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FARRELL LIBRARY

KANSAS SIAM UNIVERSE TIT EARING

BEFORE THE

COMMITTEE ON

BANKING, HOUSING, AND URBAN AFFAIRS

UNITED STATES SENATE

KSU LIBRARIES 

NINETY-SIXTH CONGRESS

SECOND SESSION

ON

THE NOMINATION OF

BARBARA S. THOMAS TO BE A MEMBER OF THE SECURITIES

AND EXCHANGE COMMISSION

AUGUST 19, 1980

Printed for the use of the Committee on Banking, Housing, and Urban Affairs

U.S. GOVERNMENT PRINTING OFFICE

66-8540 WASHINGTON: 1980
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

WILLIAM PROXMIRE, Wisconsin, Chairman

HARRISON A. WILLIAMS, JR., New Jersey

ALAN CRANSTON, California

ADLAI E. STEVENSON, Illinois

ROBERT MORGAN, North Carolina

DONALD W. RIEGLE, JR., Michigan

PAUL S. SARBANES, Maryland

DONALD W. STEWART, Alabama

GEORGE J. MITCHELL, Maine

JAKE GARN, Utah

JOHN TOWER, Texas

JOHN HEINZ, Pennsylvania

WILLIAM L. ARMSTRONG, Colorado

NANCY LANDON KASSEBAUM, Kansas

RICHARD G. LUGAR, Indiana

KENNETH A. MCLEAN, Staff Director

M. DANNY WALL, Minority Staff Director

BRUCE F. FREED, Professional Staff Member

(H)
NOMINATION OF BARBARA S. THOMAS

TUESDAY, AUGUST 19, 1980

U.S. SENATE,

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS,

Washington, D.C.

The committee met at 9:35 a.m. in room 5302, Dirksen Senate

Office Building, Senator William Proxmire (chairman of the committee) presiding.

Present: Senators Proxmire, Williams, Morgan, Garn, and Kassebaum.

The CHAIRMAN. The committee will come to order.

This morning the committee considers the nomination of Barbara

Thomas to be a member of the Securities and Exchange Commission.

Ms. Thomas, will you rise and raise your right hand?

[Witness sworn.]

The CHAIRMAN. We are very honored to have with us a former

member of this committee and a very distinguished U.S. Senator,

the senior Senator from New York, Senator Javits.

Go ahead, Senator.

STATEMENT OF SENATOR JAVITS

Senator JAVITS. Thank you very much, Mr. Chairman. Mr. Chairman, I deeply appreciate the courtesy, as I have other committee

meetings to attend.

Mr. Chairman, I find it singularly rewarding to recommend Barbara Thomas to the committee. I have from very substantial

sources in New York, received outstanding recommendations of

her. She has been in to see me twice with others who are well

known to me and are her clients, and who have recommended her

highly for this job. I have been very greatly impressed with this

young and attractive woman who has acquired a fantastic legal

experience in a relatively short time, 11 years.

It reminds me of the early days of our country when men of

considerable youth had very great responsibilities. She is so bright

it was almost difficult to believe. So I think she will make an

excellent member of the Commission.

The big worry in Wall Street, my hometown, which the SEC operation is designed to monitor, is that it will not be recognized that

the American society lives on talent and heavy risk capital. There

is no such thing as a safe investment in terms of the inexorable

march of time, changes, and the manifold people who always press

the line between truth and misrepresentation. And I think we have

a singularly able young person trained in a modern school, having

been on the side which deals with the SEC, and that can bring a

(1)
2

spirit of modern thinking as well as a thoughtful and highly professional quality to the work of the SEC.

I am especially impressed with her legal education. She went to

the same law school I did, many, many years later, of course. But

she graduated cum laude, and that's really a pretty classy law

school. I think being second out of a class is quite a distinction.

In addition, she has won other honors there which have now

been recognized by the organized bar in the short space of a few

years. She is now the chairman of the Corporation Law Committee

of the Association of the Bar of the City of New York, of which I

am also a member. The firm into which she has been admitted as a

partner, Kaye, Scholer, Fierman, Hayes & Handler—that's Milton

Handler's firm; Milton Handler is one of our most able lawyers, an

antitrust lawyer—and the firm in which she got her early training,

Judge Rifkind's firm, are both very fine firms and I think their

recognition of Ms. Thomas' quality is testimony to what I found in

the visits that I had with her as to her professional ability.

And so, without any regard to party or any consideration other

than excellence, Mr. Chairman, Senator Garn, I commend Barbara

Thomas to the committee for confirmation as a member of the

SEC.

The CHAIRMAN. Thank you, Senator Javits.

It's good to have Senator Moynihan here. This brings back

memories of only a few months ago when the two distinguished

Senators from New York did such a great job helping New York

during our hearings on that subject.

Senator Moynihan, go ahead.

STATEMENT OF SENATOR MOYNIHAN

Senator MOYNIHAN. Thank you, Mr. Chairman, Senator Garn.

I would only wish to echo my senior colleague's observations

about Ms. Thomas. She has been a most distinguished attorney in

New York, following her distinguished academic career—second in

her law school class. We will miss her in the city, but we think this is little enough that we might do for the Government and this committee, when you consider what this committee has done for

New York. [Laughter.]

The CHAIRMAN. A very eloquent and wise observation. [Laugh- ter.]

For New York and to the taxpayer. [Laughter.]

Thank you very much, gentlemen.

Senator MOYNIHAN. Thank you very much, Mr. Chairman.

Senator JAVITS. Thank you, Mr. Chairman.

The CHAIRMAN. Ms. Thomas, do you have any statement you would like to make?

MS. THOMAS. No, I do not.

The CHAIRMAN. As has been already noted, you have a most impressive educational background. You were editor of the Law Review, too, as I understand. You have been in private practice for 11 years and you bring both experience, training, and youth to this position, all of which is helpful.

Can you tell us briefly what you feel are your qualifications to be

a commissioner?
3

MS. THOMAS. Certainly. As Senator Javits was so kind to say, at

law school I was second in my class, an editor of the Law Review,

and a recipient of the Jefferson Davis Prize in public law, as well

as a recipient of the Order of the Coif. Out of my 28 courses I

received 15 grades which were the highest in the class, and accordingly, was the recipient of 15 American Jurisprudence Prizes for

Excellence in those courses.

During the past 11 years I have specialized in securities and

corporate law, first at the Paul, Weiss firm and then at the Kaye,

Scholer firm where I am now a partner. I have represented corporate clients both large and small, in a variety of securities and

corporate transactions. I have participated in both public and private equity and debt financing and have prepared registration

statements under the 1933 act, and private placement memorandums under rule 146.

I regularly prepare and review the 1934 act filing of my clients,

including proxy statements, annual reports, forms 10-K, forms 13-

D, and the like. I have participated in numerous mergers and other

acquisition transactions and prepared the necessary documents to

be filed with the SEC and distributed to stockholders.

In general, I have counseled my corporate clients as to how they

can carry on their businesses effectively and profitably in compliance with the securities laws.

In addition, as Senator Javits also mentioned, I was a member of

and am now chairman of the Corporation Law Committee of the

Association of the Bar of the City of New York. This is one of the

most significant committees of that bar association, and I believe

that I am the first woman chairman of such a committee.

I also am a member of the Securities Committee of the American

Bar Association and a charter member of the Securities Law Committee of the New York State Bar Association. I believe that I am

an effective and hardworking corporate and securities lawyer and

that I would be openminded and independent in my approach to

the work of the Commission.

The CHAIRMAN. Can you tell us what type of clients you represented in securities cases?

Ms. THOMAS. Because I am not a litigator I do not handle securities cases; I handle securities transactions. My clients are large

corporate clients, institutional investors, and companies that have

come to the market for financing for the first and subsequent

financings. I also have smaller clients that are just commencing

business and I have participated in various start-up activities. I

also counsel individuals, principally corporate executives. Would

you like the names of my clients?

The CHAIRMAN. I don't think that's necessary. At any rate,

-you've had a variety of practice in securities law; is that correct?

Ms. THOMAS. Yes, indeed.

The CHAIRMAN. For how much of your 11 years of practice?

Ms. THOMAS. I started out specializing in securities law and have

continued, in that practice from the very beginning of my practice.

The CHAIRMAN. Now, you will be filling the seat of a very distinguished and vigorous consumer protector—I should say, one of the

premier protectors of the consumer and the investing public, Irving
4

Pollock. Will you work to protect investors and their interests with

the same vigor that Mr. Pollock did?

Ms. THOMAS. I think Irving Pollock with whom I met in connection with the preparation for this hearing, is one of the outstanding

public servants of our time. I think we should all be grateful to

him for what he has done for the American public.

I, however, hope to come to the Commission with my own qualities. I am, by temperament and training, a strong and independent

person and I will try to bring to the Commission that strength and

independence. My objective will be to approach all aspects of the

position of Commissioner with honesty and integrity and openmindedness. I will always endevor to make informed and considered judgments but I will in this, as in all things, be my own

person.

The CHAIRMAN. I have more questions, but I will yield at this

point to Senator Garn.

Senator GARN. Thank you, Mr. Chairman.

As I am sure you know, the Commission has taken a number of

steps recently to reduce the regulatory burden on small business.

This is something I have been particularly concerned with. I have

discussed it at great length with Commissioner Evans.

In adopting rule 242 and S-18 for small business securities offerings, the Commission has excluded limited partnerships from the

benefits of the changes. I have encouraged the Commission, both

when they have been here before the committee and in other

discussions, to consider allowing limited partnerships to use form

S-18 since this type of securities offering serves a very important

function in my own State and other States in raising capital for

use in real estate developments, and particularly energy exploration, as well as in other fields.

Do you believe that extending form S-18 to limited partnership

offerings should be actively considered by the Commission?

Ms. THOMAS. I understand that this proposal is now being actively considered. I do believe that the Commission is now monitoring

the effectiveness of rule 242 and form S-518, and that there is a

report beging prepared on their operation during this first year or

two. I also believe the Commission is undertaking a study of whether or not the form and the rule should be expanded to permit use by limited partnerships as well as corporations in the oil and gas industries. I will be quite interested to review the report and to

pursue it further with those who are preparing it, in order to make

an independent judgment on this question.

Senator GARN. This leads me to a general question. I certainly,

as one who has lost money in securities more often than I have made any, certainly am well aware of the responsibilities of the Commission to protect the investor and the consumer as much as possible. But I am also tremendously concerned about the regula- -

tory burden.

How do you feel in this whole general area, notification forms making it easier for people to comply, and expanding from S-18 and 242? What would be your general attitude?

Ms. THOMAS. I believe in the integration and the deregulation

process that has been started by the Commission. I think a respon- sible program of deregulation is necessary now, and that the Com-
5

mission has been moving in that direction. S-16 and S-18 are both

short registration forms for use by different classes of issuers.

Large issuers with a known financial history should be permitted

to use a short form registration statement like S-16, and as was

slated before form S-18 is an excellent aid to financing of small

business.

I believe that businessmen are trying to comply with the securities laws and that the Commission ought to make it as easy for

them to do so as efficiently as possible. Of course, any revision or

promulgation of forms should provide for adequate disclosures. In

general, I believe that the Commission's effort in the area is a

positive step and I support it.

Senator GARN. The Securities Act Amendments of 1975 require

the Commission to facilitate the development of a national market

system of securities transactions. I certainly don't expect you today

to prejudge any specific issues, but instead provide us some insights

as to how you would approach these issues as a Commissioner.

What would be your general approach to Commission decisionmaking concerning issues to be addressed in implementation of the

national market system?

Ms. THOMAS. I understand that the 1975 amendments mandated

the SEC to facilitate the development of a national market system;

and I believe that the Commission has begun to do that over the

past few years. It has been intricately involved with the stock

exchanges in the new systems that they have been developing.

I think that the Commission's efforts have been positive. I believe that the SEC should be a facilitator, and a catalyst in this

effort, but that the 1975 amendments left the design and construction of the system to the stock exchanges and the industry; and

that they are doing a good job in that respect.

The United States has the most sophisticated capital markets in

the world. We ought to be very careful as we go along to make sure

that what we are doing will be beneficial to the investing public. I

believe that the Commission has been doing that and I support the

effort.

Senator GARN. Have you taken any positions on behalf of clients

on issues arising in connection with the implementation of the

national market system?

Ms. THOMAS. No; I never have.

Senator GARN. What other background might you have concerning the national market system issue?

Ms. THOMAS. I really do not have as much background in the

national market system as other people who have been studying

the issue since 1975 and before. What I would endeavor to do is to

study the issue from all sides, obtain as many opinions and judgments as I could on the issue, and then make up my own mind

after having thoroughly researched the area.

Senator GARN. Thank you very much.

Mr. Chairman, the time is brief. I may have some other questions that I would submit for answer in writing. But I will yield at

this time. [See p. 24.]

The CHAIRMAN. Senator Williams?

Senator WILLIAMS. No questions.

The CHAIRMAN. Senator Morgan?
6

Senator MORGAN. Mr. Chairman, thank you.

Just let me say to you that we are glad to have you with us. I

have read your credentials and they are superb. The only criticism

that I have heard of the nomination is one that I used to hear and

that I wish I could hear now, that you might be too young. There

was a time when that was said about me. But everything that I

have heard has been good; and unless something unexpected happens, I expect to support your nomination.

The CHAIRMAN. Senator Kassebaum?

Senator KASSEBAUM. Mr. Chairman, I don't have any comments

either. Having read the credentials of Ms. Thomas, I am very

impressed with the background that she has, and I think would

bring to the Securities and Exchange Commission.

The CHAIRMAN. Senator Williams?

Senator WILLIAMS. I had the opportunity to talk to Ms. Thomas'

office. I share Senator Kassebaum's feeling that the background

brought to this position is very significant. Her achievements in

the financial world as a lawyer working with companies that were

involved in equity financing is precisely the kind of background I

think we ought to have, and it would enhance the work of the

Securities and Exchange Commission.

The CHAIRMAN. Ms. Thomas, you have stressed the fact that you

are independent. You are proud of your independence, and I think

that's a very important characteristic for members of the SEC.

Incidentally, I think the SEC, in my judgment, is the best agency

we have in the Federal Government. I have said that a number of times and I firmly believe it. Of course, how good it is depends

entirely upon its personnel, and the Commissioners. But it has a

remarkably fine staff and I think that Mr. Sporkin and other staff

members have given it a force and integrity that is a fine example

for the rest of Government and something of which we are all very proud.

But I want to ask you how committed you are to being an independent member of the Commission who receives independent advice from the Commission staff that is not cleared or advised beforehand by any other office in the Commission. Do you believe that the Chairman's office should review and clear staff memos before they are presented to the Commissioners?

Ms. THOMAS. Let me say first that I agree with you that the Commission has always been one of the premier agencies in Government, and I am certainly immensely impressed with the staff in general and in particular the people that I have met thus far. I

have not worked at the Commission, and as yet I have not had an opportunity to understand the internal operation of the Commis- sion. I would want to view personally the operation of the agency before taking a position. But I am, as I have said, proud of my independence and proud of the fact that I try to receive informa- tion directly from whatever sources are available; and I would hope that I would continue my tradition of independence if I were to be

a Commissioner.

The CHAIRMAN. What would be your responsibility, in your view,

as a Commissioner, to assure that you receive the independent views of the Commission staff?
7

MS. THOMAS. As in all things, I would try to make sure personally that I was receiving independent views, as I have throughout my

career.

The CHAIRMAN. If the opinions of the staff first have to go

through the Chairman before you see them, they might be modified

in some way. How would you be sure that you are getting a direct

opinion?

Ms. THOMAS. As I understand it, there is a very free and open

interchange between the Commissioners and the staff. At least,

that's what I have been told.

The CHAIRMAN. I think that's right. Would you work to preserve

that free and open interchange?

Ms. THOMAS. Yes, indeed.

The CHAIRMAN. Recently there has been concern expressed that

section 30(a) of the Foreign Corrupt Practices Act has been adversely affecting American business. That section, as you may

know, makes it unlawful to pay a bribe to a foreign government

official.

In your capacity as an SEC Commissioner, would you have any

difficulties in enforcing that section and supporting investigations

into possible violation of the Foreign Corrupt Practices Act?

Ms. THOMAS. The Foreign Corrupt Practices Act is the law of the

land. As a Commissioner I would work hard to support it, as I

would support any other law enacted by Congress.

The CHAIRMAN. Do you support the Enforcement Division's efforts to enhance corporate accountability?

Ms. THOMAS. Yes, I support the Division's provision, and I believe

it has been one of the major reasons why the Commission has been

such an outstanding Federal agency. I believe that it is important

for the managers of American business to be accountable to their

shareholders, especially when such managers often do not own any

significant amount of stock in the companies they manage.

The CHAIRMAN. As I understand it, the SEC's Enforcement Division staff has not been increased in the past several years. Certainly it hasn't been increased to keep pace with the responsibilities

it faces. In fact, several positions recently were transferred to

other divisions.

Shouldn't the Commission's Enforcement staff and role be increased as more exemptions are granted from registration filing

requirements?

Ms. THOMAS. Having not worked at the Commission before, I

really would not want to make a judgment c:n how the resources of

the Commission should be allocated.

The CHAIRMAN. Wouldn't it stand to reason that the decrease in

the Enforcement Division's staff undercuts the agency's ability to

handle the increased enforcement burden that followed deregulation?

Ms. THOMAS. I would not want to draw that conclusion. It could

be that with the simplification of forms and deregulation in general, it may be possible to reallocate resources so that such a result

would not necessarily follow. As I stated before I really cannot

make a judgment at this time.

The CHAIRMAN. Let me pursue this a little bit further. In line

with the prevailing deregulation climate, which I certainly favor,

66-854 0 - 80 - 2
8

as do most other members of the committee, and most other

Americans, for that matter, the SEC has been taking steps to

increase exemptions from the registration requirements as well as

to reduce the filing requirements.

Should the SEC go any further in relaxing its registration and

filing requirements?

Ms. THOMAS. I believe at this point that there is a responsible

program of deregulation that has been commenced, and that the

SEC is monitoring that program and that it will review the results

of its monitorization. I do not believe as a matter of principle, that

a responsible program of deregulation would necessarily produce

an increase in violations. In fact it may be just the other way

around. Accordingly I would favor cautious continuation of such

relaxation.

To the extent that the Enforcement Division is strong and its

existence is widely known, I think deregulation, simplification, and

integration are positive steps for the securities industry.

The CHAIRMAN. Just one more question. The problem is whether

or not the relaxation of registration and filing requirements might

reduce investor confidence. Do you think that's a danger?

Ms. THOMAS. I really do not think so. I am not at all sure that

voluminous registration statements are even read much of the

time, by investors, or that it is the proliferation of documents, that give the investors confidence in our securities markets today. I

think the existence of the SEC, the existence of the Enforcement

Division, the high profile of the SEC's maintenance of the integrity

of the markets, are the reasons that the American investor has

more confidence now than ever before.

The CHAIRMAN. Ms. Thomas, I have other questions for the record that we would like to have you answer in writing, if you would. [See p. 19.]

The CHAIRMAN. May I join my colleagues in congratulating you

on your qualifications; and I want to congratulate President Carter for having made an outstanding nominee, one who has clearly the qualifications, the vigor, and independence of youth, which is mighty welcome.

Thank you very much.

Ms. THOMAS. Thank you very much, Senator Proxmire.

The CHAIRMAN. The committee will stand in recess for just a

minute or two. I see Senator McGovern, the first witness, is here for our next hearing. We will recess.

[Whereupon, at 10 a.m., the hearing was adjourned.]

[Additional material received for the record follows:]
9

STATEMENT FOR COMPLETION BY PRESIDENTIAL NOMINEES

Name: Thcrnas Barbara S.

WM MMM MIMM

Position to which Canmissioner, Securities and Date of

nominated: Exchange Ccrnmission nomination: July 29, 1980

28 12 46 New York City, New York

Date of birth: Place of birth: 

man momo (rum

Marital status: Married Full name of spouse: Allen Lloyd Thcmas

Name and ages None

of children: 

Education:

Dates Degrees Dates of

Institution attended received degrees 

New York University

Law School 9/66 - 6/69 J.D. June 1969

University of

Pennsylvania 9/64 - 5/66 B.A. May, 1966

Temple University

9/63 - 9/64

Great Neck North (Received

Senior High School 9/61 - 6/63 H.S. June 1964) 

Great Neck North

Junior High School 9/59 - 6/61

Honors and awards: List below all scholarships, fellowships, honorary degrees, military medals, honorary society

memberships, and any other special recognitions for outstanding service or achievement.

Order of the Coif

John Norton Pomeroy Scholar

Editor, New York University Law Review

Dean's List -- all semesters

American Jurisprudence Prizes for Excellence in 15 subjects 
10

Memberships: List below all memberships and offices held in professional, fraternal, business, scholarly,

civic, charitable and other organizations.

Officehee

Orypeireke (if any) Dehm

Bar Association of the Chairman, Corporation Front 1979 -

City of New York Law Ccruittee Present 

American Bar Association 1979 - Present

NYU Law Review Alumni Member of Board

Association of Governors 1979 - Present

University of Pennsylvania

Alumni Council on AdMissions 1978 - Present

Sales Executives Club of

New York, Inc. 1979 to Present

New York State Bar

Association 1980 to Present

Employment record: List below all posItions held since college, including the title or description of job, name of

ampkyment location of wont, anddatersofindusiveemokyment

Dates of Title or Description

Employment of Jnio Nane of Employer Location of Work

Kaye, Scholer, riertan 425 Park Avenue

4/73 - Present Attorney Hayes & Handler New York, N. Y.

Paul, Weiss, Rifkind, 345 Park Avenue

9/69 - 3/73 Attorney Wharton & Garrison New York, N.Y.

Chadbourne, Park, 30 Rockefeller

6/66 - 9/68 Summer Associate Whiteside & Wolff Plaza (present)

New York, N.Y.

25 Broadway (then)

New York, N.Y.

7/67 - 8/67 Secretary Laurie Leasing Co. 9320 Wilshire Blvd.,

Beverly Hills, CA.

6/6t - 8/66 Computer The Equitable Life 1285 Avenue of the

Programer Assurance Society of Americas,

the United States New York, N.Y.

2
11

Government

experience: List any experience in or direct association with Federal, State, or local governments, including any advisory, consultative, honorary or other part-time service or positions.

Published

writings:

Political

affiliations

and activities:

None

List the titles, publishers and dates of books, articles, reports or other published materials

you have written.

Staff member and Editor of New York University Law Review

1967-1969.

List all memberships and offices held in and services rendered to all political parties or

election committees during the last 10 years.

Registered Democrat

3
12

Political

contributions: Itemize all political contributions of $500 or more to any individual, campaign organization, political party, political action committee or similar entity during.the last eight

years and identify the specific amounts, dates, and names of the recipients.

Qualifications:

None

State fully your qualifications to serve in the position to which you have been named.

(attach sheet)

See attached sheet

Future employment

relationships: 1. Indicate whether you will sever all connections with your present employer, business

firm, association or organization if you are confirmed by the Senate.

Yes

2. As far as can be foreseen, state whether you have any plans after completing government service to resume employment, affiliation or practice with your previous employer, business firm, association or organization.

None

3. Has anybody made you a commitment to a job after you leave government?

No

4. Do you expect to serve the full term for which you have been appointed?

Yes

4
13

Qualifications 

p. 4

During the past eleven years, I have engaged in a

general securities law and corporate practice. My work

has included registration of debt and equity securities

under the Securities Act of 1933, registration and reporting

under the Securities Exchange Act of 1934, acquisitions

and mergers of public and private companies, private placement debt and equity financing, and negotiations and

drafting of numerous other corporate documents.

I have also served as a member of the Corporation Law

Committee of the Association of the Bar of the City of

New York. In September of 1979 I was appointed as Chairman

of the Corporation Law Committee for a three-year term. In

addition, I am a member of the Committee on Federal Regulation

of Securities of the American Bar Association, and a member

of the Securities Regulation Committee of the New York State

Bar Association. I have also participated in panels and

training discussions on the Federal Securities Law at my

law firm.
14

Potential conflicts

of interest: 1. Describe any financial arrangements or deferred compensation agreements or other

continuing dealings with business associates, clients or customers who will be 0-

fected by policies which you will influence in the position to which you have been

nominated.

See attachment

2. List any investments, obligations, liabilities, or other relationships which might invol:e

potential conflicts of interest with the position to which you have been nominated.

None

3. Describe any business relationship, dealing or financial transaction (other than taxpaying) which you have had during the last 10 years with the Federal Government,

whether for yourself, on behalf of a client, or acting as an agent, that might in any

way constitute or result in a possible conflict of interest with the position to which you

have been nominated.

As a lawyer in private practice, I have prepared or assisted

in preparing documents for clients which have been filed with

the Securities and Exchange Commission.
15

p.5, question 1

None. Prior to taking office as a Commissioner

of the Securities and Exchange Commission I intend to resign

as a partner of my law firm, Kaye, Scholer, Fierman, Hays &

Handler, and I will sever all connections with such firm.

However, I currently participate in the Kaye, Scholer,

Fierman, Hays & Handler Retirement Plan and pursuant to such

Plan, if I resign from the firm in 1980, the Plan would pay

me, as a lump sum, the vested portion of my account as of

December 31, 1980. In addition, because I am a partner, the

unvested portion of my account will be paid to me at the same

time. It is currently estimated that as of December 31, 1980

the total balance in my account (vested and unvested) will be

$24,248, which will be 40% vested at that time. The entire

amount would be paid in February 1981; thereafter, I will

have no further connection with the firm of any kind.

66-854 0 - 80 - 3
16

4. List any lobbying activity during the past 10 years in which you have engaged for the

purpose of directly or indirectly influencing the passage, defeat or modification of

any legislation at the national level of government or affecting the administration and

execution of national law or public policy.

None

5. Explain how you will resolve any potential conflict of interest that may be disclosed by

your responses to the above items.

See attachment

Civil, criminal and

investigatory

actions: 1. Give the full details of any civil or criminal proceeding in which you were a defendant

or any inquiry or investigation by a Federal, State, or local agency in which you were

the subject of the inquiry or investigation.

None

2. Give the full details of any proceeding, inquiry or investigation by any professional

association including any bar association in which you were the subject of the proceeding, inquiry or investigation.

None

6
17

p. 6, question 5

Resolution of Conflicts of Interest

As noted above, I will resign as a partner of Kaye, Scholer, Fierman,

Hays & Handler. In addition, as a Commissioner, I intend to disqualify and

recuse myself from matters before the Commission in the nature of a request

on behalf of a specific party for an exemption from a rule or statute of

general applicability, or matters involving the institution of enforcement

proceedings, under the following circumstances:

(a) where Kaye, Scholer, Fierman, Hays & Handler represents

any party, or

(b) where I had any connection or gained significant knowledge

while I was at Kaye, Scholer, Fierman, Hays & Handler, or

(c) where Paul, Weiss, Rifkind, Wharton & Garrison (in which

my husband, Allen L. Thomas, is a partner) represents

any party.

In addition, I intend to disqualify and recuse myself, on a case-bycase basis, with respect to any matter, where, in order to avoid the possible

appearance of inprupriety, it appears desirable to me to disqualify myself,

despite the lack of any actual conflict of interest. In general, it is not

my intention to recuse myself from general policy consideration on rule-making

proceedings.
18

OFFICEOFTHE

GENERALC.UMU.

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON. D.C. 2049

CERTIFICATION CONCERNING THE FINANCIAL HOLDINGS

OF BARBARA S. THOMAS, NOMINEE FOR MEMBER OF THE

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

I hereby certify that I have examined statements of the holdings of

Barbara S. Thomas and her husband, Allen L. Thomas, as submitted by her to

the President of the United States and to the United States Senate Committee

on Banking, Housing and Urban Affairs.

I have reviewed those statements, together with underlying documentation furnished .to me by Mrs. ThcmaS, pursuant to the requirements of Rule 5

of the Securities and Exchange Commission's Conduct Regulation, 17 CFR

200.735-5, and I certify that I found nothing in said statements which

does not fully comply with the requirements of that Rule.

I further certify that my examination was also conducted to take

into account the requirements of the Canons of Ethics for Members of the

Securities and Exchange Commission, 17 CFR 200.50, et seq., and particularly

Section 60 relating to possible disqualification in particular matters, and

the requirements of Executive Order No. 11222, as amended (3 CFR, Jan. 1973,

Rev., Chapter TV, pages 160ff), and particularly Part TV thereof relating to

Presidential appointees, and I found nothing in said statements which does

not fully comply with the requirements of the Canons and Executive Order.

,n4-A.TvLi

PAUL GONSON

Solicitor

Securities xchange Commission

Washington, D.C. 20549

(202) 272-2471

Dated: July 30, 1980
19

August 19, 1980

Mr. Bruce Freed

Senate Committee on Banking,

Housing and Urban Affairs

5300 Dirksen Senate Office

Building

Washington, D. C. 20150

Dear Bruce:

As you requested, I am enclosing written answers to the

questions which you provided me after my confirmation hearing

this morning. If you require any further information, please do

not hesitate to call me.

I appreciate the courtesies extended to me by you and the

Members and staff of the Committee. I hope that we will have an

opportunity to work together in the future.

With best wishes.

Sing,tely,

'Barbara S. Thomas

Enclosure
20

4: Could you tell the Committee what relationship you feel

that the Commission should have with the self-regulatory

organizations and what the Commission should do to make

the self-regulatory scheme as effective as possible.

A: The genius of the Exchange Act was to create a system of

regulation under which the securities industry regulates

itself in the first instance. The purpose of this

system is to permit the self-regulating organizations

to utilize their own expertise in the regulation of the

securities markets. It is the Commission's function to

oversee and supervise their regulatory activity. The

securities laws require the Securities and Exchange

Commission to review, alter or abrogate all rules of the

self-regulatory organizations and give the Securities

and Exchange Commission the power to alter or abrogate

such rules.

I believe that the Securities and Exchange Commission

should give the self-regulatory organizations substantial

autonomy in their function as industry regulators, but

should also maintain vigilant surveillance and oversight.

In order to make the self-regulatory scheme as

effective as possible, the Securities and Exchange

Commission and the self-regulatory organizations should

continue to expand their communication and exchange

ideas on policies and operation on a frequent basis

so that the ideal of a partnership in regulation can be

fulfilled.
21

-2-

is currently pending before the Commission which raises

the precise issue of the Commission's authority in this

area. Because the Administrative Procedures Act would

permit me to consider this important question, I do not

believe that it will be appropriate for me to comment

any further on this matter at this time.
22

Q: Are you committed to continuing the traditional Commission

policy of vigorously disciplining lawyers, accountants

and other professionals who violate the securities laws

and SEC rules?

Are you committed to applying Rule 2(e) against

lawyers and accounting firms?

Should Rule 2(e) be included in the American Law

Institute's proposed Federal Securities Code.

A: I understand that the Commission's professional disciplinary

proceedings are intended to protect the integrity of the

Commission's processes from unlawful or unethical conduct

that would be detrimental to the public interest and

inimical to the purposes and policies of the federal

securities laws. Touche Ross & Co. v. Securities and 

Exchange Commission, 609 F.2d 570 (2d Cir. 1979). It

is clear, given the highly specialized nature of the

securities industry and the paramount interests served

by the statutory scheme of public disclosure, that

professionals appearing or practicing before the

Commission play a crucial role in ensuring that the

policies underlying the statutory scheme are effected.

I have not conducted an independent analysis of

Rule 2(e). I am informed that an administrative proceeding

0
23

Q: What do you consider to be the most important achievements

of the SEC enforcement program?

What problems do you see with the enforcement program?

A: The Enforcement Division has done an extremely effective

job over the years in maintaining the integrity of the

the securities markets by rooting out and prosecuting

fraudulent conduct. Its very existence and reputation

for effectiveness has served as a deterrent to persons

who might otherwise be tempted to violate the law. By

maintaining the integrity of our capital markets and the

integrity of our broker-dealer community, the Enforcement

Division has helped to give the public confidence to

invest, and thus, to stimulate the formation of capital.

Occasionally, some issuers have felt that an undue

prosecutorial attitude has been taken in connection

with preliminary investigations and that some personnel

may be overzealous. I believe that the maintenance of

the appearance of fairness is an important aspect of

the Commission's work and that the Commission should

create a climate in which honest businessmen appreciate

and respect rather than fear the Enforcement Division.

I believe that, historically, the Commission has been

successful in creating the appropriate climate, however,

neither the Commission nor any other government agency

should refrain from self-examination.

66-854 0 - 80 - 4
24

August 22, 1980

The Honorable Jake Garn

Senate Committee on Banking,

Housing and Urban Affairs

United States Senate

Washington, D. C. 20510

Dear Senator Garn:

As you requested, I enclose written answers to

the questions set forth in your letter to me dated

August 20, 1980.

I appreciate the courtesies extended to me by you

ara yonr staff and the members of the Committee and I

hope that we will have an opportunity to work together

in the near future.

With best wishes.

Sincerely,

'

I

Barbara S. Thomas

Enclosure
25

Q. 1. a. We discussed briefly at your hearing recent inititaives

taken by the Commission to reduce the regulatory burdens

on small businesses seeking to raise capital through the

sale of securities. In your law practice have you had

occasion to use, or to advise clients to take advantage

of, these initiatives? If so, have you found that they

have made it easier and/or more economical for small

issuers to comply with the law?

b. As a general matter, do you believe it is appropriate

for the SEC or the Congress to focus such relief on

"small" businesses or "small offerings" or in the

alternative, should initiatives designed primarily to

benefit smaller issuers be applicable to all businesses,

irrespective of size?

A. 1. a. In my. practice I have not as yet had occasion to use,

or to advise clients to take advantage of, the recent

initiatives taken by the Commission to reduce the

regulatory burdens on small businesses seeking to raise

capital through the sale of securities. It has, however,

been my impression from discussions with other members

of my firm who have had occasion to utilize Form S-18

and Rule 242 that these innovations have been successful

in reducing the amount of time, expense and effort

necessary to be expended by small business in raising

of capital.
26

A. 1. b. As a general matter, I believe it is appropriate for

the Commission to attempt to facilitate small business

capital formation. I believe that the burden of

reporting weighs more heavily on small rather than

large companies, and that reduction of reporting

requirements for these companies is consistent with the

purposes of Federal securities laws. I do, however,

also believe that the registration and reporting •

requirements under the securities laws should be

simplified with respect to all businesses, without

regard to size, to the extent that such simplification

will continue to provide full disclosure and to promote

investor confidence. In this regard, I recognize that

the Commission has adopted Form S-16 that allows certain

large issuers to incorporate by reference periodic

filings into their registration statements. Other

integration initiatives have been proposed to simplify

registration procedures for moderate-sized as well as

for large issuers. I also endorse the Commission's

efforts to encourage issuers and their counsel to prepare

shorter, more comprehensible disclosure statements so

the reader is not flooded with minute detail, is

encouraged to read the complete document, and is able

to understand its contents.

•
27

Q. 2. There is a continuing controversy; which may ultimately

result in legislative or regulatory action, concerning

the roles of the SEC, the Commodity Futures Trading

Commission and other federal agencies in regulating

futures markets, particularly those involving "financial

futures" such as contracts involving futures on federal

government securities and proposed contracts on stock

index futures.

Have you taken positions, on behalf of clients or other—

wise, with respect to this issue?

What role, if any, do you believe that the SEC should

play in the regulation of existing futures markets?

Should there be any different or greater role with

respect to new futures contracts, such as the proposed

contracts on stock market indices?

A. 2. I have not taken positions on behalf of my clients or

otherwise with respect to the role of the Securities

and Exchange Commission, the Commodity Futures Trading

Commission and other federal agencies in regulating

futures markets. I am currently aware, however, of the

existence of a continuing study by the Securities and

Exchange Commission, the Federal Reserve Board, the

Department of the Treasury and the CFTC concerning reg—

ulation of the financial futures markets. As recent

events suggest, there may be interrelationships among
28

the different types of markets for financial instruments,

and the Commission, as well as other regulatory agencies,

should consider whether it would be appropriate to

design measures to deal with these interrelationships.

In general, however, I believe that the issues raised

by this question involve areas with respect to which

Congress should make the final policy judgments, after

receiving and analyzing the reports and recommendations

from the various regulatory agencies and affected private

interests.
29

-5-

Q. 3. As you know, there are many pending proposals to make

federal agencies more responsive and to reduce unnecessary or outmoded regulations. These include sunset

provisions, cost-benefit analyses of new regulations,

different regulatory treatment of small business, and

many other ideas.

a. What experience, if any, have you had in commenting

on, or otherwise becoming involved in, rulemaking .

proceedings of the Securities and Exchange Commission?

b. What observations, if any, do you have about the

Commission's responsiveness to comments submitted in

rulemaking proceedings?

c. Do you believe that the Commission's rules and regulations should be subjected to a formal process of

re-evaluatih, through a mechanism such as a "sunset"

provision?

A. 3. a. My practice has not involved me in the rulemaking

proceedings of the Securities and Exchange Commission.

As Chairman of the Committee on Corporation Law of the

Association of the Bar of the City of New York, I did,

however, participate in the preparation of a letter,

dated November 29, 1979, commenting unfavorably on the

Supplemental Petition of the Institute for Public

Representation, a copy of which is enclosed herewith.
30

b. In the rulemaking petition proceeding noted above, it

appeared to my Committee colleagues and me that our

Committee's comment letter, together with the comments

of other individuals and groups, were carefully considered

by the Commission and that the Commission ultimately

determined not to proceed with the rulemaking procedure

at least in part in response to those comments.

Similarly, it is my understanding that there were

large number of negative comments submitted by private

commentators in response to the Commission's proposed

rules under the internal controls provision of the Foreign

Corrupt Practices Act. After reviewing such comments,

the Commission determined to withdraw the proposed rules

and, in-stead, determined to rely, for the next three

years, on private initiatives. In general, I believe

that it is important for the Commission to consider

carefully comments on all proposed rules received from

private lawyers, businessmen, and investors because they

bring a different and important perspective to the rule—

making process. I would, if confirmed, be committed to

a careful consideration of all significant comments sub—

mitted in response to Commission rule proposals.

c. I believe that the Commission should use all appropriate

analytic techniques in evaluating proposed rules. I

believe, in general, that informed cost—benefit analyses
31

-7-

can have significant utility in such an evaluation

process, but that there are important factors in rulemaking proceedings that may not be amenable to such

quantitative analyses. I cannot at this time, however,

make a fully informed and considered judgment with

respect to whether such a procedure should be required

prior to the adoption of new rules. Should the Congress

mandate such a procedure, I would urge the Commission

to comply fully with the new requirements.

d. As a citizen, I believe that it is very important for

Congress to conduct careful oversight programs of federal

agencies. I am somewhat concerned, however, that some

sunset provisions could create a situation in which

businessmen would not be able to rely on the continued

existence of orderly, consistent regulation. Orderly,

consistent regulation such as the Securities and Exchange

Commission's regulation of the disclosure rules and

market activities has historically created, and continues

to create, confidence of investors in the public market

and facilitates the private formation of capital. I do,

however, as stated above, believe that it is essential

for Congress to periodically re-evaluate the mandates of

federal agencies and to revise them if necessary.
32

-8-

Q. 4. In recent years the SEC has become increasingly involved

in oversight of accounting practiCes involving publiclyheld companies, as well as in any non-audit relationships

between such companies and their accountants.

Some critics charge that the SEC's activities in this

area are leading toward a system of federal regulation,

superseding the traditional roles of the states in

regulating accounting practices.

a. Have you had occasion to consider these issues in your

law practice or otherwise?

b. What approach would you take in decision-making regarding

the SEC's relationship to the accounting profession?

A. 4. a. I have not had occasion to consider these issues in my

--,-.---law practice.

b. It is my understanding that the Securities and Exchange

Commission has relied to a large extent on the accounting

profession in connection with the establishment of

financial accounting standards through the Financial

Accounting Standards Board (FASB) and the establishment

of auditing standards through the American Institute of

Certified Public Accountants (AICPA). It is my belief

that the Securities and Exchange Commission should

continue to encourage these self-regulatory organizations

to regulate the accounting industry in the first instance.

I do believe, however, that the activities of the FASB and
33

-9-

the AICPA as they relate to the financial statements and

audits of publicly-held companies should be monitored

carefully by the Commission and that the Commission

should be prepared to take appropriate regulatory action

if necessary.
34

Q. 5. a. Former Commissioner Roberta Karmel criticized the

Commission's exercise of authorit4 under Rule 2(e),

which permits the Commission to disqualify attorney

who practice before it. Do you believe that there is a

significant problem if an agency such as the SEC, which

is sometimes involved in adversary proceedings with

attorneys who contest SEC actions, also has the authority

to discipline those attorneys?

b. The Commission recently proposed, and subsequently

decided not to adopt, rules which would have governed

the relationship between publicly-held corporations and

their attorneys by, among other things, mandating reports

by attorneys to the board of directors and annual certification by the corporation of actions taken in response

to such reports.

Do you believe that the Commission's authority extends to

regulation of the type contemplated by the proposed rule?

Based on your own background, do you believe that there

is a conflict between the traditional role of the states

in regulating the conduct of attorneys and the Commission's

approach to the role of attorneys representing clients

involved in securities transactions?

A. 5. a. I understand that the Commission's professional disciplinary proceedings are intended to protect the integrity

of the Commission's processes from unlawful or unethical
35

-11-

conduct that would be detrimental to the public interest

and inimical to the purposes and policies of the federal

securities laws. Touche Ross & Co. v. Securities and 

Exchange Commission, 609 F.2d 570 (2d Cir. 1979). It is

clear, given the highly-specialized nature of the securities industry and the paramount interests served by

the statutory scheme of public disclosure, that professionals appearing or practicing before the Commission

play a crucial role in ensuring that the policies underlying the statutory scheme are effected. On the other

hand, based on my 11 years of experience in private

practice, I believe that a lawyer needs to feel free to

represent vigorously the interests of his clients without

fear of retribution.

I have not conducted an independent analysis of Rule 2(e).

I am informed that an administrative proceeding is

currently pending before the Commission which raises the

precise issue of the Commission's authority in this area.

Because the Administrative Procedures Act would permit

me to consider this important question, I do not believe

that it will be appropriate for me to comment any further

on this matter at this time.

b. As I stated in response to question 3, I participated in

the preparation of a comment letter on this issue on

behalf of the Association of the Bar of the City of New
36

-12-

York, a copy of which is enclosed herewith. That letter

/

adequately reflects my current views, as a private

practitioner, on this matter.
37

-13-

Q. 6. Many businessmen believe that the Foreign Corrupt

Practices Act has interefered with the ability of

U.S. firms to compete in export markets, not because

of any desire to engage in bribery but because of the

uncertainty created by the Act with respect to conduct

which is accepted in some foreign countries.

a. Have you had any experience practicing under the Act?

b. What steps, if any, do you believe should be taken to

clarify the meaning and intent of the Act?

A. 6. a. I have not had any personal experience practicing under

the Foreign Corrupt Practices Act.

b. I believe that Congress should consider whether there

are any existing ambiguities in the Act, and,, if so,

-should clarify the obligations of businessmen thereunder

so that conscientious people can comply therewith. I

understand that the Commission .itself has recently issued

a release asking the public to comment on how best to

implement certain provisions of the Act. I also understand that the General Accounting Office has done a

survey on the impact of the Act on American business and

that the report of the survey is expected in October of

1980. As a member of the Commission, I will carefully

evaluate the comments of the public on its release, as

well as the report of the General Accounting Office.
38

-14-

Q. 7. As you are not doubt aware, questions have been raised

periodically about the standards 6f disclosure involved

in securities offerings made by state and local governments. What role, if any, do you believe the SEC or

other federal agencies should have in regulation or

oversight of municipal securities?

A. 7. As you know, there is already a self-regulatory organization, the Municipal Securities Rulemaking Board ("MSRB")

which regulates brokers and dealers of municipal securities. One of the functions of the Securities and

Exchange Commission is to oversee and supervise the

rulemaking activity of the mSRB and to enforce the MSRB

rules with regard to broker-dealers. Although I am not

an expert on the subject of municipal securities, I

understand that there have been several bills introduced

in the Congress during the last few years governing the

standards of disclosure to be followed by states and

local governments as issuers of securities. If confirmed,

I will undertake to study this area in depth and to

review all existing information gathered by the Commission

and other sources with respect thereto prior to making

any judgments in the area.
39

-15-

4. 8. Prospectuses and other disclosure documents distributed

to prospective investors seem to get longer and longer,

and they often include extensive "boilerplate" which

does not appear to make them more comprehensible to the

average investor.

a. Based on your experience, do you believe that this is a

problem which the Commission and securities professionals

should address?

b. Do you believe that legal, accounting and other fees

associated with securities offerings are likely to continue to increase substantially? If so, are there steps

which the Commission or the private sector could take

to reduce the costs associated with securities offerings?

A. 8. a. I believe that adequate disclosure is necessary to

_

maintain the integrity of the capital markets and to

continue to promote investor confidence. I do, however,

agree that in recent years disclosure documents have

proliferated, become more complex, and include information

which may not be helpful to the average investor.

Accordingly, I believe that the Commission should be, and

indeed currently is, addressing this problem, in part by

encouraging simplification of presentation. Furthermore,

I support the move toward integration and the elimination

of duplicative filings, and I believe that the promulgation of Forms S-16, S-18 and Rule 242 will have a
40

-16-

beneficial effect on the securities industry. I think

it is necessary to recognize that/different classes of

issuers and different types of transactions require

different levels of disclosure. I recognize that there

is a tension between the level of information necessary

to inform the securities analysts and other experts,

and that necessary to inform and not confuse the average

investor. I support continuing study by the Commission

of ways to resolve this tension in a manner satisfactory

to both types of users of the capital markets.

b. To the extent that disclosure documents and other

Securities and Exchange Commission filings become more

numerous, longer and more complex, it seems likely that

professional fees will continue to increase. t However,

_

as the Securities and Exchange Commission moves toward

a more simplified and integrated disclosure system, it

seems reasonable to assume that the costs associated

with securities offerings may be reduced.
41

-17-

Q. 9. A number of proposals have been advanced concerning the

general subject of "corporate accOuntability" ranging

from changes to be derived purely from initiation of

the private sector to federal chartering of large

corporations; many of these proposals would alter significantly the traditional deference to state law with

regard to the relationships between corporations and

their shareholders.

a. What are your general views concerning the role of the

SEC and of the federal government as a whole with

respect to "corporate accountability" and "corporate

governance?"

b. Do you agree that, since the enactment of the basic

federal securities laws, state laws -- particularly state

securities and corporations laws -- have generally

expanded the rights of shareholers and the responsibilities of corporate managers end directors? If so,

do you believe that federal involvement in issues of

"corporate governance" may be needed less now that it

may have been in the past?

A. 9 a. Although it is necessary to insure that corporate managers

fulfill their fiduciary responsibility to shareholders

of corporations, I do believe it is important to assess

continually the proper role of the federal government

when entering the boardroom. The Commission has held
42

-18-

hearings and is preparing a corporate governance report

reviewing all of its corporate governance initiatives

thus far, and I will want to review it carefully.

b. I believe that the federal securities laws and the state

securities laws should compliment each other, and that,

in general, it is the states that should have the primary

responsibility for the supervision of the governance of

corporations incorporated therein. To the extent that

both federal and state regulation is appropriate with

respect to specific issues, the federal government should

attempt to facilitate the coordination of all applicable

requirements to eliminate unnecessary duplication. I

also believe that it is necessary for representatives of

the two types of governing bodies to work together so

that there is no danger that compliance with one set of

rules will risk violation of the other set.
43

THE ASSOCIATION OF THE BAR

OF THE CITY OF NEW YORK

A2 WEGT 43T. STREET

NEW YORK 1003G

COMMITTEE ON SECURITIES R3GULATION

LECNARD

,EW YORK 1.23

752.43.130

COK-= ON • C0l20RATI0N LAW

4AFEA3A SET:ER THWAS

Chairman

425 ?ark Avenue

New York 10022

759'3400

Mr. George A. Fitzsimmons, Secretary

Securities and Exchange Commission

500 North Capitol Street

Washington, D. C. 20549

.Dear Sir:

Gerald A. Eppner

SECRETARY

3415 PARK AVENUE

NEW YORK 1.22

72,2•61130

GERALD S

Secretary

425 Park Avenue

New York 10022

759-8400

November 29, 1979

Re: File No. 4-210; Release No. 34-160115

This letter, prepared jointly by the Committee on

Securities Regulation and the Committee on Corporation Law

of The Association of the Bar of the City of New York, responds to the Commission's request for comments on the

Supplemental Petition ("Petition") of the Institute for

Public Representation ("Institute") proposing rulemaking

with respect to the relationships among companies required

to file reports pursuant to the Securities Exchange Act of

1934 (t1-.9 "1934 Act') and their counsel.
44

We are greatly disturbed that the Commission supmitted the Petition for comment without itseaf determining

that it has authority to adopt the rules proposed in the

Petition, that such rules are necessary or appropriate as

a matter of policy and that such rules are appropriately

drafted and would be workable. We submit that it is not

in the public interest for the Commission tc, impose on

interested persons the burden of commenting on a petition

when the Commission has not reached at least a tentative

determination that the proposals contained fLn the petition

have even the possibility of being meritorfmus.

We think it apparent that the rules proposed in

the Petition are beyond the Commission's authority to

promulgate; would be harmful to reporting• companies and

the investing public; would be eetrimental to the Commission's pursuit of its regulatory efforts .nd goals; and are

badly drafted and would prove to be unworanle. Even if

these serious defects could be cured (which we acuet), we

believe that this is the wrong time ana the wrong way to

affect the relationships between reporting companies ana

their counsel.
45

THE COMMISSION HAS NO AUTHORITY TO

DICTATE THE RELATIONSHIPS BETWEEN

REPORTING COnPANIES AND THEIR COUNSEL

IN THE XANNER PROPOSED BY THE PETITION

AND UNDER THE GUISE OF DISCLOSURE

We discuss the question of the Commission's

authority to act on the Petition by reference to the 1934

Act, which is the only statute discussed in the petition

and in the Commission release. We do not believe there is

any other statute which would give the Commission authority

to 'adopt the rules proposed in the Petition.

Nothing in the 1934 Act gives the Commission

authority to regulate the relationships between lawyers

and the corporations for which they act. Indeed, the 1934

Act does not even mention lawyers, and nothing in the stat—

ute or its legislative history authorizes the Commission

to regulate the practice of law.

The regulation of the legal profession historically has been left to the states. Congress nas epressly de—

ferred to the, states in this area,* and the Supreme Court

See Section 500(b) of the Administrative Procecure Act,

and its legislative history, particularly H.R. lep. No.

1141, 89th Cong., 1st Seas., 1905 U.S. Code Con,. t.

Admin. News 4.170, 4173.
46

has several times recently stated that federal securities .

legislation, particularly the 1934 Act, does not supersede

substantive state law..

The extent to which the Commission may affect

corporate governance has been discussed frequently in

recent years in connection with proposals for proxy state—

ment and other disclosure of the existence and functioning

of audit and other committees, the independence of boards

of directors, and similar matters. The Com:mission has

recognized the sensitivity of the question and has appeared

to concede that its powers with respect t6 substantive

regulation of corporate governance are strictly limited.

For example, the Commission has referred to the possibility

that it might seek legislation authorizing it to act in

the corporate governance area.

. See Ernst & Ernst v. Hochfelder, 425 U.S. 135 (1975);

Santa Fe Int'Jstries Inc., v. 3reen, Li30 U.S. 462

arc ,,s v. La.ser, i.,.S. , 99 Sup.

Ct. 1831 (1979).

See Securities Exchange Act Releases Nos. 13482 (April

28, 1977) ant 14970 (July 18, 1978).
47

The Petition completely disregards these limitations on the Commission's authority. It is based upon

the false assumption that the Commission is empowered to

mandate substantive action by requiring disclosure that

such substantive action has been taken. For example, the •

Petition proposes to require a corporation to disclose that

it has given specified instructions to counsel, that its

counsel has complied with ,those instructions, that its board

of directors has taken certain action, that certain information has been communicated to its auditors -and that it has

written agreements with counsel. Of course, a corporation

could not comply with these so-called disclosure requirements unless the substantive actions specified had been

taken. Clearly, the Commission has no authority to engage

in this type of substantive regulation.

THE RULES PHOPCSEDIUTE PETITIO

WOULD IiHARi:F REPOF.71.

AND THE INVESTT.::: FUBL.IC DETHI:-.EY.TAL

TO THE CO,INI, 'S PtiriSUIT UF ITS

HEGULATY EFFOHT3 GO,LS 

As the Petition recognizes, attorneys in our

system have a critical role in the aiminiztraticn of judtic

and a central impact on efficient administrative re,Lulaticn
48

and the public interest. The availability of effective and

competent legal advice to the private sector is widely regarded as a vital to achieving adherence to the rule of law

in our society. The attorney-client privilege has been

- developed in recognition of the responsibilities placed on

attorneys in our system.

To function effectively, corporate counsel needs

full access to information from all of the actors within the

corporation. Counsel must be in a position. to ascertain the

relevant facts bearing on a particular lesalfproblem in a

spirit .of cooperation and mutual understand4 mg with^ut

'inspiring fear of opprobrium or personal liability on the

part of individual management personnel. It is essential

for counsel investigating a legal problem to be able to

engage in a wide ranging inquiry that may touch on a number

of matters the relevance of which is not immediately apparent. To insure effective legal repre:ientation, corporations must be encouraged to seek legal advice even on

Matters where the need for such advice is not immediately

apparent to those requesting it. Counsel are often asked

to follow developments wit*ncu-. any certainty that they will
49

result in events•of material legal significance. Open and

candid interchanges between the management of the corporation and its legal advisers are essential for the smooth

functioning of this process.

A central feature of the proposals submitted by

the Institute is the proposed requirement that each corporation disclose, in a "certificate" contained in its Form 10-K

and annual report to shareholders, that it has instructed

all attorneys for the corporation -- whether inside mr outside counsel, or general or special counsel, and resarcless

of ;he significance of the matters on which they are representing tne corporation -- to report directly to tte Board

of Directors or a committee thereof regarding any corporate

activities discovered through "reasonaole diligence' Curing

the course of their representation which, in their opinion,

"violate or probably violate" any law, wnere sucn violations'

or probable violations coulo result in material financial

liability, call into quest,on the cua, ty and integrity of

management or are a part of 'a pattern or practice of recurring activity.
50

In general, the question of what. matters snould

be reported to the Board of Directors traditionally has

been a matter for determination by the Board itself and

by management. The problem of when and under What circumstances a lawyer may have an independent obligation to report serious violations of law to the Board of Directors,

if management persists in ignoring legal advice, is a complicated one which cannot be dealt with properly in the

simplistic fashion proposed by the Petition.

The proposed requirement that all.-±atters of the

kind referred. to in the Petition be reported to she Boaro

of Directors would reduce the effectiveness of corporate

counsel, to the detriment of reporting companies and their

shareholders. There would be much greater reluctance on

the part of management to volunteer information to counsel

concerning all facts which counsel might deem relevant to

give proper advice in the circumstances. In addition,

lawyers would. teno to be involved less often and at a

later stage than at present. Lawyers for reportin6 companies would feel impelled to undertake far more extensive

investigations than might me warranted unoer the dircum-
51

stances in order to avoid a possible charge that they failed to exercise "reasonable diligence" to discover matters

which, even though not material, might be viewed, with

hindsight, as involving the quality and integrity of management or patterns or practices of recurring activity.

The proposed rules mould place lawyers and clients in a

position where there is an inherent possibility of conflict

between the interest of -the attorney and the interest of

the client, thereby impeding the ability of the lawyer to

give fully informed and disinterested advice to the client.

Furthermore, the Institute's proposals would

require reporting companies in many cases to waive the

privlege against disclosure of confidential communications

with counsel. It is not clear whether the Petition contemplates that a reporting company's "certificate" in its Form

10-K and annual report to shareholders would only certify

that the specified procedures had been followed, or wnetner

the Form 10-K and annual report would have to disclose

Material facts concerning corporate activities wnich "violate or probably violate" the law. The Petition discdssion

concerning the importance of disclosing contingent liabili-
52

ties may suggest that the latter is intended. In any .

event, the proposed rules would require disclosure of such

facts to the independent auditors. In adaition, the proposed rules would require Form 8-K disclosure of the circumstances surrounaing any resignation or dismissal of

counsel -- a requirement whicn presumably would require

disclosure of any disagreements concerning violations or

probable violations of law. The potential destruction of

the client's privilege, through disclosure to the outside

auditors and possibly the public, necessarily would further

restrict the willingness of corporate officers to communicate with counsel and, accordingly, would further impair

the ability of corporations to obtain ant utilize informed

legal advice and effective legal representation.

The question of how to balance the interests of

investors and the public in obtaining material information

with their interests in encouraging leal review of corporate actions through the confidentiality of communications

with counsel was discussed extensively and resolved in

connection with lawyers' responses to auaitors' inquiries

on litigation ant ct,ler contingent liatilitiet. ovrai
53

years of debate on the subject led to co-ordinated statements by the American Institute of Certified Public Accountants aria the American Bar Association.* We are not

aware, and the Institute has not demonstrated, tnat there

has been any break-down in the procedures set forth in these

carefully 'constructed statements. Nevertheless, the Institute apparently believes that it is necessary to destroy

the values of confidentiality which these statements were

designed to preserve.

Of fundamental importance from the stananoint of

the Commission, we believe that the rules proposea in the

Petition would be detrimental . to toe Commission in enforcing the securities laws and achieving its regulatory goals.

The Commission nas limited resources. It nas relied

historically to a great extent on the cooperation of toe

securities bar. This cooperation has produced a high

A3A Statcment of Policy Regarding Lawyers liesponses to

Auoitors' equests for Inforation, 91 Business Lawyer

1709 (April 107o); Same, Second report of tne

on Audit Inquiry fiesponses, 90 Business Lawyer 177

(November 197b); AICPA Stace:,enc oh Auuitin6 Standards

No. 12, Inquiry of a Clienc.'s La::y,ra

Liti6atich Cluims and AsueocmJntn ..,anunry 1701.
54

degree of understanding of, and voluntary compliance with,

the federal securities laws.. The publication of tne Proposal is viewed as signalling a possible dramatic change

from cooperation to confrontation. In addition, as previously noted, the proposed rules would impair the ability

of counsel for reporting companies to give informed advice

concerning compliance with the federal securities laws and

other laws. Accordingly, the Petition is seriously counterproductive of the Commission's efforts and should be

rejected promptly.

THE TIME IS INOPPORTUNE AND TEE CIRCUASTANCES

WRONG FOR THE CONSIDERATION CF SO BASIC A

PROPOSAL TO RESTRUCTURE THE BELATIO!,SHIPS

BETWEEN REPORTING COPANIES LT.) THEIR COUNSEL

The same considerations which impelled the

Commission to conclude that it was not timely to consider

the Institute's petition of May 25, 1978, should have

impelled the Commission to determine that it was not timely

to consider the Petition of November 22, 1978, submitted

for comment... The Committee on Securities Regulation has

We do not, by referring to toe Col.,Ii.ssion's reasons

set forth in its letter of July 2o, 19/9 (Appendix A

to the :.elease), mean to acquiuce in the Commission's

remars about ...the apuropriztness of roceeaia,,; - in

the area of toe obli6ations of councel by disciplinary

anu enforcement proceedin.:.s insteau of vy mai:ing its

views "mown .in advanca tnruu,,;3
55

filed an amicus brief in the Commission's pending proceedings in the matter of William R. Carter and Charles J.

Johnson, Jr., Administrative Proceedings File No. 3-5464,

and we are hopeful that an authoritative decision in that

case may shed some light on the Commission's powers over

lawyers and their relationships to the corporations for

whom they act, and on the question of what smatters constitute practice before the Commission and what matters do not

constitute such practice. Other pending proceedings. may

produce rulings as to the Commission's powers in these

respects. In addition, wnen the consensus of the oar is

reached in the current procedures of the American 'bar

Association's Committee on tne Evaluation of Professional

Standards, it will shed light on tne obligations of counsel. Finally, the Staff of the Commission ds preparing a

report on corporate governance woicn may deal with some of

these questions.

It is most inopportune for one Commission,.

before the Carter and Johnson case and other cases are

resolved, oefore the American 'ear Association Committee has

completed its worm. ant bQfore toe Staff nas finished its
56

report, to proceed to rulemaking on the basis of so illconceived and so badly drafted a proposal as the Petition,

which does not address itself meaningfully to the question

of the Commission's authority, the issue of the client's

privilege against disclosure of confidentia:L communication

with counsel, the impact of tne proposal on the relationship

between lawyers and their clients, and other relevant

matters.

THE PROPOSAL IS POORLY DRAFTED AND

WOULD PROVE TO BE ii.-JRKABLE

Proposal 1 in the Petition would require "each

attorney employed or retained by the corporation" to report to the Board of Directors (or an independent committee

thereof) any corporate activities discovered by the lawyer

"through reasonable diligence" which "viola=e. or probably

'violate" anv law, if such violation or probable violation

"could" result in material financial liacility, or calls

into question. the quality and integrity of :..anagement, or

iis "part of a pattern or practice of recurring activity."

There are many serious defects in Proposal 1. for

ex=ple the puri:c.;anu meanin..; cm tne "t.,nough reLison-
57

able diligence" requirement are unclear. Thus, it is

unclear now the proposal would apply if a lawyer failed to

discover illegal conduct because of a lack of "reasonaole •

diligence. or, conversely', happened to find out about

illegal conduct solely through inadvertence. We assume

that Proposal 1 is intended to impose an obligation upon

lawyers to use "reasonable diligence", and we question the

authority of the Commission to impose such an obligation.

But what does "reasonble diligence" mean? Must a law firm,

acting solely as special counsel for a corporate borrower on,

a bank loan agreement, use "reasonable diligence" to discover

whether press releases or 1934 Act filings tor the aosence

thereof) violate the securities laws? Proposal 1 leaves

these and many other questions unanswered.

Proposal 1 is far too broad. It would apply to

"each attorney employed or retained by the corporation."

For a large corporation, this would cover many lawyers,

from a general counsel fully familiar with many of the

- corporation's legal affairs to a collection attorney em—

ployed solely to collect an account receivable. The Pro—

posal would apply to a violation or orcoable violation of

any law, includin,; not only federal, state arc local laws :Ln
58

the United States, but also foreign laws. it would apply to

a series of minor violations which constituted a "pattern or

practice of recurring activity", quite apart from any

consideration of materiality or integrity of management. It

would cover a "probable violation" which "could" result in

materia2. liability, quite apart from any consideration of

whether other counsel (perhaps more skilled in the particular area of law) disagreed with a particular lawyer's

assessment of the probability that the conduct violates the

law and quite apart from any practical assessment of the

actual exposure of the corporation. Thus, 'the Board of

Directors could be presented with a large amount of information having no material significance to tte corporation --

a result which would interfere with the Board's consideration of truly important matters.

Proposal 2 in the Petition would require a reporting company to file copies of "written agreements

delineating the relationship between Inc corpora:ion and

its outside attorneys". Here again, the is poorly

drafted and overly broad. Proposal 2 assumes that a corporation should have a written agreement with eF.ch cutsioe

attorney -- an assumption for which no s..pport is ;iven.
59

The Proposal would cover all outside counsel, without regard

to the amount or significance of the work performed by a

particular lawyer. For example, it would seem to require

the filing of contingent fee agreements on 'collection

matters. Proposal 2 is completely vague as to the matters

to be covered in such written agreements. Indeed, Proposal

2 simply states the agreements "may" cover matters which

"might be of concern to stockholders and other investors".

The examples provided in the Proposal dealing with the

frequency of contacts with and obligations of Counsel are

not matters that can appropriately be covered by contractual

language which, of necessity, must deal in generalities.

Proposal 3, which would require the filing of a

Form 8-K describing the circumstances surrounding the dismissal or resignation of the corporation's general counsel

or "any attorney retained in connection with matters pertaining to the laws administered or enforced by Inc Commisscan, " suffers from similar defects. The Proposal gives no

guidance as to what constitutes dismissal, e.g., if a

corporation ceases to call on a law firm for further

servicez in securities' matters or reduces drastically the
60

law firm's work in that area and gradually begins to seek

securities counsel elsewhere, does that constitute a "dis—

missal"? It does not set forth the kind of time schedule

for the filing of the Form 8-K which would be permitted in

order to give the corporation time to draft the required

disclosure, to submit it to the resigning or dismissed

attorney, and to obtain his comments. It would cover such

insignificant matters as disputes over fees and the quality

of the lawyer's work, as well as disputes concerning ques—

tionable corporate conduct.

The Petition is drafted so broadly that it would

•include non-U.S. issuers subject to Commission jurisdiction

and non-U.S. lawyers for domestic and foreign issuers

subject to Commission jurisdiction. The Petition appears to

have ignored completely the possibility that the proposals

would be in direct and serious conflict with laws and

practices regulating the legal profession in other countries.

In short, the Petition is so ill-conceived, is so

Poorly drafted and would prove to be so unworkable that it

does not merit serious consideration.

4
61

For all of the above reasons, we respectfully urge

the Commission promptly to reject the Petition.

Very truly yours, .

Leonard M. Lei.man,

Chairman of the Committee

on Securities riegulation

Barbara Singer Thomas,

Chairman of the Committee

on Corporation Law