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Comments of the Corporation, Finance and Securities Law Section: Footnotes
  1. The task force that prepared this letter was by co-chaired by Kenneth B. Winer and Gregory S. Bruch and included David M. Becker, James E. Day, Gary L. Goldsholle, Abbey G. Hairston, Paul Huey-Burns, Howard Kramer, David B.H. Martin, Phillip Parker, Broc Romanek, Richard H. Rowe, and Paul Schott Stevens. The comments in this letter represent the consensus of the task force as a whole and do not necessarily mirror the views of each individual task force participant or member of the District of Columbia Bar.
  2. Specifically, we are concerned that two other provisions threaten to undermine the attorney-client privilege. The requirement that an attorney (e.g., an attorney for an investment adviser) report evidence to issuers that are not clients of the attorney threatens the attorney-client privilege because disclosure to a third party has historically been viewed as waiving the privilege. The implied requirement that an issuer provide to the reporting attorney(s) the results of the investigation threatens the attorney-client privilege that would otherwise attach to the investigation because results of the investigation arguably are not being provided to the attorney for the purpose of obtaining legal advice and services.
  3. The proposed rule reaches attorneys who, on behalf of the issuer, "participate in the process of drafting of a document" that the issuer files with the Commission. We recommend that the Commission clarify how, if at all, "participating in the process of drafting a document" differs from "preparing or assisting in the preparation of a document," the phrase used in Proposed Part 205.3(d)(i)(C).
  4. Senator Edwards, Cong. Record S6552 (July 10, 2002) ("This amendment…basically instructs the SEC to start doing exactly what they were doing 20 years ago, to start enforcing this up-the-ladder principle.") (emphasis added); Senator Enzi, Cong. Record S6554 (July 10, 2002) ("This amendment is designed to assure that attorneys are responsible for fully informing their corporate client of evidence of material violations of Federal securities laws.") (emphasis added); Senator Corzine, Cong. Record S6556 (July 10, 2002) ("That is why Senator Edwards, Senator Enzi and I have crafted an amendment that will clarify that lawyers who know of wrongdoing by a corporation must report that wrongdoing to the client so it can be corrected.") (emphasis added).
  5. If "fiduciary duty" is the operative principle, then the same issues arise in connection with the companies that provide services to investment companies, including custodians, transfer agents, and administrators, none of whose attorneys have an attorney-client privilege with the investment company issuer.
  6. Proposed Rules at 23.
  7. See ABA/BNA LAWYERS’ MANUAL ON PROFESSIONAL CONDUCT, American Bar Association and The Bureau of National Affairs, Inc. (2002), Rule 1:13, "Organization as Client," at 1:139.
  8. Id., Rule 1:13(a).
  9. Id.
  10. Id., Rule 1:13(d).

  11. Id., Rule 1:2(a). In other parts of the proposing release, the Commission seems to be stating that the attorney’s obligation is to represent the client on the basis of what the Commission believes the client’s objectives should be. Explaining the basis for requiring up-the-ladder reporting in the context of defending the client in a Commission investigation or administrative proceeding, the proposing release states that, in that context, "one of the affected issuer’s objectives should be to determine whether there has been any violation and, if so, to decide how best to rectify it." Proposed Rules at 28.
  12. Id. at Rule 1:2, "Scope of Representation and Allocation of Authority between Client and Lawyer," 1:108. A corollary principle is that an attorney’s representation of a client may not be taken as an endorsement of its views or activities. Id. at Rule 1:2(b).
  13. The Proposing Release gives no guidance as to how the reporting attorney should assess whether a response is timely. In In re Worldcom, Inc., Case No. 02-15533 (AJG) (S.D.N.Y. Bankr. Ct.), it took Former Attorney General Dick Thornburgh approximately five months from the time that he was appointed bankruptcy examiner for Worldcom to complete his first interim report of investigation and the court has set a schedule providing for additional interim reports every 120 days thereafter.
  14. If the Commission decides to retain 205.4(b) the Commission should allow sufficient time for supervisory attorneys to develop and implement systems designed to provide assurance that subordinates comply with Part 205 and other provisions of the federal securities laws.
  15. We do not believe that the exception from the alternative for CLOs is appropriate, as CLOs also have a duty of confidentiality to their clients.
  16. This comment also applies to other uses of the term "on behalf of an issuer." See, e.g., Proposed Part 205.4(b).
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