From: Bart_Schwartz@mony.com Sent: Tuesday, December 10, 2002 6:03 PM To: rule-comments@sec.gov Subject: Comments on Section 307 Rules -- File No. 33-8150.wp (s7-45-02) By E-Mail Securities and Exchange Commission 450 Fifth Street, NW Washington, DC 20549-0609 Attention: Mr. Jonathan G. Katz Secretary Dear Mr. Chairman and Honorable Commissioners: I am Senior Vice President and General Counsel of The MONY Group Inc., a New York Stock Exchange-traded financial services and insurance company headquartered in New York City. I write to comment on your proposed rules implementing section 307 of the Sarbanes-Oxley Act of 2002 (the "Proposed Section 307 Regulations"). As explained more fully below, the Proposed Section 307 Regulations are unjustifiably and dangerously overbroad. They exceed the requirements of Sarbanes-Oxley section 307 and the manifest congressional intent of that provision. Most importantly, if adopted in their proposed form, they would disserve the investing public. What Is Good About the Proposed Section 307 Regulations Section 307 of the Sarbanes-Oxley Act of 2002 mandates that the Commission's minimum attorney-conduct standards include a rule requiring lawyers representing issuers before the Commission to report to specified, successively higher authorities within the corporation evidence of material violations of securities law, breaches of fiduciary duties and similar violations. In keeping with the thrust of many corporate governance reforms now under consideration, the procedure set forth in section 307, as implemented by the Commission's regulations, will result in the ultimate referral of issues to directors who are independent of corporate management when senior management does not respond appropriately. That will be an important and meaningful safeguard. It will also bring about a significant and salutary change in the way many lawyers approach their duties. The "up-the-ladder" requirement will give real meaning and substance to the general principle that corporate lawyers represent the entity, not its managers. Of course, other reforms (including the proposed SRO corporate governance rules now before the Commission) will bolster the conditions for directors to be considered independent and will strengthen the hand of the independent directors in the governance of the corporation. Thus, the procedure mandated by section 307 is entirely in accord with pending and recently adopted corporate governance reforms, which depend on staunchly independent outside directors to protect the interests of the company and its shareholders. In this regard, the "up the ladder" rule represents an elegant and useful evolution of the law to meet new exigencies. Where the Proposed Section 307 Regulations go too far ? although clearly with the right motivation (namely, the protection of the investing public) ? is in attempting to address other aspects of the attorney-client relationship, which Congress did not intend the SEC to regulate, and which are now under very active and searching debate within the American Bar Association and the 50 states. The Legislative Intent of Section 307 That the legislative intent behind section 307 was limited to "up-the-ladder" reporting, ultimately to independent directors, is clear from the remarks on the Senate Floor of Senator Edwards himself: "Let me be a little more specific about what this amendment does and what the responsibility of a lawyer is and should be. . . . . . . . "If you find out that the managers are breaking the law, you must tell them to stop. . . . If they won't act responsibly and in compliance with the law, then you go to the board and say something has to be done; there is a violation of the law occurring. It is basically going up the ladder, up the chain of command." 148 Cong. Rec. S6524, at S6551-S6552 (July 10, 2002). Neither the text nor the legislative history indicates that Congress intended or required the Commission to undertake more sweeping reforms of the rules governing lawyers' conduct. What Is Bad About the Proposed Section 307 Regulations Yet the Proposed Section 307 Regulations go significantly beyond the requirements of the Edwards Amendment by inappropriately addressing other, far-reaching aspects of the attorney-client relationship. In so doing, the proposed regulations would usurp much of the ground previously covered, and currently being energetically reviewed and debated, within the American Bar Association (the "ABA") in connection with model rules of professional conduct that are ultimately applied, modified or rejected within each state. If the Proposed Section 307 Regulations are adopted in their current form, the resulting harm would be not primarily to lawyers or corporate executives, but to investors in public corporations, which will have less, not more, guidance from corporate lawyers ? the vast majority of whom are well-meaning people of high integrity ?when corporate executives face difficult issues concerning disclosure and other matters. While one can debate how extensive would be the chilling effect on attorney-client communications of the "noisy withdrawal" requirement, the key point is that a vigorous and searching debate ? involving shareholder watchdogs, corporate governance experts, and institutional investors, as well as issuers and the lawyers who represent them ? is currently underway on this very issue within the ABA and in the states. It should not be short-circuited by a federal regulatory agency in the absence of a congressional mandate to do so. The Current Debate As you know, in March 2002, then-ABA president Robert Hirshon appointed a task force to "examine systemic issues relating to corporate responsibility arising out of Enron and other Enron-like situations." The task force issued a preliminary report dated July 16, 2002 (the "Cheek Committee Report" ), which includes recommendations addressing attorney conduct in the case of corporate wrongdoing. The Cheek Committee Report discusses the February 2002 ABA Commission on Evaluation of the Rules of Professional Conduct ("Ethics 2000"), which proposed certain exceptions to the confidentiality requirements. Although the ABA House of Delegates ultimately rejected two of these exceptions, the Cheek Committee Report recommends reconsideration and adoption of the Ethics 2000 proposal that would allow (but not require) disclosure "to prevent or rectify the consequences of a crime or fraud in which the client has used or is using the lawyer's services" and that is reasonably certain to result, or has resulted, "in substantial injury to the financial interests or property of another." The Cheek Committee Report also recommends requiring disclosure under Rule 1.6 to prevent clients from committing crimes, including violation of the federal securities laws, in furtherance of which the client has used the lawyer's services, and which are reasonably certain to result in substantial financial injury. Just in the past few months, from September 20 through November 11, the Cheek Committee has held public hearings around the country to give interested parties an opportunity to comment on its proposed recommendations. The hearings have included testimony from representatives of institutional investors and organized labor, as well as leading lawyers, law professors and other interested parties. While the issues that the Cheek Committee is considering require a difficult balance, the Cheek Committee is conducting its process openly, thoroughly and with all deliberate speed. The current debate over "noisy withdrawal" and the exceptions to the attorney-client privilege, if allowed to run its course, will result in a deliberate but appropriately expeditious re-examination and revision of policy within each state in a manner that balances a lawyer's duties to his or her clients and to the public at large. The debate, though thorough, is being driven by a sense of real urgency, in light of the events of the past year, to ensure that corporate lawyers' duties are calibrated in a way most likely to protect their clients (by which I mean the companies and their shareholders, not their executives). It is important to emphasize that the attorney-client privilege is intended not for the protection of attorneys but, rather, to avoid deterring clients from consulting with lawyers and receiving legal advice. Frequently, a full and frank consultation with a lawyer provides the best clear chance that a corporate client will do the right thing, rather than allowing the self-interest of executives to dictate a course of action that conflicts with the interests of the corporation and its shareholders. Reach of the Proposed Section 307 Regulations and Potential Intrusion on the Attorney-Client Privilege By defining practicing before the SEC extraordinarily broadly to include "preparing or participation in the preparation of" any document that the lawyer has "reason to believe" will be "filed with or incorporated into" any document or communication filed with or submitted to the SEC or its staff , the Proposed Section 307 Rules would cover virtually all corporate lawyers representing public company (given the requirement, for example, that issuers' material contracts be filed as exhibits to the Annual Report on Form 10-K), as well as employee benefits lawyers who prepare plans that are filed with the SEC and litigators who represent clients in adversary proceedings before the SEC. Further, practicing before the Commission would include, quite counterintuitively, advising clients that documents need not be filed with the SEC. The Commission should reconsider this aspect of the Proposed Section 307 Regulations, as well. Legal scholars more knowledgeable than I have commented on the provision that, "Where an issuer, through its attorney, shares with the Commission information related to a material violation, pursuant to a confidentiality agreement, such sharing of information shall not constitute a waiver of any otherwise applicable attorney-client privilege or protection as to other persons." On this point, I observe only that it is highly questionable whether any court applying state or even federal common law privilege rules would be bound by this pronouncement of a federal agency on an issue arguably outside its area of expertise and I therefore urge careful study of the legal issue involving waiver of the attorney-client privilege before the Commission takes any action that may put lawyers in an untenable conflict in this regard. Conclusion There is no evidence in the legislative record that "Congress intended for the agency's rule to 'occupy the field' on this issue . . . [or to] preempt any state rules governing the reporting of evidence of a material violation by attorneys representing issuers before the Commission" ? an issue the Commission has said it is considering. Implementation of Standards of Professional Conduct for Attorneys, Securities and Exchange Commission Release Nos. 33-8150; 34-46868; IC-25829 (November 21, 2002), at 57. I urge the Commission to limit the regulations it adopts, pursuant to Sarbanes-Oxley section 307, to the specific lawyer-conduct issues Congress has required the Commission to address. The required "up-the-ladder" rule will be a significant reform in itself and is wholly consistent with much other important work being done in the corporate governance area. More far-reaching aspects of the attorney-client relationship, including the attorney-client privilege, are certainly critical to the integrity of the financial markets and the protection of the investing public, but they involve difficult issues that are now being urgently and effectively addressed through the traditional process of adoption and evolution of ABA Model Rules of Professional Conduct for the guidance of policy-making within each state, which the Commission should not pre-empt. On a procedural note, section 307 requires only that, no later than 180 days after the enactment of Sarbanes-Oxley, the Commission issue minimum standards of professional conduct for attorneys representing issuers before the Commission, including the "up-the-ladder" procedure set forth in the statute. I respectfully submit that, if the Commission is interested in pursuing rule-making affecting the attorney-client relationship in a broader manner, it would be prudent, by the 180-day-deadline, for the Commission to adopt the required minimum standards including the specified procedure and then to allow more time for study and input from a cross-section of investors, corporate clients and the bar on other rule-making that may conflict with or pre-empt the policy-making efforts now underway in the ABA and within the states. In this regard, I would be pleased to meet with Commission and staff to discuss these comments. Respectfully submitted, Bart Schwartz Senior Vice President and General Counsel The MONY Group Inc. 1740 Broadway New York, NY 10019