[Federal Register: February 6, 2003 (Volume 68, Number 25)]
[Proposed Rules]
[Page 6324-6337]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr06fe03-14]
[[Page 6324]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 205, 240 and 249
[Release Nos. 33-8186; 34-47282; IC-25920; File No. S7-45-02]
RIN 3235-AI72
Implementation of Standards of Professional Conduct for Attorneys
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule.
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SUMMARY: The Securities and Exchange Commission (``Commission'') is
soliciting comments on proposed rules setting standards of professional
conduct for attorneys who appear and practice before the Commission on
behalf of issuers. Section 307 of the Sarbanes-Oxley Act of 2002
requires the Commission to prescribe minimum standards of professional
conduct for attorneys appearing and practicing before the Commission in
any way in the representation of issuers. The Commission in a companion
release has adopted rules under Section 307. The Commission also is
extending the comment period for certain other rules under Section 307.
In particular, the Commission is extending the comment period for the
provisions regarding an attorney's notification to the Commission (more
commonly referred to as ``noisy withdrawal'') when an attorney, after
reporting evidence of a material violation up-the-ladder of the
issuer's governance structure, reasonably believes an issuer's
directors have either made no response (within a reasonable time) or
have not made an appropriate response. This release solicits additional
comments on the ``noisy withdrawal'' provisions previously proposed and
proposes an alternative approach. This release also solicits additional
comments on the rules that the Commission adopted under Section 307.
DATES: Comments should be received on or before April 7, 2003.
ADDRESSES: To help us process and review your comments efficiently,
comments should be sent by hard copy or by e-mail, but not by both
methods.
Comments sent by hard copy should be submitted in triplicate to
Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450
Fifth Street, NW, Washington, DC 20549-0609. Alternatively, comments
may be submitted electronically to the following e-mail address: rule-
comments@sec.gov. All comment letters should refer to File No. S7-45-
02; this file number should be included on the subject line if e-mail
is used. All comment letters received will be available for public
inspection and copying in the Commission's Public Reference Room at the
same address. Electronically submitted comments will be posted on the
Commission's Internet Web site (http://www.sec.gov).\1\
FOR FURTHER INFORMATION CONTACT: Laura Walker, Office of the General
Counsel, U.S. Securities and Exchange Commission, 450 Fifth Street, NW,
Washington, DC 20549. Phone: (202) 942-0835.
SUPPLEMENTARY INFORMATION: The Commission is proposing amendments to
Rule 205.3 \2\ of Title 17, Chapter II, of the Code of Federal
Regulations, establishing standards of professional conduct for
attorneys who appear and practice before the Commission in the
representation of issuers, under the Securities Act of 1933,\3\ the
Securities Exchange Act of 1934,\4\ the Investment Company Act of
1940,\5\ the Investment Advisers Act of 1940,\6\ and the Sarbanes-Oxley
Act of 2002.\7\ The Commission also is proposing new Rules 13a-17 \8\
and 15d-17 \9\ and amendments to Rules 13a-11 \10\ and 15d-11 \11\ and
Forms 20-F \12\, 40-F \13\, and 8-K \14\ under the Exchange Act.
\1\ The Commission does not edit personal identifying
information, such as names or electronic mail addresses, from
electronic submissions. Interested person submitting comments should
only submit information that they wish to make publicly available.
\2\ 17 CFR 205.3.
\3\ 15 U.S.C. 77a et seq.
\4\ 15 U.S.C. 78a et seq.
\5\ 15 U.S.C. 80a-1 et seq.
\6\ 15 U.S.C. 80b-1 et seq.
\7\ 15 U.S.C. 7201 et seq.
\8\ 17 CFR 240.13a-17.
\9\ 17 CFR 240.15d-17.
\10\ 17 CFR 240.13a-11.
\11\ 17 CFR 240.15d-11.
\12\ 17 CFR 249.220f.
\13\ 17 CFR 249.240f.
\14\ 17 CFR 249.308.
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Table of Contents
I. Background
II. The Role of Attorneys Who Appear Before the Commission
III. Discussion of the Proposals
A. Part 205 As Adopted
B. Extension of Comment Period/Solicitation of Comments for
``Noisy Withdrawal'' Provisions As Previously Proposed
C. Alternative Proposal to ``Noisy Withdrawal''
D. Proposed Amendments to Forms
IV. General Request for Comments
V. Paperwork Reduction Act
VI. Costs and Benefits
VII. Effect on Efficiency, Competition and Capital Formation
VIII. Initial Regulatory Flexibility Analysis
IX. Small Business Regulatory Enforcement Fairness Act
X. Statutory Basis and Text of Proposed Amendments to Parts 205, 240
and 249
I. Background
Section 307 of the Sarbanes-Oxley Act of 2002 (the ``Act'')
mandates that the Commission:
shall issue rules, in the public interest and for the protection of
investors, setting forth minimum standards of professional conduct
for attorneys appearing and practicing before the Commission in any
way in the representation of issuers, including a rule--
(1) Requiring an attorney to report evidence of a material
violation of securities law or breach of fiduciary duty or similar
violation by the company or any agent thereof, to the chief legal
counsel or the chief executive officer of the company (or the
equivalent thereof); and
(2) If the counsel or officer does not appropriately respond to
the evidence (adopting, as necessary, appropriate remedial measures
or sanctions with respect to the violation), requiring the attorney
to report the evidence to the audit committee of the board of
directors of the issuer or to another committee of the board of
directors comprised solely of directors not employed directly or
indirectly by the issuer, or to the board of directors.
On November 21, 2002, the Commission proposed rules under Section
307 to implement those provisions, including an up-the-ladder reporting
system mandated by the Act.\15\ On January 23, 2003, the Commission
voted to approve the up-the-ladder reporting system.\16\ In addition to
the up-the-ladder reporting requirement, the Proposing Release proposed
several corollary provisions in 205.3(d) that are not explicitly
required by Section 307, but that the Commission considered potentially
important minimum standards for attorneys appearing and practicing
before the Commission in the representation of issuers. Under certain
circumstances, these provisions would have permitted or required
attorneys to withdraw from representation of an issuer, to notify the
Commission that they have done so, and to disaffirm documents filed or
submitted to the Commission on behalf of the issuer.
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\15\ Release No. 33-8150 (December 2, 2002) [67 FR 71670] (the
``Proposing Release'').
\16\ Release No. 33-8185 (Jan. 29, 2003) (the ``Adopting
Release''). The effective date of the rule is 180 days following
publication in the Federal Register. Until the effective date, those
wishing to see the text of the rule should refer to the Adopting
Release.
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The Commission received numerous comment letters concerning these
``noisy withdrawal'' provisions. A number of commenters supported the
proposal. They were of the view that the ``noisy withdrawal'' proposal
is
[[Page 6325]]
consistent with the Commission's mandate under Section 307 and is
necessary to effectuate the up-the-ladder reporting rule, because it
addresses the situation where an issuer inappropriately refuses to
implement remedial measures.\17\ One commenter not only thought the
Commission's proposed rule was sound, but opined that ``considerably
more demanding reporting obligations would be consistent with the most
plausible interpretation of corporate interests in
confidentiality.''\18\ Other commenters supported the proposal but
recommended certain modifications.\19\
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\17\ See, e.g., Comments of Susan P. Koniak, et al., at 23.
\18\ See Comments of William Simon, at 2.
\19\ See, e.g., Comments of Richard Painter, at 2-3.
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On the other hand, a greater number of commenters opposed the
``noisy withdrawal'' provisions. Some commenters objected to the
proposal because they are of the view that the Commission does not have
the statutory authority to require ``noisy withdrawal.'' They pointed
to legislators'' comments that, in their view, supported the position
that Section 307 does not require the Commission to promulgate a rule
mandating ``noisy withdrawal.'' \20\ Other objectors were concerned
that the provision would conflict with longstanding requirements under
state ethics laws and therefore would infringe on the jurisdiction of
state ethics-setting bodies.\21\ One commenter argued that such a
provision would subject attorneys to conflicting liability claims,
whether or not they complied with the rule. Several commenters from
outside the United States stated that compliance with the ``noisy
withdrawal'' requirement would cause them to violate the laws of their
home jurisdiction.\22\ Finally, several commenters believed that the
rule would not further the Commission's goals because it would cause
clients to exclude attorneys from meetings where information was
exchanged that could lead an attorney to believe a material violation
had been committed.\23\
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\20\ See Comments of Attorneys' Liability Assurance Society,
Inc., at 8; Comments of Frederick Lipman, at 1-3.
\21\ See Comments of the Conference of Chief Justices, at 3;
Comments of Attorneys' Liability Assurance Society, Inc., at 8.
\22\ See, e.g., Comments of Shearman & Sterling, at 3-7.
\23\ See Comments of Attorneys' Liability Assurance Society,
Inc., at 8.
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The vast majority of commenters suggested that the Commission defer
action on a rule mandating ``noisy withdrawal'' and provide interested
parties an additional opportunity to comment. Their principal concerns
were that: The rule raises novel issues with respect to establishing
ethical rules for attorneys that require reporting to a third party;
the rules are complex and the period of time provided under Section 307
did not allow adequate time for the preparation of comments or for the
Commission to consider those comments; and because Section 307 requires
the Commission only to issue the up-the-ladder reporting requirements
within 180 days, the Commission need not issue a ``noisy withdrawal''
provision at the time it adopts the up-the-ladder reporting system and
can postpone its consideration of the issue.
In light of these comments, the Commission has determined to extend
the comment period on proposed Sec. 205.3(d) of the proposed rule.\24\
The Commission is soliciting comments on proposed alternative
provisions, which prescribe attorney withdrawal in a narrower set of
circumstances, and which require the issuer, rather than the attorney,
to report to the Commission the attorney's withdrawal or written notice
of failure to receive an appropriate response to a report of a material
violation. The Commission also requests comment on whether any rules we
are currently adopting under Section 307 should be revised if we adopt
either of these proposals. The Commission is interested especially in
receiving comments from interested parties outside the legal
profession, such as issuers and investors, who might be affected by, or
benefit from, the final rule or the proposals.\25\
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\24\ Proposed Part 205.3(d) should not be confused with Part
205.3(d) as adopted (``Issuer Confidences''). In the event that
proposed Part 205.3(d), or an alternative thereto, is adopted,
current Part 205.3(d) will be re-numbered.
\25\ Persons who previously commented on proposed Part 205 need
not re-submit the same comment letters. We will consider all
relevant comment letters previously submitted, as well as any new
comment letters we receive, in our deliberations on the rule.
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II. The Role of Attorneys Who Appear Before the Commission
As discussed in more detail in the Proposing Release and the
Adopting Release, attorneys play a varied and crucial role in the
Commission's processes. Attorneys prepare, or assist in preparing,
materials that are filed with or submitted to the Commission by or on
behalf of issuers. Public investors rely on these materials in making
their investment decisions. Thus, the Commission, and the investing
public, must be able to rely upon the integrity of in-house and
retained lawyers who represent issuers before the Commission. Attorneys
also play an important and expanding role in the internal processes and
governance of issuers, ensuring compliance with applicable reporting
and disclosure requirements, including requirements mandated by the
federal securities laws.
The actions of some attorneys have drawn increasing scrutiny and
criticism in light of recent events demonstrating that at least ``some
lawyers have forgotten their responsibility.'' \26\ Moreover, existing
state ethical rules have not proven an effective deterrent to attorney
misconduct.\27\ The July 16, 2002 Preliminary Report of the American
Bar Association Task Force on Corporate Responsibility (the ``Cheek
Report'') noted that ``a disturbing series of recent lapses in
corporations involving false or misleading financial statements and
alleged misconduct by executive officers'' has compromised investors'
confidence in both the ``quality and the integrity'' of public company
governance.\28\ Indeed, the Cheek Report concluded that ``the system of
corporate governance at many public companies has failed
dramatically.'' Moreover, the Cheek Report acknowledges that attorneys
representing and advising corporate clients bear some share of the
blame for this failure.\29\
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\26\ See remarks by Senator John Edwards, 148 Cong. Rec. at
S6551 (July 10, 2002). See also Speech by SEC Chairman Harvey L.
Pitt: Remarks Before the Annual Meeting of the American Bar
Association's Business Law Section (Aug. 12, 2002) (``recent events
have refocused our attention on the need for the profession to
assist us in ensuring that fundamental tenets of professionalism,
ethics and integrity work to ensure investor confidence in public
companies''), available at http://www.sec.gov/news/speech/spch579.htm
.
\27\ See remarks by Senator Michael Enzi, 148 Cong. Rec. at
S6555 (``I am usually in the camp that believes that [s]tates should
regulate professionals within their jurisdiction. However, in this
case, the [s]tate bars as a whole have failed. They have provided no
specific ethical rule of conduct to remedy this kind of situation.
Even if they do have a general rule that applies, it often goes
unenforced'').
\28\ See Cheek Report at 3-4.
\29\ See Cheek Report at 7 (``It is a clear failure of corporate
responsibility if executive officers aware of potential accounting
irregularities sell millions of dollars of stock to public investors
who are unaware of [earnings misstatements and self-dealing by
corporate officers]. It is a clear failure of corporate
responsibility for insiders to borrow enormous amounts from their
companies without adequate security beyond inflated stock of the
company itself. And it is a clear failure of corporate
responsibility when outside directors, auditors and lawyers, who
have important roles in our system of independent checks on the
corporation's management, fail to avert or even discover--and
sometimes actually condone or contribute toward the creation of--the
grossest of financial manipulations and fraud'').
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[[Page 6326]]
III. Discussion of Proposals
The proposals regarding ``noisy withdrawal'' contained in the
Proposing Release, and the alternative provisions discussed below, are
intended to further the purposes of the up-the-ladder requirement and
enhance investor confidence in the financial reporting process. The
proposed rules are designed to deter instances of attorney and issuer
misconduct, and, where misconduct has occurred, reduce its impact on
issuers and their shareholders.
At the same time, the Commission does not want the rule to impair
zealous advocacy, which is important to the Commission's processes. The
Commission also does not want the rule to discourage issuers from
seeking and obtaining appropriate and effective legal advice. In this
regard, the Commission today is proposing for comment alternative
provisions to the ``noisy withdrawal'' provisions contained in the
Proposing Release.
A. Part 205 as Adopted
In a companion release, we adopted rules under Sec. 307 of the Act
that mandate attorneys appearing and practicing before the Commission
in the representation of an issuer to report evidence of a material
violation up-the-ladder within the issuer.\30\ The rules require an
attorney to report such evidence to the issuer's chief legal officer,
or to its chief legal officer and chief executive officer. The issuer's
chief legal officer is required to inquire into the evidence of the
material violation and, unless he or she reasonably believes that no
material violation has occurred, is ongoing, or is about to occur, he
or she must take reasonable steps to cause the issuer to adopt an
appropriate response to the attorney's report. Unless an attorney, who
has made a report of evidence of a material violation, reasonably
believes that the chief legal officer or chief executive officer has
provided an appropriate response within a reasonable period of time to
his or her report, the attorney shall report the evidence to an
appropriate committee of the issuer's board of directors. An attorney
who reasonably believes that the issuer has not made an appropriate
response shall explain his or her reasons to the issuer's chief legal
officer, chief executive officer, or board of directors. An attorney
retained or employed by an issuer that has established a qualified
legal compliance committee (``QLCC'') (a committee established to
consider and investigate attorney reports under the rule and to
recommend appropriate responses to such reports) may, as an alternative
to the reporting requirements described above, report evidence of a
material violation to the QLCC.
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\30\ See Adopting Release. While we summarize here certain
salient aspects of the rules as adopted, for a complete discussion,
please review the Adopting Release.
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The final rule provides that members of the QLCC may not be
``employed, directly or indirectly, by the issuer.'' This language,
which is also included in Sec. 205.3(b)(3), is drawn directly from
Sec. 307 of the Sarbanes-Oxley Act. The Commission considers it
appropriate and consistent with the mandate of the Act, however, to
ensure a high degree of independence in QLCC members and members of
committees to whom reports are made. Accordingly, we anticipate that
these provisions will be amended to conform to final rules defining who
is an ``independent'' director under Sec. 301 of the Act, upon
adoption of those rules.\31\ We request comment on who should be
considered independent in this context.
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\31\ See Standards Related to Listed Company Audit Committees,
Release No. 33-8173 (Jan. 8, 2003).
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The rule as adopted does not require either an attorney or an
issuer to report evidence of a material violation, or an issuer's
response to such evidence, outside the issuer. We request additional
comment on the rule as adopted. Commenters should consider whether any
aspects of the rule, as adopted, should be revised if we adopt any of
the proposals discussed in this release. If yes, how should they be
revised? If not, why not?
B. Extension of Comment Period/Solicitation of Comments for ``Noisy
Withdrawal'' Provisions as Previously Proposed
As explained in the Proposing Release, proposed Sec. 205.3(d)
addresses what we hope is the rare situation in which an attorney
reasonably believes an issuer has either made no response (within a
reasonable time) or has not made an appropriate response to reported
evidence of a material violation. The proposed section distinguishes
between material violations that have already occurred and are not
ongoing, and material violations that are either ongoing or are about
to occur. The proposed section also distinguishes between outside
attorneys retained by an issuer and in-house attorneys employed by an
issuer. The section requires an attorney to withdraw from representing
an issuer and/or to disaffirm documents filed with the Commission in
some circumstances; it also requires a withdrawing attorney to notify
the Commission in writing of his or her withdrawal.
As proposed in the Proposing Release, Sec. 205.3(d)(1) prescribes
actions by an attorney who has not received an appropriate response to
his or her report of a material violation and who believes that a
material violation is ongoing or about to occur.\32\ It states:
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\32\ Proposed Sec. 205.3(d) would follow Sec. Sec. 205.3(b)
and (c) as adopted, which set forth the duty of an attorney to
report evidence of a material violation up-the-ladder of the
issuer's governance structure, and, if appropriate, to explain to
the issuer his or her reasons for believing that the issuer has not
made a timely or appropriate response.
(d) Notice to the Commission where there is no appropriate
response within a reasonable time. (1) Where an attorney who has
reported evidence of a material violation under paragraph 3(b) of
this section rather than paragraph 3(c) of this section does not
receive an appropriate response, or has not received a response in a
reasonable time, to his or her report, and the attorney reasonably
believes that a material violation is ongoing or is about to occur
and is likely to result in substantial injury to the financial
interest or property of the issuer or of investors:
(i) An attorney retained by the issuer shall:
(A) Withdraw forthwith from representing the issuer, indicating
that the withdrawal is based on professional considerations;
(B) Within one business day of withdrawing, give written notice
to the Commission of the attorney's withdrawal, indicating that the
withdrawal was based on professional considerations; and
(C) Promptly disaffirm to the Commission any opinion, document,
affirmation, representation, characterization, or the like in a
document filed with or submitted to the Commission, or incorporated
into such a document, that the attorney has prepared or assisted in
preparing and that the attorney reasonably believes is or may be
materially false or misleading;
(ii) An attorney employed by the issuer shall:
(A) Within one business day, notify the Commission in writing
that he or she intends to disaffirm some opinion, document,
affirmation, representation, characterization, or the like in a
document filed with or submitted to the Commission, or incorporated
into such a document, that the attorney has prepared or assisted in
preparing and that the attorney reasonably believes is or may be
materially false or misleading; and
(B) Promptly disaffirm to the Commission, in writing, any such
opinion, document, affirmation, representation, characterization, or
the like; and
(iii) The issuer's chief legal officer (or the equivalent) shall
inform any attorney retained or employed to replace the attorney who
has withdrawn that the previous attorney's withdrawal was based on
professional considerations.
Proposed Sec. 205.3(d)(2) concerns situations in which the
reported
[[Page 6327]]
material violation has already occurred and is not ongoing. It
provides:
(2) Where an attorney who has reported evidence of a material
violation under paragraph (b) rather than paragraph (c) of this
section does not receive an appropriate response, or has not
received a response in a reasonable time, to his or her report under
paragraph (b) of this section, and the attorney reasonably believes
that a material violation has occurred and is likely to have
resulted in substantial injury to the financial interest or property
of the issuer or of investors but is not ongoing:
(i) An attorney retained by the issuer may:
(A) Withdraw forthwith from representing the issuer, indicating
that the withdrawal was based on professional considerations;
(B) Give written notice to the Commission of the attorney's
withdrawal, indicating that the withdrawal was based on professional
considerations; and
(C) Disaffirm to the Commission, in writing, any opinion,
document, affirmation, representation, characterization, or the like
in a document filed with or submitted to the Commission, or
incorporated into such a document, that the attorney has prepared or
assisted in preparing and that the attorney reasonably believes is
or may be materially false or misleading; and
(ii) An attorney employed by the issuer may:
(A) Notify the Commission in writing that he or she intends to
disaffirm some opinion, document, affirmation, representation,
characterization, or the like in a document filed with or submitted
to the Commission, or incorporated into such a document, that the
attorney has prepared or assisted in preparing and that the attorney
reasonably believes is or may be materially false or misleading; and
(B) Disaffirm to the Commission, in writing, any such opinion,
document, affirmation, representation, characterization, or the
like; and
(iii) The issuer's chief legal officer (or the equivalent) shall
inform any attorney retained or employed to replace the attorney who
has so withdrawn that the previous attorney's withdrawal was based
on professional considerations.
Proposed Sec. 205.3 (d)(3) restates what is largely settled law:
(3) The notification to the Commission prescribed by this
paragraph (d) does not breach the attorney-client privilege.
Interested persons are invited to comment on any aspect of this
proposal,\33\ including: (1) Whether the proposed rule should include
any provision permitting or requiring notification to the Commission
when an attorney receives no response or an inappropriate response or
whether this is a matter best left to state or local bar disciplinary
processes; (2) whether a higher standard should apply to notification
to the Commission than to reporting up-the-ladder within the issuer
and, if so, how much higher it should be and how should such a higher
test be framed; (3) whether ``noisy withdrawal'' should be mandatory
under some circumstances but permissive under others and, if so, what
circumstances should make ``noisy withdrawal'' mandatory and what
circumstances should make ``noisy withdrawal'' permissive, or whether
``noisy withdrawal'' should be mandatory under all circumstances
covered by Sec. 205.3(d) or should be permissive under all such
circumstances; (4) whether it is appropriate to distinguish between
material violations that are ongoing or impending and material
violations that are past and have no continuing effect, and whether
such a distinction would be meaningful to investors; (5) whether the
attorney who has reported evidence of a material violation to which the
issuer has not made an appropriate response must know that the reported
material violation has occurred, is occurring, or is about to occur
before the attorney is required, or permitted, to make a ``noisy
withdrawal''; (6) whether an attorney should be required, or permitted,
to make a ``noisy withdrawal'' where the attorney has not received an
appropriate response to reported evidence of a material violation, and
the attorney reasonably believes that the reported material violation
has occurred, is occurring, or is about to occur; (7) whether there is
an appropriate basis for a ``noisy withdrawal'' under circumstances in
which an attorney reasonably believes that the reported material
violation is likely to have occurred, be ongoing, or be about to occur;
(8) whether there is an appropriate basis for a ``noisy withdrawal''
under circumstances in which the attorney reasonably believes that it
is reasonably likely that the reported material violation has occurred,
is ongoing, or is about to occur; (9) whether substantial injury to the
financial interest of investors is an appropriate prerequisite to a
``noisy withdrawal''; (10) whether substantial injury to the financial
interest of the issuer client is an appropriate prerequisite to a
``noisy withdrawal'' and, if so, whether such substantial injury to a
financial interest must be reasonably certain, likely, or merely
possible; (11) whether the rule should distinguish between outside
attorneys and those employed by the issuer and, if so, under what
circumstances, how, and why; (12) whether an attorney who is employed
by an investment adviser or manager and who is appearing and practicing
before the Commission in the representation of the investment company
should be treated as an outside attorney retained by the investment
company under proposed paragraph (d)(1)(i) or should be treated as an
in-house attorney under proposed paragraph (d)(1)(ii); (13) whether the
rule should specify the content of a disaffirmance of an opinion or
representation; (14) whether the rule should require that any
disaffirmance be in writing; (15) whether there are any other actions
the rule should require an attorney to take when the attorney does not
receive an appropriate response to his or her report of evidence of a
material violation (e.g., should an in-house attorney be required to
cease participating in or assisting in any matter relating to the
violation); (16) what is the appropriate length of time to permit an
attorney to make a ``noisy withdrawal''; (17) whether it is important
to require any successor attorney to be notified that the previous
attorney withdrew based on ``professional considerations'' and, if so,
whether there is a better way to require such notification be made than
is proposed in paragraph (d)(1)(iii); (18) whether such notification
should be required where ``noisy withdrawal'' is merely permissive;
(19) whether it is important to provide a ``safe harbor'' from civil
suits for the attorney who notifies the Commission that he or she has
withdrawn based on professional considerations under proposed paragraph
(d) and/or disaffirmed a document; and (20) whether the ``noisy
withdrawal'' provisions would create conflicts with applicable law for
any attorneys (foreign or U.S.) not excluded by the definition of
``non-appearing foreign attorney'' (section 205.2(j) of the rule as
adopted). Should ``noisy withdrawal'' apply to these attorneys? If not,
why not? If the provisions would create conflicts for these attorneys,
please describe the conflicts and how they appropriately may be
resolved.
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\33\ See also the solicitation of comments in the Proposing
Release.
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The Commission is particularly interested in learning commenters'
views on how common it is for attorneys to alert their issuer-clients'
management or directors to evidence of violations of law but to receive
either no response or an inappropriate response. How often would
attorneys be required to make a ``noisy withdrawal'' under this
provision, if adopted? Should we revise the provision so that attorneys
must make a ``noisy withdrawal'' less often or more often? If so, how?
[[Page 6328]]
C. Alternative Proposal to ``Noisy Withdrawal''
In response to comments received to date on Sec. 205.3(d) as
proposed in the Proposing Release and described above, the Commission
also proposes, and solicits comments on, the following alternative
proposal. The alternative proposal does not contain ``noisy
withdrawal'' and disaffirmation requirements and requires attorney
action only where the attorney reasonably concludes that there is
substantial evidence that a material violation is ongoing or about to
occur and is likely to cause substantial injury to the issuer.
Section 205.3(e) of the alternative proposal requires an issuer
(rather than its attorney) to report to the Commission an attorney's
written notice of withdrawal or failure to receive an appropriate
response, as described in Sec. 205.3(d) of the alternative proposal.
In connection with Sec. 205.3(e) of the alternative proposal, the
Commission also proposes to amend Forms 8-K, 20-F, and 40-F to require
issuers to disclose publicly an attorney's written notice of withdrawal
within two business days of that notice.\34\ Section 205.3(f) of the
alternative proposal permits (but does not require) an attorney to
inform the Commission of his or her withdrawal if the issuer does not
comply with paragraph (e).
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\34\ On June 17, 2002, the Commission proposed to shorten the
current deadlines for filing Form 8-K to two business days.
``Additional Form 8-K Requirements and Acceleration of Filing
Date,'' Release No. 33-8106. The Commission is still considering
that rulemaking proposal and may address it separately from this
release.
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1. Requiring an Attorney to Provide Written Notice of Withdrawal to the
Issuer Where the Attorney Does Not Receive an Appropriate Response to
His or Her Report of a Material Violation
Alternative proposed Sec. 205.3(d) requires an attorney retained
by the issuer who has reported evidence of a material violation and has
not received an appropriate or timely response to withdraw from
representing the issuer and to notify the issuer, in writing, that the
withdrawal is based on professional considerations. In the same
circumstances, an attorney employed by the issuer is required to cease
participating or assisting in any matter concerning the violation and
to notify the issuer, in writing, that he or she believes the issuer
has not provided an appropriate response.
Unlike the original proposed Sec. 205.3(d)(1), this proposed
paragraph does not require a withdrawing attorney to notify the
Commission of his or her withdrawal, and it does not require an
attorney to disaffirm documents filed with the Commission. The proposed
paragraph also does not require an attorney to withdraw or cease
participation or assistance in a matter if he or she would be
prohibited from doing so by order or rule of a court, administrative
body, or other authority with jurisdiction over the attorney.
Alternative proposed Sec. 205.3(d) provides:
(d) Actions required where there is no appropriate response
within a reasonable time. (1) Where an attorney who has reported
evidence of a material violation under paragraph (b) of this section
rather than paragraph (c) of this section (i) does not receive an
appropriate response, or has not received an appropriate response in
a reasonable time, and (ii) has followed the procedures set forth in
paragraph (b)(3) of this section, and (iii) reasonably concludes
that there is substantial evidence of a material violation that is
ongoing or about to occur and is likely to cause substantial injury
to the financial interest or property of the issuer or of investors:
(A) An attorney retained by the issuer shall withdraw from
representing the issuer, and shall notify the issuer, in writing,
that the withdrawal is based on professional considerations.
(B) An attorney employed by the issuer shall cease forthwith any
participation or assistance in any matter concerning the violation
and shall notify the issuer, in writing, that he or she believes
that the issuer has not provided an appropriate response in a
reasonable time to his or her report of evidence of a material
violation under paragraph (b) of this section.
(2) An attorney shall not be required to take any action
pursuant to paragraph (d)(1)(A) or (B) of this section if the
attorney would be prohibited from doing so by order or rule of any
court, administrative body or other authority with jurisdiction over
the attorney, after having sought leave to withdraw from
representation or to cease participation or assistance in a matter.
An attorney shall give notice to the issuer that, but for such
prohibition, he or she would have taken such action pursuant to
paragraph (d)(1)(A) or (B), and such notice shall be deemed the
equivalent of such action for purposes of this part.
(3) An attorney employed or retained by an issuer who has
reported evidence of a material violation under this part and
reasonably believes that he or she has been discharged for so doing
shall notify the issuer's chief legal officer (or the equivalent
thereof) forthwith.
(4) The issuer's chief legal officer (or the equivalent thereof)
shall notify any attorney retained or employed to replace an
attorney who has given notice to an issuer pursuant to paragraph
(d)(1), (d)(2) or (d)(3) of this section that the previous attorney
has withdrawn, ceased to participate or assist or has been
discharged, as the case may be, pursuant to the provisions of this
paragraph.
Interested persons are invited to comment on any aspect of
alternative proposed section 205.3(d), including: (1) Whether requiring
a different and higher evidentiary standard for withdrawal than for
reporting up-the-ladder of the issuer, such as requiring an attorney to
``conclude'' there is ``substantial evidence,'' will make the
circumstances in which an attorney must withdraw (triggering an
issuer's notification of the Commission) too narrow adequately to
protect investors; (2) whether requiring an attorney to make a
separate, more definitive, determination that evidence shows that a
material violation ``is'' ongoing or ``is'' about to occur (rather than
is likely to be ongoing or is likely to occur) too narrows the
circumstances in which an attorney must withdraw (triggering an
issuer's notification of the Commission) and fails adequately to
protect investors; (3) whether requiring an attorney to make a separate
determination of whether ``substantial injury'' is likely will make the
circumstances in which an attorney must withdraw (triggering an
issuer's notification to the Commission) too narrow adequately to
protect investors; (4) whether the proposed alternative's requirement
that the attorney make all three determinations addressed in the three
preceding questions (higher level of evidence, more definitiveness, and
substantial injury) so narrows the circumstances in which an attorney
would withdraw (and an issuer would notify the Commission) so that the
withdrawal and reporting requirements would be rendered ineffective;
(5) whether an issuer's ability under the adopted rule to respond
appropriately to a report of evidence of a material violation by
retaining or directing an attorney to assert a colorable defense
(should one exist), with the consent of the board of directors, would
mitigate issuer concerns about withdrawal being required in situations
where no violation actually has occurred; (6) whether failing to apply
mandatory withdrawal (triggering an issuer's notification of the
Commission) to past violations fails adequately to protect investors;
(7) whether requiring an attorney to make a determination as to whether
a violation ``has occurred'' or whether it ``is ongoing'' adequately
protects investors; (8) whether the proposed rule should include a
provision permitting or requiring withdrawal from representation when
an attorney does not receive an appropriate response to his or her
report of a material violation; (9) whether alternative proposed
section (d) is more compatible with existing state standards
[[Page 6329]]
governing attorney conduct than the ``noisy withdrawal'' and
disaffirmation requirements of proposed section 205.3(d)(1)-(3)
described above and, if so, how; (10) whether alternative proposed
section (d) is otherwise preferable to original proposed Sec.
205.3(d)(1)-(3) as described above and in the Proposing Release; (11)
whether alternative proposed section (d) is more compatible with
foreign law governing attorney conduct than the ``noisy withdrawal''
and disaffirmation requirements of proposed Sec. 205.3(d)(1)-(3)
described above; if so, why; if not, why not; (12) whether an attorney
who has reported evidence of a material violation to which the issuer
has not made an appropriate response must know that the reported
material violation is occurring or is about to occur before the
attorney is required to withdraw or cease participation or assistance
on a matter; (13) whether an attorney who is required to withdraw under
this paragraph should be required to withdraw from all representation
of the issuer, or only from representation on the matter concerning the
material violation; (14) whether investors and issuers will receive
adequate protection if the rule does not require attorneys to disaffirm
any opinion, affirmation, representation or the like in a document the
attorney or issuer filed with the Commission and that the attorney
reasonably believes is or may be (or is reasonably likely to be)
materially false or misleading; (15) whether investors and issuers will
receive adequate protection if the rule contains no requirement that
either an attorney or an issuer notify the Commission when the attorney
withdraws or gives the issuer notice that he or she has not received an
appropriate response to a report of a material violation; (16) whether
an attorney who is prohibited from withdrawing or ceasing participation
or assistance in a matter by a court or administrative body or other
authority with jurisdiction over the attorney should be required to
give notice to the issuer that, absent such prohibition, he or she
would have taken such action or whether such a requirement is likely to
be inconsistent with the attorney's continuing representation of the
issuer; and (17) whether the proposal's withdrawal requirements would
conflict with the obligations of attorneys not excluded by the ``non-
appearing foreign attorney'' definition under applicable foreign law or
professional standards of conduct.
2. Requiring an Issuer to Report an Attorney's Written Notice of
Withdrawal
As noted above, the Commission received many comments opposing the
``noisy withdrawal'' provisions of the proposed rule. One commenter
suggested that the requirement would ``risk destroying the trust and
confidence many issuers have up to now placed in their legal counsel,
creating divided loyalties and driving a wedge into the attorney-client
relationship,'' \35\ and others expressed similar views.\36\ Several
commenters believed that the rule would not further the Commission's
goals because it would cause clients to exclude attorneys from
discussions that might prompt the attorney to begin the up-the-ladder
reporting process.\37\ Foreign lawyers and law associations expressed
concerns, both in written comments and at the Commission's December 17,
2002 Roundtable on the International Impact of the Proposed Rules
Regarding Attorney Conduct, that the ``noisy withdrawal'' requirements
of the proposed rule would conflict with the laws and principles of
confidentiality and attorney-client privilege recognized in certain
foreign jurisdictions.\38\ Some foreign commenters stated that it
violated principles of international comity for the Commission to
exercise jurisdiction over the legal profession outside the U.S.\39\
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\35\ Comments of the American Bar Association, at 26.
\36\ See, e.g., Comments of 77 Law Firms, at 2; Comments of the
American College of Trial Lawyers, at 2.
\37\ See, e.g., Comments of Attorneys' Liability Assurance
Society, Inc., at 8.
\38\ See, e.g., Comments of the International Bar Association,
at 5-6; Comments of the Law Society of England and Wales, at 1;
Comments of the Japanese Federation of Bar Associations, at 3-4.
\39\ See Comments of De Brauw Blackstone Westbroek, at 2;
Comments of Stibbe, at 2.
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Accordingly, the Commission solicits comments on an alternative
proposal that would require an issuer, rather than an attorney, to
disclose publicly an attorney's withdrawal under the rule. The
Commission believes that this alternative approach to ``reporting
out,'' by placing the responsibility on the issuer for such disclosure,
addresses a number of the commenters' concerns noted above (those
related to attorney-client privilege and those of foreign lawyers), yet
provides some assurance that issuers will respond appropriately to
reports of material violations by attorneys. Requiring issuers to
report attorney withdrawals in a public filing with the Commission may
also provide protection to investors by alerting them to the
possibility of ongoing material violations by issuers. At least one
commenter proposed requiring issuers, rather than attorneys, to report
attorney resignations on Form 8-K, arguing that the proposed ``noisy
withdrawal'' requirement ``does little to warn investors about what is
going on at the issuer.'' \40\ In addition, the Commission invites
comment on whether, from a corporate governance perspective, there may
be advantages to vesting the obligation to ``report out'' an attorney's
withdrawal for professional considerations in the board of directors of
an issuer.
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\40\ Comments of Jeffrey L. Schultz, at 2.
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Proposed Sec. 205.3(e) would require an issuer who has received
notice from an attorney under alternative proposed Sec. 205.3(d) to
report the notice and the circumstances related thereto in an
appropriate filing with the Commission. Proposed section 205.3(e)
provides:
(e) Duties of an issuer where an attorney has given notice
pursuant to paragraph (d). (1) Where an attorney has provided an
issuer with a written notice pursuant to paragraph (d)(1), (d)(2),
or (d)(3) of this section, the issuer shall, within two business
days of receipt of such written notice, report such notice and the
circumstances related thereto on Form 8-K, 20-F, or 40-F, as
applicable.
Proposed Sec. 205.3(e) provides that the filing must be made by
the issuer on Form 8-K, 20-F or 40-F, as applicable. Accordingly, the
Commission is proposing to amend Forms 8-K, 20-F and 40-F to require
issuers to report an attorney's written notice under alternative
proposed paragraph (d) of the rule. These proposed amendments are
described below.
In connection with proposed Sec. 205.3(e), the Commission seeks
comment on whether any circumstances exist in which an issuer should
not be required to disclose an attorney's written notice under the
rule. The Commission specifically seeks comment on whether an issuer
should be permitted not to disclose an attorney's written notice where:
a committee of independent directors of the issuer's board
determines, based on the advice of counsel that was not involved in
the matters underlying the reported material violation, (i) that the
attorney providing such written notice acted unreasonably in
providing such notice, or (ii) that the issuer has, subsequent to
such written notice, implemented an appropriate response.
The Commission requests comment on the following questions: (1)
Whether an issuer should be able to determine not to report an
attorney's notice if an independent committee of the issuer's board of
directors determines, based on
[[Page 6330]]
the advice of counsel, that subsequent to the attorney's notice, the
issuer has implemented an appropriate response, or whether such a
provision would be undesirable because the rule already provides
issuers with sufficient opportunity to implement an appropriate
response; (2) whether an issuer should be able to determine not to
report an attorney's notice if an independent committee of the board of
directors determines, based on the advice of counsel, that the attorney
providing such notice acted unreasonably, or whether this provision
would undermine the objectives of the rule; (3) whether, if an issuer
should be able to determine not to report an attorney's notice to the
Commission if an independent committee of the issuer's board of
directors makes the appropriate determination, it is necessary to
require the committee to obtain the advice of counsel not involved in
the matters underlying the material violation; (4) whether there should
be an alternative standard identifying when a board of directors could
determine not to report an attorney's notice; (5) whether, with regard
to foreign private issuers, ``an independent committee of the issuer's
board of directors'' is the right group to make the determination that
an attorney had acted unreasonably in providing a notice pursuant to
Sec. 205.3(d) or that the issuer had implemented an appropriate
response subsequent to the notice and, if so, why? If not, what other
bodies or groups at a foreign private issuer, or with oversight or
audit responsibilities for the foreign private issuer, might be more
appropriate? The Commission also requests comment on whether such an
issuer should be required to inform the reporting attorney in writing
of a decision by a committee of independent directors of the issuer's
board not to report the attorney's written notice in a filing with the
Commission.\41\
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\41\ Such a provision may be necessary in light of the proposal
(discussed below) to permit an attorney to notify the Commission
where an issuer has not complied with the issuer's reporting
requirement in proposed Sec. 205.3(e).
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Interested persons are invited to comment on any other aspect of
alternative proposed Sec. 205.3(e), including: (1) Whether an issuer
should be required to report an attorney's notice under paragraph
(d)(1), (d)(2) or (d)(3); (2) whether a requirement that an issuer
report an attorney's notice is preferable to the ``noisy withdrawal''
requirement in the original proposed rule; (3) whether investors will
receive adequate protection if neither the issuer nor the attorney is
required to report to the Commission an attorney's withdrawal or other
notice of failure to receive an appropriate response; (4) whether it is
inconsistent with the attorney-client privilege to require an issuer to
report the circumstances related to an attorney's notice under
paragraph (d)(1) or (d)(2), and whether an issuer should instead be
permitted to report only the fact of the attorney's notice; (5)
whether, if issuers should be required to report the circumstances
related to an attorney's notice, and if the rule should specify which
circumstances must be reported, which circumstances should be reported;
(6) whether an issuer's report to the Commission under paragraph (e)
should be confidential (e.g., in the form of confidential
correspondence) or public; (7) whether there are circumstances in which
requiring a public filing under paragraph (e) could harm an issuer or
its shareholders; (8) whether investors will receive adequate
protection if issuer reports to the Commission under paragraph (e) are
confidential; and (9) whether the requirement that a foreign private
issuer report an attorney's notice of withdrawal would conflict with
applicable foreign law or foreign principles of attorney-client
privilege or corporate governance.
3. Permitting an Attorney To Inform the Commission Where an Issuer Has
Not Complied With the Issuer Reporting Requirements
Proposed Sec. 205.3(f) would permit an attorney, if an issuer had
not complied with paragraph (e), to inform the Commission that he or
she had provided the issuer with notice under paragraph (d)(1), (d)(2)
or (d)(3). The Commission proposes, in this paragraph, making attorney
notification to the Commission permissive in light of the numerous
comments it received that were critical of ``noisy withdrawal.''
Proposed Sec. 205.3(f) states:
(f) Additional actions by an attorney. (1) An attorney retained or
employed by the issuer may, if an issuer does not comply with paragraph
(e) of this section, inform the Commission that the attorney has
provided the issuer with notice pursuant to paragraph (d)(1), (d)(2),
or (d)(3) of this section, indicating that such action was based on
professional considerations.
Interested persons are invited to comment on any aspect of
alternative proposed Sec. 205.3(f), and to address the following
questions in particular: (1) Would it be more consistent with the
protection of investors to require, rather than permit, an attorney to
inform the Commission of his or her written notice where an issuer does
not comply with the issuer disclosure requirement? Would mandatory,
rather than permissive, ``reporting out'' under these circumstances
raise the same concerns as ``noisy withdrawal?'' If not, why not? If
so, which ones; (2) assuming an issuer were permitted not to disclose
an attorney's written notice if an independent committee of the
issuer's board of directors were to make an appropriate determination,
should an attorney be permitted to inform the Commission that he or she
has provided the issuer with notice pursuant to paragraph (d) where the
attorney disagrees with the independent committee's determination, or
should the attorney be permitted to inform the Commission that he or
she has provided the issuer with notice only where the issuer fails to
report the notice without the required determination by the independent
committee?
D. Proposed Amendments to Forms
1. Proposed Amendment to Form 8-K
The Commission proposes to amend Form 8-K to add a new item
specifically designed for issuer disclosure, under alternative proposed
Sec. 205.3(e), of an attorney's written notice under alternative
proposed Sec. 205.3(d). Form 8-K prescribes information, such as
material events or corporate changes, that an issuer subject to the
reporting requirements of Sections 13(a) or 15(d) of the Exchange Act
must disclose on a current basis. The proposed amendment to Form 8-K
would require an issuer to report an attorney's written notice of
withdrawal or failure to receive an appropriate response under
alternative proposed Sec. 205.3(e) within two business days of
receiving the written notice.
Proposed Sec. 205.3(e) also would apply to issuers that are
registered investment companies. Exchange Act Rules 13a-11(b) \42\ and
15d-11(b), \43\ however, generally exempt registered investment
companies from Form 8-K filing requirements. We recently amended those
rules to require registered investment companies to file on Form 8-K in
order to meet any filing obligations that might arise under Regulation
BTR. \44\ We are today
[[Page 6331]]
proposing an additional amendment to Exchange Act Rules 13a-11(b) and
15d-11(b) that would subject registered investment companies to Form 8-
K filing requirements for the purpose of meeting any filing obligations
that arise under proposed section 205.3(e).
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\42\ 17 CFR 240.13a-11(b).
\43\ 17 CFR 240.15d-11(b).
\44\ See Release No. 34-47225 (Jan. 22, 2003). Regulation
Blackout Trading Restriction (BTR) under the Exchange Act (17 CFR
245.100-104) clarifies the scope and application of Section 306(a)
of the Sarbanes-Oxley Act of 2002, which prohibits any director or
executive officer of an issuer from, directly or indirectly,
purchasing, selling or otherwise acquiring or transferring any
equity security of the issuer during a pension plan blackout period
that prevents plan participants and beneficiaries from engaging in
transactions involving issuer equity securities held in their plan
accounts.
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We solicit comments on all aspects of this proposal and the effects
it would have on issuers and the benefits it would provide to
investors. We ask the following additional questions: (1) Is Form 8-K
the appropriate form to use for this type of disclosure or should the
Commission adopt a new form exclusively for such reports; (2) should
issuers be permitted to make such reports in their periodic filings,
such as Form 10-Q \45\ or Form 10-K; \46\ (3) is two business days the
appropriate amount of time in which to require issuers to make the
filing? What other amount of time might be more appropriate and what
factors should we consider in determining the right amount of time
under this rule? Should the time calculation use calendar days or U.S.
business days; (4) should we exclude registered investment companies
from proposed requirements to disclose under section 205.3(e)? If so,
what would be the rationale for the exclusion? If we exclude registered
investment companies, should we require them to meet their filing
obligations under proposed Sec. 205.3(e) in some other manner, e.g.,
by filing a new form specifically for registered investment companies,
Form N-CSR, \47\ or some other means? With regard to the proposed Form
8-K filing requirement, we request public comment on the applicability
of this requirement to registered investment companies, as well as
feasible alternatives that would reduce the reporting burdens on
registered investment companies. In addition, we request comment on the
utility to investors of the reports to the Commission in relation to
the costs to registered investment companies and their affiliated
persons of providing those reports.
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\45\ 17 CFR 308a.
\46\ 17 CFR 310.
\47\ 17 CFR 249.331 and 17 CFR 274.128.
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2. Proposed Amendments to Forms 20-F and 40-F for Foreign Private
Issuers
With the globalization of the U.S. capital markets, there has been
a marked increase in the number of companies from non-U.S.
jurisdictions registering securities with the Commission. At present,
there are over 1,300 foreign private issuers \48\ from 59 countries
that are filing reports with the Commission under the Exchange Act, as
compared with approximately 400 issuers from less than 30 countries in
1990. The Commission realizes that the application of Section 307 and
the rules we are proposing under Part 205 to foreign law firms,
multijurisdictional law firms, foreign lawyers employed by those law
firms and foreign registrants, raises a number of significant and
difficult issues. We are requesting comment on a broad range of
questions in this area, including whether foreign law firms and foreign
lawyers should be exempt from Part 205.
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\48\ The term ``foreign private issuer'' is defined in Exchange
Act Rule 3b-4(c) [17 CFR 240.3b-4(c)].
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Foreign private issuers that are subject to the periodic reporting
requirements under the Exchange Act generally are not required to file
current reports on Form 8-K. \49\ Rather, many of the disclosures
required of foreign private issuers are made on either Form 20-F or
Form 40-F (in the case of some Canadian issuers), which are integrated
forms used both as registration statements for purposes of registering
securities of qualified foreign private issuers under Section 12 of the
Exchange Act \50\ or as annual reports under Section 13(a) \51\ or
15(d) \52\ of the Exchange Act.
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\49\ See Exchange Act Rules 13a-11(b) and 15d-11(b) [17 CFR
240.13a-11(b) and 240.15d-11(b)].
\50\ 15 U.S.C. 78l.
\51\ 15 U.S.C. 78m(a).
\52\ 15 U.S.C. 78o(d).
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Our rules pertaining to attorney conduct apply to attorneys for
foreign private issuers, and we believe that foreign private issuers
should have the same reporting duties as those proposed for domestic
issuers in the alternative proposed section 205.3(e). Accordingly, we
propose to require foreign private issuers to file a report on either
Form 20-F or 40-F, as applicable, in order to make these disclosures.
The proposal to amend these forms is designed to respond to comments we
received from foreign attorneys and regulators stating that the
original proposed ``noisy withdrawal'' requirement may conflict with
foreign standards of attorney conduct. The proposed amendments to these
forms would require an issuer to report to the Commission an attorney's
written notice of withdrawal or failure to receive an appropriate
response. The foreign private issuer would be required to make the
disclosure by filing the form within two business days of the
attorney's written notice. The proposed amendments provide that a
filing for this purpose may consist only of the facing page of the
form, the information required under the appropriate item of the form,
and a signature page; issuers would not be required to file a complete
Form 20-F or 40-F each time they made a disclosure of an attorney's
written notice. \53\
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\53\ Similarly, the report would not need to be certified by the
issuer's principal executive officer or principal financial officer
under Exchange Act Rules 13a-14 and 15d-14 [17 CFR 240.13a-14 and
240.15d-14].
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We solicit comments on all aspects of this proposal and the effects
it would have on foreign private issuers and the benefits it would
provide to investors. Furthermore, we ask the following additional
questions: (1) Is it appropriate to require a filing on Form 20-F or
40-F in order to meet these new disclosure requirements, or should we
require that this disclosure be made on some other form? Would it be
more appropriate to require that this disclosure be made on Form 6-K?
\54\ Should the Commission create a separate disclosure form (similar
to Form 8-K) for these reports by foreign private issuers; (2) will
there be any additional consequences to requiring that this disclosure
be made on Form 20-F or 40-F; (3) would this type of mandatory
disclosure requirement impose undue burdens on foreign companies that
have chosen to register their securities in the United States? What
might those burdens be? Would it discourage foreign companies from
registering their securities in the United States? If so, would a broad
exception for foreign companies disadvantage U.S. companies? Would such
an exception lead U.S. companies to relocate off-shore; (4) is two
business days the appropriate amount of time to allow foreign private
issuers to make the required filing? What other amount of time might be
more appropriate and what factors should we consider in determining the
right amount of time under this rule? Should the time calculation use
calendar days or U.S. business days? Would it be sufficient to require
foreign private issuers to report this information on an annual basis
in their annual reports on Form 20-F or 40-F; (5) should we allow any
exceptions for certain foreign private issuers to this new proposed
rule in light of the differing regulatory regimes for foreign attorneys
and foreign private issuers? Which foreign private issuers would need
such an exception and when should it be granted? How would
[[Page 6332]]
any exceptions we might grant affect the benefits to investors that
would otherwise accrue from the application of this rule to foreign
private issuers; (6) would the disclosure requirements of proposed
paragraph (e) effect a waiver of the attorney-client privilege by a
foreign private issuer or present other special problems for foreign
private issuers under applicable foreign law?
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\54\ 17 CFR 249.30b. See generally Release No. 33-8106,
``Proposed Rule: Additional Form 8-K Disclosure Requirements and
Acceleration of Filing Date'', for a discussion of the types of
information reported on Form 6-K and for our solicitation of comment
as to whether the requirements of that form should be otherwise
modified.
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IV. General Request for Comments
The Commission requests comments on the rules and amendments
proposed in this release, whether any further changes to our rules or
forms are necessary or appropriate to implement the objectives of our
proposed amendments, and on other matters that might have an effect on
the proposals contained in this release.
V. Paperwork Reduction Act
The proposed rules and form amendments contain ``collection of
information'' requirements within the meaning of the Paperwork
Reduction Act of 1995 (``PRA''). \55\ We are submitting the proposed
rules and form amendments to the Office of Management and Budget
(``OMB'') for review in accordance with the PRA. \56\ The title for the
proposed collection of information with respect to the proposed amended
Rule 205.3 is ``Notifications Under Part 205.'' The titles for the
collections of information with respect to the proposed form amendments
are ``Form 20-F'' (OMB Control No. 3235-0288), ``Form 40-F'' (OMB
Control No. 3235-0381) and ``Form 8-K'' (OMB Control No. 3235-0060).
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\55\ 44 U.S.C. 3501 et seq.
\56\ 44 U.S.C. 3507(d) and 5 CFR 1320.11.
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The Commission has adopted rules to impose an up-the-ladder
reporting requirement when attorneys appearing and practicing before
the Commission become aware of evidence of a material violation by the
issuer or any officer, director, employee or agent of the issuer. The
information collections in the proposed amendments to the rules are
necessary to implement the Standards of Professional Conduct for
Attorneys prescribed by the proposed rule. Specifically, the
collections of information are intended to ensure that in the rare
cases in which issuers do not act appropriately after being informed of
possible violations, the information would be communicated to the
public and the Commission, so that the Commission could take
appropriate action. The collection of information is, therefore, an
important component of the Commission's program to discourage
violations of the federal securities laws and promote ethical behavior
of attorneys appearing and practicing before the Commission.
The respondents to the proposed collections of information would be
lawyers, issuers, and officers, directors and committees of issuers. We
cannot estimate with precision how many attorneys will be subject to
the ``noisy withdrawal'' requirements, if adopted. There are
approximately 18,200 issuers that may employ or retain attorneys that
would be subject to the rule. \57\ These issuers may employ in-house
attorneys, outside counsel, or a combination of both. We believe,
however, that it will be the rare occasion when, as a last resort, a
disclosure will be made to the Commission. In the vast majority of
cases, we expect that problems will be resolved at the corporate level,
and the Commission will not be notified. We therefore estimate for the
purposes of the PRA that approximately 10 attorneys, CLOs, CEOs, or
QLCCs will make one disclosure to the Commission per year. Depending on
the circumstances, the disclosure could consist of a notice of
withdrawal (and, in some cases, a similar notice to the issuer and a
CLO's notice to successor attorneys), a notice of material violations,
a notice of discharge, a notice of disaffirmation, a disaffirmation, or
some combination thereof. The burden hours for the disclosure will
obviously vary depending on the circumstances. We believe that none of
the components of the disclosure, however, would require a significant
amount of time to compile. We therefore estimate, for purposes of the
PRA, that on average, each disclosure would require 10 burden hours.
Under these assumptions, this aspect of the collection of information
would impose approximately 100 annual burden hours. Assuming half the
burden hours will be incurred by outside counsel at a rate of $300 per
hour, the total cost would be $15,000.
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\57\ This estimate is based, in part, on the total number of
operating companies that filed annual reports on Form 10-K (8,484),
Form 10-KSB (3,820), Form 20-F (1,194) or Form 40-F (134) during the
2001 fiscal year, and an estimate of the average number of issuers
that may have a registration statement filed under the Securities
Act pending with the Commission at any time (100). In addition, we
estimate that approximately 4,500 investment companies currently
file periodic reports on Form N-SAR.
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Lawyers under the alternative proposal would not be required to
report out, but they would be required, if they do not receive an
appropriate response to a report of a material violation, to notify the
issuer in writing that their withdrawal is based on professional
considerations or that they believe that the issuer has not provided an
appropriate response in a reasonable time period to their report. In
addition, in the cases where a lawyer provides notice to an issuer, the
CLO will be required to notify the successor attorney of the
predecessor lawyer's withdrawal. For purposes of the PRA, we estimate
that 10 lawyers or CLOs will make such written notifications each year
and that each notification will require one hour. Proposed Sec.
205.3(f) permits, but does not require, a withdrawing attorney to
notify the Commission if the issuer does not comply with proposed Sec.
205.3(e). For purposes of the PRA, we estimate that five lawyers will
make a voluntary submission under Sec. 205.3(f) and that each report
would impose a burden of 10 hours.
We therefore estimate that this collection of information will have
a total annual burden of 100 hours if the ``noisy withdrawal'' proposal
is adopted and a total annual burden of 60 hours if the alternative
proposal is adopted.
As we stated above, we estimate that there are approximately 18,200
issuers that would be subject to the proposed rule. We cannot estimate
with precision how many issuers will be subject to the alternative
rule's requirements or, if adopted, how frequently they will be
required to notify the Commission that their attorney has notified them
that they withdrew or that they did not receive an appropriate response
to a report of a material violation. Under those circumstances, the
issuer must file a form with the Commission. We estimate for the
purposes of the PRA that approximately eight U.S. issuers, one Canadian
issuer and one foreign private issuer per year will make one disclosure
to the Commission. We estimate, for purposes of the PRA, that on
average, each disclosure would require five burden hours. Under these
assumptions, this aspect of the collection of information would impose
approximately 40 annual burden hours to file Form 8-K, five hours to
file Form 40-F and five hours to file Form 20-F. We assume that 25% of
the burden hours for issuers that file on Form 8-K, and 75% of the
burden hours for issuers that file on Form 20-F or 40-F, will be
incurred by outside counsel at a rate of $300 per hour. \58\ Using
these assumptions, we estimate this aspect of these collections of
information would result in a cost of $5,250.
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\58\ This allocation of the burden is consistent with our recent
PRA submissions for Exchange Act Reports. See, e.g., Release No. 33-
8098 (May 10, 2002) [67 FR 35620].
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[[Page 6333]]
Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits
comments to: (i) Evaluate whether the proposed collections of
information are necessary for the proper performance of the functions
of the agency, including whether the information will have practical
utility; (ii) evaluate the accuracy of the Commission's estimate of the
burden of the proposed collections of information; (iii) determine
whether there are ways to enhance the quality, utility, and clarity of
the information to be collected; and (iv) evaluate whether there are
ways to reduce the burden of the collections of information on those
who are to respond, including through the use of automated collection
techniques or other forms of information technology.
Persons submitting comments on the collections of information
requirements should direct the comments to the Office of Management and
Budget, Attention: Desk Officer for the Securities and Exchange
Commission, Office of Information and Regulatory Affairs, Washington,
DC 20503, and should send a copy to Jonathan G. Katz, Secretary,
Securities and Exchange Commission, 450 Fifth Street, NW., Washington,
DC 20549-0609, with reference to File No. S7-45-02. Requests for
materials submitted to OMB by the Commission with regard to these
collections of information should be in writing, refer to File No. S7-
45-02, and be submitted to the Securities and Exchange Commission,
Records Management, Office of Filings and Information Services. OMB is
required to make a decision concerning its review of the collections of
information between 30 and 60 days after publication of this release.
Consequently, a comment to OMB is assured of having its full effect if
OMB receives it within 30 days of publication.
An agency may not conduct or sponsor, and a person is not required
to respond to, a collections of information unless it displays a
currently valid control number. Compliance with the collections of
information requirements is, as described above, in some cases
mandatory and in some cases voluntary depending upon the circumstances.
There is no mandatory record retention period. Responses to the
requirements to make disclosures to the Commission will not be kept
confidential.
VI. Costs and Benefits
We are proposing amendments to section 205.3 and Forms 8-K, 20-F
and 40-F to more fully implement Section 307 of the Sarbanes-Oxley Act
and recently adopted Part 205. Part 205 affects all attorneys who
appear and practice before the Commission in the representation of an
issuer and who become aware of evidence of a material violation of the
federal securities laws, a material breach of fiduciary duty, or a
similar material violation by the issuer or an officer, director, agent
or employee of the issuer that has occurred, is ongoing, or is about to
occur. We are sensitive to the costs and benefits of our proposal. We
discuss these costs and benefits below.
Part 205 imposes an up-the-ladder reporting requirement for
attorneys representing an issuer before the Commission who become aware
of potential misconduct of which a reasonably prudent investor in the
issuer would want to be informed. It is expected that, in the vast
majority of instances of such reports, the situation will be addressed
and remedied before it causes significant harm to investors. Where the
potential impropriety is ongoing and not taken care of internally
following a report mandated by the rule, we are proposing an
alternative means of providing notice to the Commission and the public.
Previously, we have proposed that the attorney, if retained by the
issuer, effectuate a ``noisy withdrawal'' from representation of the
issuer and disaffirm to the Commission any tainted documents, which
will alert the Commission to investigate the issuer. In this release we
are proposing that the attorney would have to inform the issuer and the
issuer would be required to inform the Commission.
A. Benefits
Many commenters on our original proposal noted that a ``noisy
withdrawal'' may violate the attorney-client privilege, chill the
zealous advocacy of lawyers and create an incentive for issuers not to
seek legal advice on certain matters. Our alternative therefore allows
the attorney to withdraw without notifying the Commission. Instead, the
issuer must report the attorney's withdrawal to the Commission in a
public filing. Thus, the Commission and the public obtain the benefit
of the information of the attorney's withdrawal (at least when the
issuer acts properly) where a violation of the law is likely, the
lawyer may preserve the attorney-client privilege and the issuer has
the opportunity to remedy the situation before disclosure is required.
In addition, attorneys licensed in foreign jurisdictions would not be
required to violate applicable professional obligations. These benefits
are difficult to quantify. Interested persons are invited to comment
upon this benefits analysis. Are there other foreseeable benefits? What
is the likely economic impact of these benefits? Can the benefits be
quantified in any meaningful way? If so, how, and what conclusions
should be drawn?
B. Costs
The proposed form amendments will impose costs on issuers. Issuers
would be subject to the additional cost of preparing and filing a brief
report to the Commission on Forms 8-K, 20-F or 40-F, as applicable.
This may require the issuer to report its own potentially illegal act
to the Commission (although an issuer accused of wrongdoing may be less
likely to report itself than the withdrawing attorney may be).
Investors may treat the news that an attorney has resigned as proof of
wrongdoing before any formal proceedings are brought. The issuer's cost
of capital may increase. Unlike the ``noisy withdrawal'' proposal, this
proposal would not require the attorney to disaffirm any corporate
filings that he or she participated in drafting, which would provide
clearer information about what the withdrawal signifies.
Issuers that receive notice that their lawyers have withdrawn for
professional considerations will be required to file a Form 8-K (or
comparable forms by foreign private issuers). For purposes of the PRA,
we estimated that ten issuers will file such a report each year and
that each form will impose a burden of five hours. Using estimates
derived from our Paperwork Reduction Analysis, we estimate that the
incremental impact of our proposals will result in a total cost of
$8,825.\59\ In addition, the withdrawing lawyer will be required to
notify the issuer and may notify the Commission. For purposes of the
PRA, we estimated that lawyers will make ten such required
notifications and five such permissive notifications a year, for a
combined burden of 60 hours. Assuming a cost of $300 an hour, this
paperwork burden imposes a cost of $18,000.
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\59\ For purposes of the Paperwork Reduction Act, we estimate
that the proposals would result in 32.5 burden hours and $5,250 in
external costs. Assuming a cost of $110/hour for in-house
professional staff, the total cost of the burden would be $8,825.
The $110/hour estimate is derived from The SIA Report on Management
and Professional Earnings for the Securities Industry (Oct. 2001).
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Interested persons are invited to comment upon this costs analysis.
Are there other foreseeable costs? What is the likely economic impact
of these costs? Can the costs be quantified in any meaningful way? If
so, how, and what conclusions should be drawn? Interested persons are
invited to address
[[Page 6334]]
all aspects of costs and benefits attributable to proposed Part 205.
The Commission requests data to quantify the expected costs and the
value of the anticipated benefits.
VII. Effect on Efficiency, Competition and Capital Formation
Section 23(a)(2) of the Exchange Act (15 U.S.C. 78w(a)(2)) requires
us, when adopting rules under the Exchange Act, to consider the impact
that any new rule would have on competition. Section 23(a)(2) prohibits
us from adopting any rule that would impose a burden on competition not
necessary or appropriate in furtherance of the purposes of the Exchange
Act. In addition, Section 2(b) of the Securities Act,\60\ Section 3(f)
of the Exchange Act,\61\ and Section 2(c) of the Investment Company Act
\62\ require us when engaging in rulemaking where we are required to
consider or determine whether an action is necessary or appropriate in
the public interest, to consider, in addition to the protection of
investors, whether the action will promote efficiency, competition and
capital formation.
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\60\ 15 U.S.C. 77b(b).
\61\ 15 U.S.C. 78c(f).
\62\ 15 U.S.C. 80a-2(c).
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The proposals should boost investor confidence in the financial
markets. We anticipate that these proposals would enhance the proper
functioning of the capital markets and promote efficiency by reducing
the likelihood that illegal behavior would remain undetected and
unremedied for long periods of time. Proposed section 205.3(d)-(f)
would apply to all issuers and attorneys appearing before the
Commission and is therefore unlikely to affect competition.
Interested persons are invited to comment upon any aspect of this
analysis. We request comment on whether proposed section 205.3(d)-(f),
if adopted, would impose a burden on competition. For example, would
U.S. lawyers face a competitive disadvantage because attorneys
practicing outside the U.S. would not be required to comply with the
proposal's withdrawal requirements to the extent that such compliance
is prohibited by applicable foreign law? Commenters are requested to
provide empirical data and other factual support for their views if
possible.
VIII. Initial Regulatory Flexibility Analysis
This Initial Regulatory Flexibility Analysis has been prepared in
accordance with 5 U.S.C. 603.
A. Reasons for the Proposed Action
We are proposing section 205.3 to more fully implement Section 307
of the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7245 et seq.) (``the
Act'') and recently adopted Part 205 of Title 17 of the Code of Federal
Regulations.
B. Objectives
Section 307 of the Act requires the Commission to prescribe
``minimum standards of professional conduct for attorneys appearing and
practicing before the Commission in any way in the representation of
issuers.'' The standards must include a rule requiring an attorney to
report ``evidence of a material violation of securities laws or breach
of fiduciary duty or similar violation by the company or any agent
thereof'' to the chief legal counsel or the chief executive officer of
the company (or the equivalent); and, if they do not respond
appropriately to the evidence, requiring the attorney to report the
evidence to the audit committee, another committee of independent
directors, or the full board of directors. This proposal is designed to
address those circumstances where the attorney withdraws from
representation due to professional considerations. We originally
proposed to require the attorney to report such a withdrawal to the
Commission; we are still considering that option. However, we are now
also proposing an alternative whereby the withdrawing attorney would
notify the issuer and the issuer would be required to notify the
Commission. An objective is to provide notice of such an event to both
the Commission and the public without unduly intruding on the attorney-
client relationship.
C. Legal Basis
We are proposing the new rules and amendments under the authority
set forth in Sections 7, 10 and 19 of the Securities Act of 1933,
Sections 3(b), 4C, 12, 13, 15 and 23(a) of the Securities Exchange Act
of 1934, Sections 30, 38 and 39 of the Investment Company Act of 1940,
Section 211 of the Investment Advisers Act of 1940, and Sections 3(a),
307 and 404 of the Sarbanes-Oxley Act of 2002.
D. Small Entities Subject to Proposed Part 205
The proposed additions to Part 205 would affect issuers that are
small entities. Exchange Act Rule 0-10(a) (17 CFR 240.0-10(a)) defines
an issuer, other than an investment company, to be a ``small business''
or ``small organization'' if it had total assets of $5 million or less
on the last day of its most recent fiscal year. As of October 23, 2002,
we estimated that there were approximately 2,500 issuers, other than
investment companies, that may be considered small entities. For
purposes of the Regulatory Flexibility Act, an investment company is a
small entity if it, together with other investment companies in the
same group of related investment companies, has net assets of $50
million or less as of the end of its most recent fiscal year.\63\ We
estimate that there are 211 small investment companies that would be
subject to the proposed rule. The proposed revisions would apply to any
small entity that is subject to Exchange Act reporting requirements.
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\63\ 17 CFR 270.0-10.
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The proposed additions to Part 205 also would affect law firms that
are small entities. The Small Business Administration has defined small
business for purposes of ``offices of lawyers'' as those with under $6
million in annual revenue.\64\ Because we do not directly regulate law
firms appearing before the Commission, we do not have data to estimate
the number of small law firms that practice before the Commission or,
of those, how many have revenue of less than $6 million. We request
data on that issue.
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\64\ 13 CFR 121.201.
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E. Reporting, Recordkeeping, and Other Compliance Requirements
Lawyers who believe that their issuer client is engaged in ongoing
illegal conduct would be required to notify their client and withdraw
from the representation. Issuers who receive such notices would be
required to notify the Commission and the successor lawyer of the
withdrawal. The time required for the actual preparation of a report
would vary, but should not be extensive.
F. Duplicative, Overlapping, or Conflicting Federal Rules
Proposed Sec. 205.3 would not duplicate, overlap, or conflict with
other federal rules. There are no other statutory federal requirements
that small entities make similar reports or provide similar
information.
G. Agency Action To Minimize Effect on Small Entities
The Regulatory Flexibility Act directs the Commission to consider
significant alternatives that would accomplish the stated objective,
while minimizing any significant adverse impact on small entities. In
connection with the proposed rule, we considered the following
alternatives: (a) The establishment of differing compliance or
[[Page 6335]]
reporting requirements that take into account the resources available
to small entities; (b) the clarification, consolidation, or
simplification of the reporting requirements for small entities; (c) an
exemption from coverage of the requirements, or any part thereof, for
small entities; and (d) the use of performance rather than design
standards.
The Act does not contain any exemption or other limitation for
small entities. We believe that utilizing different reporting or other
compliance requirements for small entities would seriously undermine
the effective functioning of the proposed reporting regime. The
proposed rule is designed to help restore investor confidence in the
reliability of the financial statements of the companies they invest
in--if small entities were not subject to such requirements, investors
might decline to invest in their securities. Further, we see no valid
justification for imposing different standards of conduct upon small
law firms than would apply to others who choose to appear and practice
before the Commission. We also believe that the proposed reporting and
recordkeeping requirements will be at least as well understood by small
entities as would be any alternate formulation we might propose to
apply to them. Therefore, it does not seem necessary or appropriate to
develop separate requirements for small entities. We nevertheless
solicit comment on whether small entities should be subject to
different requirements.
H. Solicitation of Comments
Interested persons are invited to comment upon any aspect of this
Initial Regulatory Flexibility Analysis. In particular, we request
comments concerning: (1) The number of law practices that constitute
small entities; (2) the number of small entities that may be affected
by proposed section 205.3; (3) the existence or nature of the potential
impact of the proposed rule on small entities; and (4) how to quantify
the impact of the proposed revisions. Commenters are asked to describe
the nature of any impact and provide empirical data supporting the
extent of the impact. Such comments will be considered in the
preparation of the Final Regulatory Flexibility Analysis, if the
proposed rule is adopted, and will be placed in the same public file as
comments on the proposed rule itself.
IX. Small Business Regulatory Enforcement Fairness Act
For purposes of the Small Business Regulatory Enforcement Fairness
Act of 1996 (``SBREFA''),\65\ we must advise the OMB as to whether the
proposed rule constitutes a ``major'' rule. Under SBREFA, a rule is
considered ``major'' where, if adopted, it results or is likely to
result in an annual effect on the economy of $100 million or more
(either in the form of an increase or a decrease); a major increase in
costs or prices for consumers or individual industries; or significant
adverse effects on competition, investment, or innovation. Where a rule
is ``major,'' its effectiveness will generally be delayed for 60 days
pending Congressional review. We request comment on the potential
impact of the proposed rule on the economy on an annual basis.
Commenters are requested to provide empirical data and other factual
support for their views to the extent possible.
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\65\ Pub. L. 104-121, Title II, 110 Stat. 857 (1996) (codified
in various sections of 5 U.S.C., 15 U.S.C., and as a note to 5
U.S.C. 601).
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X. Statutory Basis and Text of Proposed Amendments to Parts 205, 240
and 249
The proposals contained in this document are being proposed under
the authority in Sections 3, 307, and 404 of the Sarbanes-Oxley Act of
2002,\66\ Sections 7, 10 and 19 of the Securities Act of 1933,\67\
Sections 3(b), 4C, 12, 13, 15 and 23 of the Securities Exchange Act of
1934,\68\ Sections 30, 38 and 39 of the Investment Company Act of
1940,\69\ and Section 211 of the Investment Advisers Act of 1940.\70\
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\66\ 15 U.S.C. 7202, 7245, 7262.
\67\ 15 U.S.C. 77g, 77j and 77s.
\68\ 15 U.S.C. 78c(b), 78d-3, 78l, 78m, 78o and 78w.
\69\ 15 U.S.C. 80a-29, 80a-37, 80a-38.
\70\ 15 U.S.C. 80b-11.
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List of Subjects
17 CFR Part 205
Standards of conduct for attorneys.
17 CFR Parts 240 and 249
Reporting and recordkeeping requirements, Securities.
For the reasons set out in the preamble, the Commission proposes to
amend Title 17, Chapter II, of the Code of Federal Regulations to read
as follows:
PART 205--STANDARDS OF PROFESSIONAL CONDUCT FOR ATTORNEYS APPEARING
AND PRACTICING BEFORE THE COMMISSION IN THE REPRESENTATION OF AN
ISSUER
1. The authority citation for Part 205 continues to read as
follows:
Authority: 15 U.S.C. 77s, 78d-3, 78w, 80a-37, 80a-38, 80b-11,
7202, 7245, and 7262.
2. Amend Sec. 205.3 by:
a. Redesignating paragraph (d) as paragraph (g); and
b. Adding new paragraphs (d), (e) and (f).
The additions read as follows:
Sec. 205.3 Issuer as client.
* * * * *
(d) Actions required where there is no appropriate response within
a reasonable time.
(1) Where an attorney who has reported evidence of a material
violation under paragraph (b) of this section rather than paragraph (c)
of this section:
(i) Does not receive an appropriate response, or has not received a
response in a reasonable time,
(ii) Has followed the procedures set forth in paragraph (b)(3) of
this section, and
(iii)Reasonably concludes that there is substantial evidence of a
material violation that is ongoing or is about to occur and is likely
to cause substantial injury to the financial interest or property of
the issuer or of investors:
(A) An attorney retained by the issuer shall withdraw from
representing the issuer, and shall notify the issuer, in writing, that
the withdrawal is based on professional considerations.
(B) An attorney employed by the issuer shall cease forthwith any
participation or assistance in any matter concerning the violation and
shall notify the issuer, in writing, that he or she believes that the
issuer has not provided an appropriate response in a reasonable time to
his or her report of evidence of a material violation under paragraph
(b) of this section.
(2) An attorney shall not be required to take any action pursuant
to paragraph (d)(1) of this section if the attorney would be prohibited
from doing so by order or rule of any court, administrative body or
other authority with jurisdiction over the attorney, after having
sought leave to withdraw from representation or to cease participation
or assistance in a matter. An attorney shall give notice to the issuer
that, but for such prohibition, he or she would have taken such action
pursuant to this paragraph (d)(1) or (d)(2), and such notice shall be
deemed the equivalent of such action for purposes of this part.
(3) An attorney employed or retained by an issuer who has reported
evidence of a material violation under this part and reasonably
believes that he or she has been discharged for so doing shall notify
the issuer's chief legal officer (or the equivalent thereof) forthwith.
(4) The issuer's chief legal officer (or the equivalent thereof)
shall notify any attorney retained or employed to replace
[[Page 6336]]
an attorney who has given notice to an issuer pursuant to paragraph
(d)(1), (d)(2) or (d)(3) of this section that the previous attorney has
withdrawn, ceased to participate or assist or has been discharged, as
the case may be, pursuant to the provisions of this paragraph.
(e) Duties of an issuer where an attorney has given notice pursuant
to paragraph (d). Where an attorney has provided an issuer with a
written notice pursuant to paragraph (d)(1), (d)(2) or (d)(3) of this
section, the issuer shall, within two business days of receipt of such
written notice, report such notice and the circumstances related
thereto on Form 8-K, 20-F, or 40-F (Sec. Sec. 249.308, 220f or 240f of
this chapter), as applicable.
(f) Additional actions by an attorney. An attorney retained or
employed by the issuer may, if an issuer does not comply with paragraph
(e) of this section, inform the Commission that the attorney has
provided the issuer with notice pursuant to paragraph (d)(1), (d)(2),
or (d)(3) of this section, indicating that such action was based on
professional considerations.
* * * * *
PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934
3. The authority citation for Part 240 is amended by adding the
following citations in numerical order to read as follows:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3,
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i,
78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5,
78w, 78x, 78ll, 78mm, 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-37, 80b-
3, 80b-4 and 80b-11, unless otherwise noted.
* * * * *
Section 240.13a-11 is also issued under Secs. 3(a) and 307, Pub.
L. 107-204, 116 Stat. 745.
* * * * *
Section 240.13a-17 is also issued under Secs. 3(a) and 307, Pub.
L. 107-204, 116 Stat. 745.
* * * * *
Section 240.15d-11 is also issued under Secs. 3(a) and 307, Pub.
L. 107-204, 116 Stat. 745.
* * * * *
Section 240.15d-17 is also issued under Secs. 3(a) and 307, Pub.
L. 107-204, 116 Stat. 745.
* * * * *
4. Section 240.13a-11 is amended by revising paragraph (b) to
read as follows:
Sec. 240.13a-11 Current reports on Form 8-K (Sec. 249.308 of this
chapter).
* * * * *
(b) This section shall not apply to foreign governments, foreign
private issuers required to make reports on Form 6-K (17 CFR 249.306)
pursuant to Sec. 240.13a-16, issuers of American Depositary Receipts
for securities of any foreign issuer, or investment companies required
to file reports pursuant to Sec. 270.30b1-1 of this chapter under the
Investment Company Act of 1940, except where such investment companies
are required to file:
(1) Notice of a blackout period pursuant to Sec. 245.104 of this
chapter, or
(2) A notice regarding an attorney withdrawal pursuant to Sec.
205.3(e) of this chapter.
5. Add Sec. 240.13a-17 to read as follows:
Sec. 240.13a-17 Reports of foreign private issuers pursuant to Sec.
205.3(e) of this chapter.
Every foreign private issuer which is subject to Sec. 240.13a-1
shall make reports pursuant to Sec. 205.3(e) of this chapter. If a
foreign private issuer is filing a report on Form 20-F (Sec. 249.220f
of this chapter) or Form 40-F (Sec. 249.240f of this chapter) solely
to provide information pursuant to Sec. 205.3(e) of this chapter, the
foreign private issuer is not required to include the certifications
required by Sec. 240.13a-14 in such report.
6. Section 240.15d-11 is amended by revising paragraph (b) to read
as follows:
Sec. 240.15d-11 Current reports on Form 8-K (Sec. 249.308 of this
chapter).
* * * * *
(b) This section shall not apply to foreign governments, foreign
private issuers required to make reports on Form 6-K (17 CFR 249.306)
pursuant to Sec. 240.15d-16, issuers of American Depositary Receipts
for securities of any foreign issuer, or investment companies required
to file periodic reports pursuant to Sec. 270.30b1-1 of this chapter
under the Investment Company Act of 1940, except where such investment
companies are required to file:
(1) Notice of a blackout period pursuant to Sec. 245.104 of this
chapter, or
(2) A notice regarding an attorney withdrawal pursuant to Sec.
205.3(e) of this chapter.
7. Add Sec. 240.15d-17 to read as follows:
Sec. 240.15d-17 Reports of foreign private issuers pursuant to Sec.
205.3(e) of this chapter.
Every foreign private issuer which is subject to Sec. 240.15d-1
shall make reports pursuant to Sec. 205.3(e) of this chapter. If a
foreign private issuer is filing a report on Form 20-F (Sec. 249.220f
of this chapter) or Form 40-F (Sec. 249.240f of this chapter) solely
to provide information pursuant to Sec. 205.3(e) of this chapter, the
foreign private issuer is not required to include the certifications
required by Sec. 240.15d-14 in such report.
PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934
8. The authority citation for Part 249 is amended by revising the
sectional authority for Sec. Sec. 249.220f, 249.240f and 249.308 to
read as follows:
Authority: 15 U.S.C. 78a, et seq., unless otherwise noted.
* * * * *
Section 249.220f is also issued under secs. 3(a), 202, 208, 301,
302, 306(a), 307, 401(a), 401(b), 406 and 407, Pub. L. 107-204, 116
Stat. 745.
Section 249.240f is also issued under secs. 3(a), 202, 208, 301,
302, 306(a), 307, 401(a), 406 and 407, Pub. L. 107-204, 116 Stat.
745.
Section 249.308 is also issued under 15 U.S.C. 80a-29, 80a-37
and secs. 3(a), 306(a), 307, 401(b) and 406, Pub. L. 107-204, 116
Stat. 745.
* * * * *
9. Amend Form 20-F (referenced in Sec. 249.220f) by:
a. Adding a paragraph on the cover page before the line beginning
with the phrase ``Commission file number'';
b. Adding paragraph (d) to General Instruction A;
c. Removing the word ``annual'' in each place where it appears in
paragraphs (a) and (b) of General Instruction D;
d. Adding Item 16E; and
e. Removing the phrase ``[annual report]'' in the paragraph after
``Signatures'' and adding in its place ``[report]''.
The additions read as follows:
Note: The text of Form 20-F does not, and this amendment will
not, appear in the Code of Federal Regulations.
Form 20-F
* * * * *
Or
[ ] Report Pursuant to Rules 13a-17 and 15d-17 Under the Securities
Exchange Act of 1934
Commission file number * * *
* * * * *
General Instructions
A. Who May Use Form 20-F and When It Must Be Filed
* * * * *
(d) A foreign private issuer must file a report on this Form within
two business days after receipt of an attorney's written notice
pursuant to 17
[[Page 6337]]
CFR 205.3(d)(1), (d)(2) or (d)(3). Such filing may consist only of the
following: the facing page, the information required by Item 16E of
this Form and the signature page. If such filing is made solely to
provide information pursuant to 17 CFR 205.3(e), the foreign private
issuer is not required to include the certifications required by 17 CFR
240.13a-14 or 17 CFR 240.15d-14 in the report.
* * * * *
Item 16E. Receipt of an Attorney's Written Notice Pursuant to 17 CFR
205.3(d)
Upon receipt of written notice from an attorney (as defined in 17
CFR 205.3(d)), provide the information specified in 17 CFR 205.3(e).
You do not need to provide the information called for by this Item 16E
unless you are using this form pursuant to General Instruction A.(d).
* * * * *
10. Amend Form 40-F (referenced in Sec. 249.240f) by:
a. Revising the line on the cover page that begins with the phrase
``For the fiscal year ended'';
b. Adding paragraph (5) to General Instruction A;
c. Adding paragraph (15) to General Instruction B;
d. Removing the word ``annual'' in each place where it appears in
paragraphs (7) and (8) of General Instruction D;
e. Removing the phrase ``[annual report]'' in the paragraph after
``Signatures'' and in its place adding ``[report]''; and
f. Removing the word ``annual'' in the first sentence of
Instruction A to ``Signatures.''
The revisions and additions read as follows:
Note: The text of Form 40-F does not, and this amendment will
not, appear in the Code of Federal Regulations.
Form 40-F
* * * * *
For the fiscal year ended * * *
Or
[ ] Report Pursuant to Rules 13a-17 and 15d-17 Under the Securities
Exchange Act of 1934
Commission file number * * *
* * * * *
General Instructions
A. Rules as to Use of Form 40-F
* * * * *
(5) If the Registrant uses Form 40-F to file reports with the
Commission pursuant to Section 13(a) of the Exchange Act (15 U.S.C.
78m(a)) and Rule 13a-3 thereunder (17 CFR 240.13a-3) or pursuant to
Section 15(d) of the Exchange Act (15 U.S.C. 78o(d)) and Rule 15d-4
thereunder (17 CFR 240.15d-4), the Registrant must file a report on
this Form 40-F within two business days after receipt of an attorney's
written notice pursuant to 17 CFR 205.3(d)(1), (d)(2) or (d)(3). Such
filing may consist only of the following: the facing page, the
information required by General Instruction B.(15) of this Form 40-F
and the signature page. If such filing is made solely to provide
information pursuant to 17 CFR 205.3(e), the Registrant is not required
to include the certifications required by 17 CFR 240.13a-14 or 17 CFR
240.15d-14 in the report.
* * * * *
B. Information To Be Filed on This Form
* * * * *
(15) Receipt of an Attorney's Written Notice Pursuant to 17 CFR
205.3(d). Upon receipt of written notice from an attorney (as defined
in 17 CFR 205.3(d)), provide the information specified in 17 CFR
205.3(e). You do not need to provide the information called for by this
General Instruction B.(15) unless you are using this form pursuant to
General Instruction A.(5).
* * * * *
11. Form 8-K (referenced in Sec. 249.308) is amended by:
a. Removing the word ``and'' after the phrase ``Rule 15d-11'' and
in its place adding a comma and adding the phrase ``and for reports of
an attorney's written notice required to be disclosed by 17 CFR
205.3(e)'' before the period at the end of General Instruction A;
b. Adding a sentence to the end of General Instruction B(1); and
c. Adding Item 13 under ``Information to be Included in the
Report.''
The additions read as follows:
Note: The text of Form 8-K does not, and this amendment will
not, appear in the Code of Federal Regulations.
Form 8-K
* * * * *
General Instructions
* * * * *
B. Events To Be Reported and Time for Filing of Reports
1. * * * A report on this form pursuant to Item 13 is required to
be filed within two business days after receipt of an attorney's
written notice pursuant to 17 CFR 205.3(d)(1), (d)(2) or (d)(3).
* * * * *
Information To Be Included in the Report
* * * * *
Item 13. Receipt of an Attorney's Written Notice Pursuant to 17 CFR
205.3(d)
Upon receipt of written notice from an attorney (as defined in 17
CFR 205.3(d)) provide the information specified in 17 CFR 205.3(e).
Dated: January 29, 2003.
By the Commission.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 03-2520 Filed 2-5-03; 8:45 am]
BILLING CODE 8010-01-P