, as currently set forth in
a hodge-podge of often contradictory state codes, bar opinions,
restatements, learned commentary and court decisions, do not always provide
clear guidance to attorneys endeavoring to satisfy both their clients
business goals and their own ethical duties.  It is not just the legal
profession as a whole that is self-regulated; each and every attorney who
practices must consult his or her conscience many times a day.  If, with the
Commissions prodding, the existing body of laws and regulations applicable
to the legal profession can be harmonized and clarified, then the Model
Rules will finally be worthy of their name and all lawyers and clients will
benefit.

I am concerned, however, that the Commissions proposed Rule does not
sufficiently take into account the important differences among attorneys in
different practices or contexts, i.e., litigation vs. transactional and
outside vs. in-house.  I am primarily concerned with in-house counsel and
their duties, and I believe that the Rule should be as well.  Outside
counsel should have no reporting duties except to the chief legal officer
(CLO) of their client.  Under cover of attorney-client privilege, they can
give a full accounting of any actual or threatened violations to the CLO.
Once they inform the CLO about a violation or any other matter, the sole
responsibility should shift to the CLO and, if one exists, the qualified
legal compliance committee (QLCC).  In this way, expert outside securities
lawyers can focus on their expert representation of the client Issuer before
the Commission and can continue to be advocates under a more adversarial
model than the one that should apply to an in-house counsel with
pre-existing compliance duties to the client Issuer.

I view the QLCC as a particularly helpful innovation.  An in-house attorney
generally does his or her best to balance competing roles as compliance
officer and keeper of confidences, attempting along the way to identify the
most efficient, advantageous and trouble-free path for the companys
transactions and general business activities.  In a worst-case scenario,
howeverof which we have seen all too many latelythe in-house attorney
becomes a cop who must try to halt misconduct, violations of law or
breaches of legal obligations committed by executives or employees.  All too
often, even an in-house attorney with the prestige and credibility to
deserve the title of General Counsel either feels obligated not to, or
chooses not to, oppose misconduct by top management.  He or she may feel
more like a part of the companys management team than a cop.  This can be
due to the influence of personal relationships, financial incentives, or the
simple fear of losing employment (and, sometimes, paradoxically,
professional reputation, since the obligation to stay silent may make
self-defense or justification difficult).  The creation by the Commission,
under the proposed Rule, of the CLO title with specific statutory duties and
ideally reporting to the QLCC recognizes these structural issues.

The Rules differentiated approach to in-house and outside counsel suggests
to me that the Commission understands the different roles and
responsibilities of such counsel.  The Commission also seems to understand
what many state courts like the Illinois court in the case of Balla v.
Gambro, Inc. (584 N.E. 2d. 104 (Ill. 1991)) still do not: the real, human
costs of standing up to misconduct, and the difficulties that discharged
attorneys face when they must remain silent about the cause of their
discharge and can not seek professional redemption and/or monetary
compensation in court because the claim of retaliatory discharge is not
recognized in law for an employed lawyer.  As the Release containing the
proposed Rule states: Requiring an in-house attorney employed by the Issuer
to resign when that attorney receives an inappropriate response to the
attorney's reported evidence of an ongoing or impending material violation
appears to be unreasonably harsh. (emphasis in the original)  But what does
the Commission expect will happen to an in-house attorney who disaffirms an
opinion or other document he or she prepares, or otherwise spills the
 beans to the Commission?  Whether the attorney can bring a retaliatory
discharge claim will still be a matter of state law, and the fact that
Section 205.3(e) of the Rule would bless the use of Issuer confidences by
the attorney in self-defense is small comfort to an attorney who respects
his clients privilege and confidentiality and values his own reputation.
It seems to me that this provision also puts a powerful weapon in the hands
of a disgruntled attorney who may actually have been discharged for
incompetence or, ironically, violating ethical rules.

The Commission seems to conclude in its Release that: The noisy withdrawal
 provision in Section 205.3(d) probably makes permissive disclosure of
confidential information under the circumstances in Section 205.3(e)
sufficient to protect investors. But the requirement or option (depending
if the violation is ongoing or imminent or has already occurred) to make a
noisy withdrawal (which becomes a noisy disaffirmance requirement or
option in the case of the in-house counsel), requires disclosure and
disaffirmance only to the Commission.  It does little to warn investors
about what is going on at the Issuer.  Under the ABAs more restrictive
version of Model Rule 1.13, counsel could theoretically notify the
shareholders and avoid violating the separate obligation to keep client
confidences under Mode Rule 1.6.  In the case of a widely-held stock,
however, direct notice is impracticable; for a publicly-traded company, the
closest thing to notifying the shareholders is to inform the investing
public at large.  But under the Rule, counsel can only tell the public at
large once they begin the process of self-defense and remedy-seeking as a
consequence of being fired by the client.  That is far too late to warn
investors.

I would propose an alternative to both the noisy withdrawal and the
notification of successor counsel under Section 205.3(d)(1) and (2).  My
proposal would create an effective deterrent to managements discharging the
CLO or counsel for doing their job of investigating misconduct and other
legal violations, without bestowing an individual power on a discharged
attorney to use an Issuers confidential information as he or she sees fit.
The Rule should provide for the amendment of Item 4 of Form 8-K under the
1934 Act to require the public reporting within five business days of the
resignation or dismissal of an Issuer/Registrants CLO (or dismissal of a
subordinate and/or outside attorney to which such CLO objects), in either
case when the CLO invokes professional responsibility to justify his or
her resignation or to contest the dismissal by the Issuer.  Similar to the
disclosure required regarding independent accountants under the guidelines
contained in Regulation S-K Item 304 (applicable to Item 4 of Form 8-K), the
Issuer/Registrant should be specifically required to state whether: (1) the
former CLO (or other attorney, as applicable) resigned or was dismissed and
the date thereof; (2) the former CLO (or other attorney, as applicable) has
notified the Issuer or the Commission of his or her intention to disclaim or
has actually disclaimed any opinion, document, affirmation, representation,
characterization, or the like in a document filed with or submitted to the
Commission; (3) the decision to accept the attorneys resignation or to
discharge the attorney was recommended or approved by (A) the
Issuer/Registrants QLCC or audit or similar committee of the board, if it
has such committee or (B) the board if not; and (4) the Issuer/Registrant
has authorized the former attorney to respond fully to the inquiries of any
successor attorney concerning the subject matter of any disagreement and, if
not, describe the nature of any limitation thereon and the reason therefor.

The Commission is right to focus on structure, and bolsters the credibility
and status of the General Counsel with the CLO concept.  By creating the
QLCC, the Commission also opens up the possibility of using the QLCC for
direct Board supervision of a companys principal lawyer, which would shift
the balance of power within management in a way that would support the CLO
in trying to be a good compliance officer or cop for the companys own
good when necessary.  An institutionalized QLCC that is solely responsible
for determining the compensation of the companys CLO, and hiring and firing
the companys CLO (who in turn would be invested with the delegated hiring
and firing power over other attorneys in the organization) would provide
significant protection.  The Commission comments in its Release that it
thinks the QLCC will be institutionalized in 25% of Issuers as a standing
committee.  I hope that number will go even higher and that it will spread
to private companies as a best practices approach.  Although the duties
foreseen by the Commission Staff for the QLCC are limited to carrying out
the up-the-ladder investigations required by the proposed Rule, it does
not seem far-fetched to think that a standing QLCC might take on the
additional duties described immediately above.

	I also believe some of the Rules definitions are problematic.  One of
several tricky concepts under the Rule is that of a supervisory attorney
under Section 205.4.  In an outside law firm, it should be fairly clear who
the ultimate supervisory attorney is: the billing partner.  Inside a
company, however, it may not be entirely clear who is supervising whom.  The
Rule catches supervisory attorneys in its web under a tag youre it
principle.  The definition includes supervisors even if they have no actual
knowledge at the time that a subordinate attorney, who may be on the other
side of the corporate structure chart, is deemed to have an obligation to
report to them.  Even an attorney who knows they are a supervisor to another
may not realize that at a particular moment what the subordinate below them
is doing counts as appearing and practicing before the Commission.

As to the concept of appearing and practicing, the Commission has in the
past with respect to enforcement matters under its Rule of Practice 102(e)
set a hurdle that required at a minimum a relational nexus with practicing
securities law.  The Rule sets a lower hurdle, sweeping into the coverage
of its definition a number of organizational and informational activities by
subordinate attorneys that should not constitute practicing securities
 law, and by so doing, turns any of their superiors into securities law
practitioners.  The definition also includes any attorney representing an
Issuer in the adversarial context of an administrative proceeding.  I
believe counsel representing an Issuer in an adversarial proceeding should
have more leeway to keep communications with the client in the context of
rendering legal advice absolutely confidential.  This is very different from
a case where an attorney is preparing disclosure for filing with the
Commission.

I also find it rather circular to bring an attorney investigating a
violation of the Act or the Rule under the coverage of the Rule.  Most
likely this would be special outside counsel hired to do an internal
investigation by the CLO or the QLCC.  The start of an investigation
indicates that the potential violation is already being dealt with at the
highest levels of the Issuer.  Requiring the investigating attorneys to
disclose will likely only produce excessive disclosure and may well
jeopardize the internal investigative process.

Finally, the triggering events that the Rule requires an attorney to
reporta material violation of the securities laws or material breach of
fiduciary dutyare drawn too broadly.  Since few of the in-house
subordinate and supervisory attorneys who first come across a breach or
violation will be experts in securities law, over-reporting will ensue.
Such over-reporting would be exacerbated by the record-keeping required
under the Rule, which mandates the creation and retention of a written
report, even where no violation is deemed to exist, that could be
miscontrued at a later date in the context of litigation or a Commission
investigation.  The Commission also applies an objective standard, under
which, the Release states, an individual attorney is not excused from
reporting evidence of a material violation on the grounds that he or she
does not personally believe that a material violation has occurred, is
occurring, or is about to occur.  Coupled with a definition of material
linked to a reasonable investor standard, and put into the hands of
inexperienced attorneys, the reporting obligation is destined to be
over-invoked unless the definitions are tightened.

Other commentators on the proposed Rule have made the legislative history
points at great length, so it is not worth repeating their citations to the
legislative record in Congress.  I share their conclusion that neither the
author of Section 307 of the Sarbanes-Oxley Act, Senator Edwards of North
Carolina, nor any of his fellow sponsorssuch as Senator Enzi of
Wyomingintended anything but a restatement of the up-the-ladder approach
that the Commission has been advocating for more than 20 years.  The Rule as
proposed by the Commission admittedly goes beyond this more limited mandate.
I hope that my own proposal for signaling to the public the replacement by
an Issuer of its attorneys offers a useful approach to bolstering the
in-house attorneys role as compliance officera goal which the Commission
has advanced considerably through the creation of the CLO and QLCC concepts.

Very truly yours,

Jeffrey L. Schultz, Esq.
(Jeff_Schultz@ksg04.harvard.edu)