[I]f an issuer responds to an attorney’s report regarding the legality of a particular transaction by informing the attorney that a reputable law firm has reviewed the transaction and concluded that there has been no violation, and if the issuer provides a copy of the opinion to the attorney, the attorney could reasonably believe that the issuer’s response was appropriate so long as the opinion satisfactorily addresses all of the reporting attorney’s reasonable legal and factual concerns and is otherwise reasonable.

The Commission should reconsider this position. Our disagreement is based on a number of factors:

• We agree with the assertion in the Proposing Release that "[I]t should be truly extraordinary for an attorney reporting evidence of a material violation to receive an inappropriate response…." Proposing Release at 36.
• It can be a substantial undertaking to review such a report in order to ascertain whether the report satisfactorily addresses all of the reporting attorney’s reasonable and factual concerns and is otherwise reasonable. This factor is particularly significant in light of the substantial possibility that, under the proposed rules as currently drafted, multiple attorneys would be required to shoulder this substantial burden.
• Imposing substantial burdens on reporting attorneys is contrary to the public interest in several respects. First, it will chill the willingness of attorneys to make the initial report to the CLO and CEO. Second, it will increase the risks, and therefore likely the costs, associated with providing legal services to issuers.
• The attorney(s) that conducted the investigation and the issuer’s CLO and CEO will both be in a far better position than the reporting attorney to evaluate whether the report satisfactorily addresses all of the reporting attorney’s reasonable legal and factual concerns.
• There is a substantial risk that an issuer would forfeit the attorney-client privilege if it provided the otherwise privileged results of an internal investigations to the reporting attorney. Even if the issuer is a client of the reporting attorney, a strong argument could be made that the issuer is providing the internal investigation results to the reporting attorney in order to address the Part 205 obligations of the reporting attorney and not to obtain legal advice and services from the attorney. Faced with the choice of losing the assistance of counsel or risking the waiver of the attorney client privilege, it is likely that a number of issuers will simply terminate their relationships with the reporting attorneys rather than risk waiving the privilege.

• cause such inquiry into the indicated material violation as the CLO reasonably believes is necessary;
• assess whether, based on the information reported by the reporting attorney and as a result of the subsequent inquiry, a material violation has occurred, is occurring or is about to occur;
• if the CLO reasonably believes that a material violation has occurred, is occurring, or is about to occur, take any necessary steps to ensure that the issuer implements appropriate remedial measures;
• promptly report the remedial measures adopted to the audit committee and to each reporting attorney;
• take reasonable steps to document the inquiry; and
• retain the documentation for a reasonable time.

We recommend that the proposed rules be modified to provide that if the attorney obtains representations that the CLO has fulfilled the obligations set forth in Part 205(b)(3), then the reporting attorney has received an appropriate response for the purpose of Part 205.3(d), unless the reporting attorney is reasonably certain that the representations are untrue.

The proposed rule implies that the appropriateness of a response need not include compensation of injured parties. We support this standard. Requiring an attorney to assess whether a response appropriately compensated injured parties would be deeply impractical. Identifying and compensating injured parties is a difficult task, but one to which the private plaintiff’s bar devotes considerable attention. A reporting attorney is likely to have little expertise or resources in this area, and requiring the reporting attorney to make such an assessment would impose additional cost and potential liability to attorneys, with no appreciable benefit to the issuer or to investors. Accordingly, we recommend that Part 205(b) be modified to read as follows:

Appropriate response means…

2. That the issuer has, as necessary, adopted remedial measures, consisting of appropriate disclosures to correct any materially false or misleading disclosures that continue to be relied on by investors, and/or imposed sanctions and procedures that provide reasonable assurance against the recurrence of any material violation that is occurring and the occurrence of material violations that have yet to occur.