Sent: Monday, January 13, 2003 8:28 AM
Subject: (S7-45-02) File No. 33-8150.wp

Mr. Chairman and Honorable Commissioners:

This is a post-test comment submittal. Pre-test comments were
tendered on Dec.5, 2002 before the avalanche of the noteworthy
responses, predicted in that submittal, had struck. The purpose
herein is to assist in gaining dependable information from your
well-crafted and commendable experiment. Since the test cycle
shed so much light on the operative value system of commerce, a
second section is provided on the subject of appropriate
selection of methods. As you know, this issue is critically
important to our society.

That the collective action of commerce is a mystery is shown by
the need to propose new rules in the first place. In the rule-
making procedure, the SEC is properly treating unfathomable
commerce as a "black box." If you knew everything about all the
components and their relationships in the Box, of course, you
would have gotten it right the first time.

The professional engineer (PE) is routinely assigned to deal with
"black box" issues. This problem classification applies to any
system composed of many components in many relationships - some
of which are unknown. There is a trustworthy protocol for
interacting with a Box for the purpose of gaining information
about its collective input/output functionality - its nature.
This protocol for reducing the field of ignorance applies to any
Box, technical or social. Your rule-making procedure is a
classic, proven "black box" investigation technique. That is why
it works.

What you have formed for the purpose of building information
about the nature of the Box is a compound system composed of the
black box (commerce) and the investigator (SEC) in communication.
Since any system subjected to no disturbance as its input, cannot
gain information, the proposed rule comprises a known input
disturbance to the Box. The comment responses comprise the output
from the Box. The advantage of the meta system technique is that
the laws and theorems of communication and control apply and they
are infallible

Test evaluation
Regarding the response to rule 33-8150, it was the most
comprehensive black box "output," from the most distinguished,
credentialed, honored assembly of professionals I have ever had
the good fortune to witness. This is an awesome, intelligent
aggregation and, because of this, considerable information about
the Box was gained.

This proposal (disturbance) confirmed that the Box is indeed very
complicated with an intricate network of relations among diverse
components. It has very many degrees of freedom and by no means
do we know them all from this test. Rule 33-8150 as proposed rang
a variety of chimes. The responses, representing a significant
investment of efforts, identified which components of the box
considered the rule a disturbance large enough to take action. In
turn, many responses revealed their extended network connections.
That is the test purpose.

Several lessons were learned from the experiment. One reliable
conclusion is that the Box does not now possess an effective
early-warning system for corporate misconduct or worse. That is,
the status quo contains no viable system (as in whistleblower)
for protecting stakeholders, prior to substantial economic
damage. An attending warranted conclusion is that the
introduction of the rule, regardless of its legality, fairness,
etc., is considered by the Box as likely to be effective in that
mission. The particular rule may not be the best in the litter,
but the test has confirmed it as an effective one. You need not
feel curious about the outcome.

The significant and brilliant feature of this rule, enabling
these test conclusions, congratulations to your staff, is that it
has zero impact on any corporation diligent in its duty to abide
the standard of care. As long as the entity acts as the law
instructs in the benchmark of tort, it can speed about its
enterprise with impunity and without extra expense. It is only
those entities which consider their regular practices likely to
land them, sooner or later, as defendants in tort court that need
to spend resources in response to the rule. To the responsibly
run business (method, again), the rule is transparent and can be
ignored in its entirety. We have already added this special
property for disturbance design (zero impact) to our method
armamentarium. Our thanks to the inventor.

The meager response from stakeholder groups to support the rule
is also telling. The profound silence strongly signals a
complicity in defending the status quo. History teaches that it
is not at all unusual for organized victim groups to regulate
their actions so as to sustain the "game" of victims, cops and
robbers. If you wish to make a difference in this unfinished
affair, valued in the trillions, you will have to find the
courage to continue towards effective remedy largely on your own.
As a reward for your trouble, you can expect that, after the rule
is passed, you will have as many criticisms from the stakeholder
groups as you will certainly have with your primary clients.

Another test of the Box
As you are well aware, an independent test on the same Box was
conducted during 2002 under the auspices of the liability
insurance industry. Since an entirely different disturbance was
used, you can gain additional information about the nature of
this Box. The test input was a large step change in the cost of
corporate liability insurance. The general response from commerce
to this disturbance, for all practical purposes, was to continue
business as usual and drop the insurance. Significantly,
management reaction did not stop there.

Rather than increasing efforts to reduce liability exposures by
improving practices, as was widely expected by the engineering
community a year ago, risk management activity of all kinds has
been sharply curtailed. This secondary reaction is typical of
what psychologists call the denial sequence. In this progression,
the inability to deal with the facts of reality leads to a
suspension of other beliefs in order to legitimize the first
choice. Once it is "proven" unnecessary to carry liability
insurance, an as example, a conviction of invulnerability to all
peril sets in. In that light, the question - why waste money on
risk management and loss control, etc. - makes perfect sense.

The two problems with this policy, already in place, are that it
makes operational matters much worse and it has no stop rule.
Concealed from stakeholders and regulators, bankruptcy has become
a management strategy. Because the Box is an enormous network,
there are many corresponding indicators of this sea change in
risk allocation. You only have to look.

You now have an opportunity to run a third investigation to
extend the knowledge gained about the Box from these two. Just
ask to see a copy of the corporate liability insurance policies -
the same ones stakeholders think are still there protecting their
investment from collapse by liability litigation.

The corporate attorney, who by now already knows the corporation
has quietly dropped its liability insurance and kept that fact
from the stakeholders, will be called to duty the first day this
rule takes effect. Without 33-8150 or its equivalent, it is only
a matter of time before someone armed with the doctrine of
deliberate ignorance will ask: Where was the board of directors
in all this?

Methodology as central
It will be found valuable, in this challenging quest, to
appreciate that the basic science of method to the PE is
identical to the set of principles upon which tort law is based.
The only difference is vocabulary. What tort calls
foreseeability, for instance, engineers call design practice.
Both fields of endeavor are governed by and occupied with the
natural laws of systems and dynamics. A work in progress, PEs are
legally bound to advance the standard of care (method) that the
plaintiff's bar is obliged to use to determine negligence. The
louder commerce complains about greedy plaintiff lawyers, the
more we methodology nerds are assured we are meeting our
conditions of license.

The methodology weltanschauung clearly reveals the simple
engines, one level up, producing the apparent complexity of the
operational reality below. In the same manner Darwin showed how
simple natural selection (method) could account for the
incredible diversity on planet earth, evaluation of means enables
a comprehension of ends and it works perfectly in both
directions. If you believe that effects have causes and that man
chooses means while nature produces ends, you will find in
methodology science a most valuable aid for efficiently solving
problems. One size fits all.

It is incontrovertible that any system that intentionally
allocates resources (work, not heat) in imposing structure for
the purpose of reducing entropy has an immutable advantage over
any system that permits the inexorable increase in entropy to
continue unanswered. An example of a system that acts, by design,
to reduce entropy as part of its basic process is tort law.
Commerce, in contrast, is composed primarily of rule-based
systems that aggressively reject any entropy reduction efforts.
You know the proverbs.

If the intent is to keep commerce as it wishes to be on a par
with the professional standard of care and diligence (SoCaD), an
ever-advancing target, you must first repeal the 2nd law of
thermodynamics. Otherwise, sustaining an equilibrium between
these two fundamentally different paradigms is the pursuit of the
impossible. Whatever chains you lock on tort to attain parity
today will be corroded away through entropy reduction by
tomorrow. Persistence in the defiance of natural law, any of
them, is not the stuff of intelligent regulation. None escape the
reckoning.

Roots
At the core, you have a Box to be supervised that benchmarks its
operations by a set of practices, commonly known as business as
usual (BaU). In time this method, inappropriately applied,
unnecessarily causes damage. Eventually, long after the damage
episode, this activity will be assessed in hindsight by an
untouchable whistleblower system, namely tort. This interrogation
references a method standard, bearing no resemblance whatsoever
to business as usual, to evaluate actions taken by the Box prior
to the damage. The contest between benchmark stationary and
benchmark advancing is a rout.

As a regulator, the SEC is set between these two incompatible
frameworks of practice. You can choose, like commerce, to ignore
entropy as it grows out of hand or you can choose to reduce the
inexorable buildup of entropy as it occurs. Natural law will
determine the consequences.

Suggestions from the trenches
You will be better off coming to terms with whistleblowing. It
does no good to cloak that true purpose of the rule. The
clientele is far too intelligent and vested in the status quo.
There is nothing evil about your mandate to preempt material
damage to stakeholders - to limit the time available for
misconduct to deplete the treasury. In spite of the fact that
society will take that achievement as blowing the whistle, which
it is, you have had decades to find an effective alternative.

Meanwhile, you have a proven template from which you can
replicate successful professional whistleblowing practice - tort.
As far as method is concerned, it doesn't  matter that tort is
whistleblowing after the collapse. The very same proven method
benchmark, the standard of care and diligence (SoCaD) used by
tort to legally transfer wealth after the fact of damage, is
available for use to preempt the damage. The tort process
automatically takes care of the maintenance for you.

Plaintiff's bar is legally bound to raise the goal of
professional practice in synch with the best method technology we
PEs can develop and scrutably connect to universal principles.
Society legitimately expects our capability platform to rise to
meet the flow of new challenges to our nation's survival.

The opportunity the SEC has provided to contribute to this matter
is greatly appreciated.

William L. Livingston, PE