First, the Proposing Release invites comments on the appropriate measure of evidence. We begin from the assumption that the confidentiality of the attorney-client relationship serves important societal policies and exceptions to that confidentiality should not be triggered by uncertain beliefs about whether violations have occurred. The "reasonably believes" standard is a relatively low, negligence-oriented standard which would lead to frequent invocation of Part 205 by lawyers fearful of being second-guessed about the reasonableness of their judgment. The "reasonably believes" language may be found in the Comment to Model Rule of Professional Conduct 1.6, where the disclosure is permissive rather than mandatory and restricted to violent crimes. We believe the more appropriate standard, used in jurisdictions which allow lawyers to more broadly reveal the intent of clients to commit crimes, is the "reasonably certain" standard. E.g., N.Y. State Op. 562 (1984) (interpreting DR4-101(C)(3)). After canvassing 33 states with broader versions of Rule 1.6 or its equivalent not limited to violent crime, the A.B.A. Commission on Evaluation of the Rules of Professional Conduct used the "reasonably certain" standard in its proposed broadening of Rule 1.6 beyond violent crime. Report of the Commission on Evaluation of the Rules of Professional Conduct (Nov. 2000). We believe the same more rigorous standard is appropriate in Part 205.

The legislative history indicates that Congress contemplated a similarly rigorous standard. Senator Michael Enzi, one of the key sponsors of Section 307, made the following statement regarding the reporting obligation required by Section 307:

Under 31 CFR, part 10.21 of the IRS regulations, each attorney who knows the client has not complied with the revenue laws or who has made an error or omission on any return or document required by the IRS shall advise the client promptly of the fact of such non-compliance, error, or omission. The amendment I am supporting will give the SEC authority to promulgate a rule similar to the IRS rule.

The reasonably certain threshold for reporting possible violations up the chain would serve a valuable winnowing effect on what otherwise may be an unmanageable volume of information. Lawyers advise clients routinely about legal risk—including the possibility that the conduct may later be found to be a material violation—in a proposed course of action, while leaving it for the client to decide whether to incur that risk. Many issuers are large organizations with numerous divisions and subsidiaries. If the presence of such legal risk meant that the matter had to be decided by the issuer’s chief legal officer, chief executive officer, or audit committee, the nature of the attorney’s relationship with management would be transformed and senior management and audit committees of large issuers would be overwhelmed.

Second, if the Commission decides to use a negligence standard, then the Commission should delete 205.2(e) and revise 205.3(b)(l) to read as follows:

If, based on information of which the attorney became aware in appearing and practicing before the Commission in the representation of an issuer, an attorney reasonably believes or is negligent in failing to reasonably believe that a material violation by the issuer or by any officer, director, employee, or agent of the issuer is occurring or is about to occur, the attorney shall report…. An attorney does not reveal client confidences or secrets or privileged or otherwise protected information by communicating such information related to the attorney’s representation of an issuer to the issuer’s officers or directors.

When an attorney "becomes aware" of information that would lead an attorney reasonably to believe in the existence of a material violation would turn, at least in part, on the attorney’s training, experience, position and seniority….What the reasonable, experienced securities lawyer might regard as a clear violation of the law may appear different—or not appear at all—to an unseasoned attorney with a different level of expertise.

We note that the proposed rule refers to "evidence" of a material violation, which suggests that the attorney is entitled to make certain informed professional judgments about the sources of information, the credibility of the information, and to weigh them against the possibility of other mitigating information that the attorney may know. The Commission should confirm whether this interpretation is correct.

The Proposing Release suggests that an attorney should conclude that information is "evidence of a material violation" only if it is clearly illegal. Proposing Release at 27. ("The duty to report ’up the ladder’ does not…arise where an officer actually pursues a course of action despite being advised by the attorney that the course of action had been held illegal by courts in three states, in none of which the issuer does business, even if the attorney thinks there is a reasonable argument that other courts would also be likely to find it illegal.") We support this position. However, we note that this important concept is not reflected in the Commission’s proposed definition of "evidence of material violation." If the Commission retains a negligence standard, the proposed rule should be modified to incorporate the concept that the information does not constitute "evidence of a material violation" unless the indicated conduct is clearly illegal in the relevant jurisdiction(s).

Finally, proposed Part 205 defines "material" to refer "to conduct or information about which a reasonable investor would want to be informed before making an investment decision." This proposed definition is different from the well-established definition set forth by the Supreme Court. Namely, information is material if "there is a substantial likelihood that a reasonable shareholder would consider it important" in making an investment decision, and that it must be substantially likely that a fact "would have been viewed by the reasonable investor as having significantly altered the `total mix’ of information made available." TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976). See also Basic, Inc. v. Levinson, 485 U.S. 224 (1988). When Congress uses a term that has been defined by the Supreme Court, the presumption should be that Congress intended to adopt that definition. Moreover, the use of a different definition is confusing, and would negate the experience of the Commission, the courts, and the securities bar in working with the Supreme Court definition. We recommend that the Commission replace the proposed definition with the Supreme Court definition.

We also believe that, given the elaborate reporting scheme contemplated by the rule, the Commission should define the types of violations that will be regarded as "similar violations." Attorneys should not be exposed to liability for failing to report other, unspecified types of violations, and the courts are more likely to defer to the Commission’s judgment if it defines the term after notice-and-comment rulemaking.