- Proposed Part 205 Will Dramatically Change the Attorney-Client
Relationship and May Bring a Host of Negaive, Unintended Consequences
In finalizing Part 205, the Commission should consider the burdens that the rule imposes on issuers, attorneys, and the investing public. First, and foremost, the noisy withdrawal provisions will impose extraordinary costs— both social and monetary—on legal practice before the Commission. Most of these costs will not be borne by counsel, but will be borne by issuers and ultimately by shareholders who are likely to have more expensive, but less comprehensive, disclosure as a result of these rules. First, we believe that the noisy withdrawal provisions would substantially chill communications between issuers and counsel, impairing compliance with not only the securities laws but potentially other laws. Second, because of the serious consequences of a noisy withdrawal that conflicts with other state ethical rules, attorneys are likely to need to retain other lawyers to counsel them regarding the attorneys’ conflicting obligations of zealous representation and confidentiality under state ethics rules and withdrawal and notification under SEC Part 205. Third, to the extent that the rule requires an attorney to withdraw from representation of an issuer even though that representation is unrelated to the indicated material violation, the rule will substantially increase the cost of representation and undermine the quality of legal advice and other services.Even without the noisy withdrawal provision, the burdens of proposed Part 205 are substantial. Among other things, the proposed rules sweep within the Commission’s jurisdiction many attorneys who traditionally never thought of themselves as practicing or appearing before the SEC. The proposed rule is, at best, unclear as to what kinds of violations are within Part 205’s ambit, and to what violations are "material violations." The proposed rule is likewise unclear as to when attorneys have obtained "evidence" of a material violation, and how covered attorneys should assess the appropriateness of the issuer’s response to reports of possible material violations.
If enacted as proposed, Part 205 is likely to alter the attorney-client relationship in ways that do not serve the Commission’s charter to protect investors. The rules threaten to chill communications between issuers and their attorneys, undermining the ability of attorneys to provide the guidance issuers need to comply with the law. The rules threaten to deter specialist attorneys (e.g., regulatory counsel) from reviewing select portions of SEC filings, adversely affecting the quality of disclosure in SEC filings and other disclosures. We intend these comments to identify and explain some of these unintended consequences and to suggest modifications that will help the Commission achieve a rule consistent with Section 307 of Sarbanes-Oxley and the public interest.
 |
||
