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					                                                Preliminary Draft of Note for Circulation and Comment


“PROPOSED SEC RULE ON „NOISY WITHDRAWAL‟ FOR ATTORNEYS UNDER

SECTION 307, SARBANES-OXLEY ACT-WHAT IS ALL THE NOISE ABOUT?”

                                                                                                 Puja Sondhi1

A. Background- Section 307, Sarbanes-Oxley Act

        Attorneys have an integral function to perform in the corporate governance structure of

issuers, and in ensuring their compliance with applicable reporting and disclosure requirements,

including those mandated by federal securities laws. The investing public, in making its

investment decisions, relies heavily upon these documents filed with, or submitted to the

Securities and Exchange Commission (the “SEC”) by the attorneys on behalf of issuers. Lawyers

have hitherto enjoyed an honored position in society, well encoded in the attendant

confidentiality and related attorney-client privileges, the scope of which is bearing close scrutiny

and possible refashioning today. This is because, in light of the recent Enron-like scandals, it is

increasingly being alleged, that lawyers have failed in their role as one of the pivotal

“gatekeepers” of corporate America.2 This sentiment led to the adoption of Section 307 of the

Sarbanes-Oxley Act of 2002 (the “Act”), which mandates that the SEC issue national rules

establishing minimum professional standards for lawyers appearing and practicing before the

SEC, including a rule requiring lawyers to report misconduct up-the-ladder within the corporate

client.3 In making lawyers accountable for their clients‟ wrongdoing, the Act proposes to restore

investor confidence, and to increase corporate compliance with the applicable legal regime.4



1
  I would like to thank Vice-Dean Stephen Gillers for supervising this paper, Prof. David A. Katz and Prof. Norman
Redlich for their insightful comments on this issue. A preliminary draft of this paper was presented for comment on
March 26, 2003 at the Hauser Seminar, NYU School of Law, and I would also like to thank Prof. Joseph Weiler, and
all other participants of this seminar for their valuable inputs.
2
  The July 16, 2002 Preliminary Report of the American Bar Association Task Force on Corporate Responsibility
(the “Cheek Report”) points out that attorneys representing and advising corporate clients must partake the blame
for this failure of corporate governance.
3
  See, Section 307, Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, 116 Stat. 745.


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                                                   Preliminary Draft of Note for Circulation and Comment


         Prior to this Act also, the SEC had authority under Rule 102(e) of its Rules of Practice, to

discipline lawyers practicing before it, but it has exhibited great caution in exercising its power

under this provision in the past. The most it did, two decades ago in the Carter and Johnson

Case 5 , was to suggest that an attorney who saw repeated and substantial misstatements and

omissions by a client, in disregard of the attorney‟s advice, should, under the SEC‟s rules of

practice, take affirmative steps, including possibly going “up the ladder” within the corporate

client. However, the SEC soon abandoned this approach, noting its lack of time/expertise to

fashion a code of professional conduct for attorneys appearing and practicing before it, and

decided to limit itself to bringing proceedings only if there was first a judicial determination that

the lawyer had violated the federal securities laws. 6 This is a far cry from the disciplinary

authority the SEC is now set to exert over attorneys appearing and practicing before it.

         The SEC first proposed rules7 under Section 307, on November 21, 2002, and after taking

into account the comments8 of those concerned, on January 23, 2003, it adopted the final rules9




Section 307 requires the SEC to “…. issue rules, in the public interest and for the protection of investors, setting
forth minimum standards of professional conduct for attorneys appearing and practicing before the Commission in
any way in the representation of issuers, including a rule -
          (1) requiring an attorney to report evidence of a material violation of securities law or breach of fiduciary
          duty or similar violation by the company or any agent thereof, to the chief legal counsel or the chief
          executive officer of the company (or the equivalent thereof); and
          (2) if the counsel or officer does not appropriately respond to the evidence (adopting, as necessary,
          appropriate remedial measures or sanctions with respect to the violation), requiring the attorney to report
          the evidence to the audit committee of the board of directors of the issuer or to another committee of the
          board of directors comprised solely of directors not employed directly or indirectly by the issuer, or to the
          board of directors.”
4
  See, Final Rule, infra n.9 at 1, that states: “Proposed Part 205…..is intended to protect investors and increase their
confidence in public companies by ensuring that attorneys who work for those companies respond appropriately to
evidence of material misconduct.”
5
  In the Matter of William R. Carter, Charles J. Johnson, Jr., 22 S.E.C. Docket No. 292, 1981 WL 384414.
6
  Edward F. Greene, Lawyer Disciplinary Proceedings before the Securities and Exchange Commission, Remarks to
the New York County Lawyers‟ Association (Jan. 18, 1982), Fed. Sec. L. Rep. (CCH) ¶83,089, cited from
Comments of Debevoise & Plimpton, at 3.
7
  See, The Securities and Exchange Commission, Implementation of Standards of Professional Conduct for
Attorneys (the “Proposed Rule”), 17 CFR Part 205, Release Nos. 33-8150; 34-46868; IC-25829, issued November
21, 2002, available at http://www.sec.gov/rules/proposed/33-8150.htm.


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                                                 Preliminary Draft of Note for Circulation and Comment


to implement this section, by setting “standards of professional conduct for attorneys appearing

and practicing before the SEC in any way in the representation of issuers”. The SEC in a

companion release10, provided an extended comment period till April 7, 2003, with respect to the

controversial “noisy withdrawal” provisions of the original proposed rule11, and an alternative

proposal to the same. These provisions, as proposed would under certain circumstances, permit

or require attorneys to withdraw from representation of an issuer, notify the SEC of such

withdrawal and disaffirm the tainted documents filed or submitted to the SEC.



B. Scope and Limitations

      The proposed SEC provisions on “noisy withdrawal” have from their very inception, been

plagued with the question of SEC‟s statutory authority to promulgate such a rule, including its

authority to preempt state ethical rules in so doing, and this has been the source of much debate

among lawyers and academics alike. In my opinion, this issue, while extremely important is not

pertinent for the purposes of this paper, which is premised on the assumption that the SEC

(rightly or wrongly) believes that it does possess such authority and is proceeding accordingly.

Thus, while the question of the SEC‟s authority to so act remains highly debatable, I will not

delve into that question, and instead look at some other issues related to the “noisy withdrawal”

rule, which the SEC has explicitly asked for comments on, and in relation to which, it is likely to



8
   The Comments of lawyers, law firms, academics, various organizations and other interested parties submitted prior
to December 18, were extremely useful in writing this paper, and have been cited wherever relevant. The Final
Rules were published after consideration of the 167 timely comment letters that the SEC received.
9
   See, The Securities and Exchange Commission, Implementation of Standards of Professional Conduct for
Attorneys (the “Final Rule”), 17 CFR Part 205, Release Nos. 33-8185; 34-47276; IC-25919, issued January 29, 2003,
iliaviava at http://www.sec.gov/rules/final/33-8185.htm.
10
   The Securities and Exchange Commission, Implementation of Standards of Professional Conduct for Attorneys
(the “Proposing Release”), 17 CFR Part 205, Release Nos. 33-8186; 34-47282; IC-25920, issued January 29, 2003,
iliaviava at http://www.sec.gov/rules/proposed/33-8186.htm.
11
    Supra n.7.


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                                          Preliminary Draft of Note for Circulation and Comment


be more amenable to change. I shall mainly deal with three broad questions, which for the sake

of clarity and convenience are delineated below.



   I. Whether the proposed SEC Rule on “noisy withdrawal” is inconsistent with the

       ethical rule of client confidentiality-This will entail an examination of the:-

     (1) Position under the ABA Model Rules

     (2) Position under the state ethical rules

     (3) Position under the Final SEC Rule- Section 205.3(d)(2)



   II. Whether the proposed standard and manner of effectuating “noisy withdrawal” is

       appropriate, or requires modification

     a) Whether the standard triggering this rule should be objective or subjective

     b) Whether such a rule should be mandatory or merely permissive

     c) Whether it is necessary to make a distinction between material violations that are

         ongoing or impending and those that are past and have no continuing effect

     d) Whether rule should be limited to circumstances narrower than “material violations”

     e) Whether the rule should distinguish between retained attorneys and employed attorneys

     f) Whether the successor attorney should be notified that the previous attorney withdrew

         due to “professional considerations”



  III. Whether a “noisy withdrawal” requirement would be self-defeating in purpose




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      Besides this, the proposed rule raises several other complex and multifaceted issues,

including among others, those relating to waiver (whether selective or otherwise) of attorney-

client privilege, extraterritorial application of this rule, many core definitional issues12 and the

proposed alternative, but these are specifically placed outside the scope of this paper. It follows

that I shall not examine the final SEC rules under Section 307, including the plain withdrawal

provisions, except incidentally insofar as they are pertinent to our understanding of the “noisy

withdrawal provisions”, or their alteration.



C. Highlights of the Final Rules

        To provide a proper background to the discussion in this paper, it might be useful to look

very briefly at some of the salient features of the Final Rules, issued by the SEC to regulate

attorney conduct under Section 307 of the Sarbanes-Oxley Act. These rules require an attorney

to report evidence of a material violation, determined according to an „objective‟ standard 13, “up-

the-ladder” within the issuer to the chief legal counsel or the chief executive officer of the

company or the equivalent, and if they fail to respond appropriately, to report the evidence to the

audit committee, another committee of independent directors, or the full board of directors.

Alternatively, the attorney could satisfy the rule‟s reporting obligation by reporting evidence of a

material violation to a “qualified legal compliance committee” (the “QLCC”), if such QLCC is

duly constituted by the issuer.14 The rules, as adopted do not require an attorney or an issuer to



12
   There has been much debate over several key definitions, including „evidence of material violation‟, „appropriate
response‟, „appearing and practicing before the Commission‟, all of which are defined in the Final Rules, some may
argue unsatisfactorily, but I shall not examine this.
13
   This triggering „objective‟ standard would require credible evidence, based upon which it would be unreasonable,
under the circumstances, for a prudent and competent attorney not to conclude that it is reasonably likely that a
material violation has occurred, is ongoing or is about to occur.
14
   See, Section 205.2(k) of the Final Rule, supra n.9. The QLCC is to consist of at least one member of the issuer‟s
audit committee, or an equivalent committee of independent directors, and two or more independent board members,


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                                              Preliminary Draft of Note for Circulation and Comment


report outside the issuer, evidence of a material violation, or the issuer‟s response (or the lack of

it) to such evidence, or to disaffirm any documents prepared by such attorney.

        They apply to attorneys providing legal services to an issuer who have an attorney-client

relationship with the issuer, and are on notice that documents they are preparing or assisting in

preparing will be filed with or submitted to the SEC, and do not generally apply to foreign

attorneys, except in certain specified circumstances. The SEC in the Final Rules has expressly

said that its rules preempt state law in case of conflict, but states can still impose more rigorous

obligations on attorneys, provided those are not inconsistent with the rules. The SEC also

explicitly excludes a private cause of action, retaining exclusive authority to enforce these rules.



D. “Noisy Withdrawal” Proposal for Attorneys

Introduction

        Under the concept of “noisy withdrawal”, an attorney withdraws from representing the

client, gives notice of such withdrawal to third parties using generalized language (“professional

reasons,” etc.), and disaffirms specific tainted documents.15 The proposed SEC rule on “noisy

withdrawal” would essentially require an attorney to notify the SEC of his withdrawal, when

after reporting evidence of a material violation up-the-ladder of the issuer‟s governance structure,

the attorney reasonably believes that an issuer‟s directors have either not made an appropriate

response or no response at all (within a reasonable time), and he has therefore withdrawn from

representation of the issuer. Once the “noisy withdrawal” duties are so triggered, there are four

possible scenarios that can emerge, based upon two distinctions between (1) material violations



and is responsible for recommending that an issuer implement an appropriate response to evidence of a material
violation.
15
   See, Comments of Latham & Watkins, at 13.


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that have already occurred and are not ongoing, and those that are either ongoing, or impending,

and (2) retained and employed attorneys.

         What the attorney shall/may do when he does not receive an appropriate response within

a reasonable time, or no response at all from the issuer, to his report of material violation:

Scenario 1: In case of a retained attorney and an ongoing or future material violation, it is

mandatory for the attorney to (i) withdraw forthwith from representing the issuer, (ii) notify the

SEC (within one business day of withdrawing) that he has so withdrawn on „professional

considerations‟, and (iii) promptly disaffirm to the SEC any opinion/document/affirmation/

representation/characterization or the like in a document filed with, or submitted to the SEC, that

the attorney has prepared, or helped prepare and which the attorney reasonably believes is, or

may be materially false or misleading.16

Scenario 2: In case of an employed attorney and an ongoing or future material violation, it is

mandatory for the attorney to (i) notify the SEC (within one business day) that he intends to

disaffirm some opinion/document/affirmation/representation/characterization or the like in a

document filed with, or submitted to the SEC, that the attorney has prepared, or helped prepare

and which the attorney reasonably believes is, or may be materially false or misleading; and (ii)

promptly so disaffirm, in writing.17


16
   See, Proposing Release, supra n.10, at Section 205.3(d) that reads: “(i) An attorney retained by the issuer shall:
          (A) Withdraw forthwith from representing the issuer, indicating that the withdrawal is based on
          professional considerations;
          (B) Within one business day of withdrawing, give written notice to the Commission of the attorney’s
          withdrawal, indicating that the withdrawal was based on professional considerations; and
          (C) Promptly disaffirm to the Commission any opinion, document, affirmation, representation,
          characterization, or the like in a document filed with or submitted to the Commission, or incorporated into
          such a document, that the attorney has prepared or assisted in preparing and that the attorney reasonably
          believes is or may be materially false or misleading;”
17
   See, Proposing Release, supra n.10, at Section 205.3(d) that reads:“(ii)An attorney employed by the issuer shall:
      (A) Within one business day, notify the Commission in writing that he or she intends to disaffirm some opinion,
      document, affirmation, representation, characterization, or the like in a document filed with or submitted to the
      Commission, or incorporated into such a document, that the attorney has prepared or assisted in preparing and
      that the attorney reasonably believes is or may be materially false or misleading; and


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                                                 Preliminary Draft of Note for Circulation and Comment


Scenarios 3 and 4: In case of a past material violation, it is permissive for the retained18 and

employed19 attorney to do exactly what is mandatory for them in Scenarios 1, and 2 respectively.

        Thus the attorney‟s withdrawal, notifying the SEC and disaffirmance of documents are

mandatory or permissive, depending on whether the material violation is past, ongoing or future.

However, in all the above scenarios, if the reporting attorney does withdraw, or notify the SEC, it

is mandatory for the issuer‟s chief legal officer to inform the successor lawyer of the fact that the

employed/retained lawyer he is replacing, withdrew because of “professional considerations”.20

        The SEC recognizes that “noisy withdrawal” raises complex and significant issues, thus it

has given another sixty days to comment on this provision (including an alternative proposal).21



Dynamics of “Noisy Withdrawal”: Issues and Concerns

        The most widespread criticism to the SEC proposed rule on “noisy withdrawal”, has been

that it contemplates something which is completely contrary to the existing ethical rules that


      (B)Promptly disaffirm to the Commission, in writing, any such opinion, document, affirmation, representation,
      characterization, or the like;…”
18
   See, Proposing Release, supra n.10, at Section 205.3(d) that reads:
“(i) An attorney retained by the issuer may:
          (A) Withdraw forthwith from representing the issuer, indicating that the withdrawal was based on
              professional considerations;
          (B) Give written notice to the Commission of the attorney’s withdrawal, indicating that the withdrawal
              was based on professional considerations; and
          (C) Disaffirm to the Commission, in writing, any opinion, document, affirmation, representation,
              characterization, or the like in a document filed with or submitted to the Commission, or incorporated
              into such a document, that the attorney has prepared or assisted in preparing and that the attorney
              reasonably believes is or may be materially false or misleading;…”
19
   See, Proposing Release, supra n.10, at Section 205.3(d) that reads:
“(ii) An attorney employed by the issuer may:
          (A) Notify the Commission in writing that he or she intends to disaffirm some opinion, document,
              affirmation, representation, characterization, or the like in a document filed with or submitted to the
              Commission, or incorporated into such a document, that the attorney has prepared or assisted in
              preparing and that the attorney reasonably believes is or may be materially false or misleading; and
          (B) Disaffirm to the Commission, in writing, any such opinion, document, affirmation, representation,
              characterization, or the like; …”
20
   See, Proposing Release, supra n.10, at Section 205.3(d) that reads:
“(iii) The issuer’s chief legal officer (or the equivalent) shall inform any attorney retained or employed to replace
the attorney who has withdrawn that the previous attorney’s withdrawal was based on professional considerations.”
21
   The comments on this new proposed rule are due on April 7, 2003.


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                                           Preliminary Draft of Note for Circulation and Comment


govern lawyer conduct, making it necessary for us to compare the positions under the two rules

and determine whether they are really so different. It may be argued that this issue is irrelevant if

the SEC possesses authority to preempt the state ethical rules, which in its own words at least, it

does. I disagree- I believe independent of the SEC‟s preemption authority here, this discussion

has its own normative merit because if I can establish (which is my aim here) that “noisy

withdrawal” is not inconsistent with the existing ethical rules then we deprive the dissenters of

this rule their main source of attack. Further, if lawyers can be made to view this rule as not

overturning the status quo of their regulatory regime (namely the ethical rules)-merely modifying

it and giving it more teeth-then it will have the psychological advantage of making the rule more

acceptable to lawyers, and hence more practically workable. Quite apart from the considerable

merit of clawing away at the resistance to a “noisy withdrawal” proposal, I think this discussion

has other legitimizing consequences insofar as it also addresses critical issues that go to the very

heart of this debate-like client confidentiality and the lawyer‟s duties when confronted with his

client‟s actual/potential misdeeds.



       I. Whether the proposed SEC Rule on “noisy withdrawal” requirement is

inconsistent with the ethical rule of client confidentiality

       As an opening remark to this discussion, we also need to fully comprehend that the

attorney-client privilege is the evidentiary law counterpart of the ethical principle of

confidentiality, and as interrelated as they might be, they have distinct legal settings and

bearings, which cannot be confused, though the temptation to use them interchangeably is often

great-understandably so, given their overlapping (but not identical) scope and similar governing

logic. For conceptual clarity, I think we need to be cognizant of this distinction, so that when we




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                                                Preliminary Draft of Note for Circulation and Comment


test this proposal for consistency with the ethical rules regulating attorney conduct, we are

measuring it against the ethical norm of confidentiality, and not the allied attorney-client

privilege.

        One of the core problems in allowing “noisy withdrawal” is that it amounts to an implicit

disclosure of client confidences, insofar as it is an indication of the fact that the client is engaged

in some crime/fraud/material violation, as the case maybe, which has necessitated “noisy

withdrawal”. Some might argue that “noisy withdrawal” only entails the attorney telling the SEC

that he has withdrawn due to “professional considerations”, and thus keeps confidential the

particular facts underlying the withdrawal. While technically correct, I believe that this

maintenance of confidentiality is illusory because everyone will be aware of the connotations of

the phrase “professional considerations”,22 and it will operate as a „code word‟ to alert the SEC

that the client is violating the law in a way that is material to investors, which will in all

probability initiate some investigation into that company‟s affairs, just like it would have had the

attorney expressly revealed confidential information to the SEC.23

        Some jurisdictions like New York have, in my view, a more honest and conceptually

correct way of dealing with “noisy withdrawal” as an explicit exception to the rule on

confidentiality24, which is how I will approach this issue. It is therefore necessary to examine the

extent to which (if at all) the exceptions to the principle of confidentiality permit a “noisy

withdrawal”. I may add, that if the confidentiality rule has an explicit exception that permits (or

mandates) disclosure of confidential information under certain circumstances, then “noisy

22
   The SEC itself notes that the withdrawal “reflects substantially more than a disagreement about the best legal
strategy or a dispute about the cost of representation.” See, Proposed Rule, supra n.7.
23
   See, Comments of Debevoise & Plimpton at 2-3.
24
   See, DR 4-101(C)(5), New York Code of Professional Responsibility, that reads: “A lawyer may reveal…..
Confidences or secrets to the extent implicit in withdrawing a written or oral opinion or representation previously
given by the lawyer and believed by the lawyer still to be relied upon by a third person where the lawyer has
discovered that the opinion or representation was based on materially inaccurate information or is being used to
further a crime or fraud.”


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                                           Preliminary Draft of Note for Circulation and Comment


withdrawal”-that only serves as an implicit disclosure of that information-would not be an issue.

In light of the recent scandals, there is undoubtedly an imminent need for greater accountability

of lawyers, which is purportedly the aim of these rules; at the same time I also think that we

should not hastily embrace a complete erosion of well established principles like confidentiality.

       In the course of this paper, while recognizing the importance of the client‟s right to

confidentiality, I shall attempt to show how the right itself can be interpreted to accommodate an

exception for “noisy withdrawal”. Quite apart from that, I wish to emphasize that like most

others, the right to confidentiality is also not without limits, and should be open to a legitimacy

analysis. This is especially true in this context, given the fact that an elaborate procedure has

been devised for correcting, or remedying the wrong within the organization itself first, which in

no way transgresses upon the confidentiality principle. It is only when that mechanism has failed

to yield results, and there is no appropriate response to the material violation, that the question of

reporting out arises-and we then need to ask ourselves whether the organization‟s interest in

preserving its right to confidentiality is a legitimate interest any longer. I would argue that it is

clearly not, and it can be supervened by the countervailing policy interest of furthering client

compliance with law and restoring investor confidence. As a logical extension of this argument, I

would say that the same analysis holds good as a justification for reading a limitation into the

other similar rights of the organization in this context. In other words, while testing the validity

of this proposal, or of its different elements, I want to stress that we need to be cognizant of the

conflicting interests at issue for every question we deal with-be it about the appropriate

triggering standard, or the rule being mandatory or permissive, or any other matter related to the

working of the rule.




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(1) Position under the ABA Model Rules
                                                                               25
         Most state courts have patterned their ethical rules                       along the ABA Model Rules on

Professional Responsibility (the “Model Rules”), and these are thus an important standard

against which to evaluate this issue. The problem is that the Model Rules do not explicitly

provide for “noisy withdrawal”, therefore we need to ascertain whether these Rules can

nevertheless, still be interpreted to permit “noisy withdrawal” and if so, when-the answer lies in

understanding the interplay between the relevant Model Rules, which I examine below.


     At the outset, we need to resolve the inconsistency allegedly emanating from the fact that

these rules were aimed at protecting investors, to whom the lawyer for an issuer traditionally

owes no duties to. Model Rule 1.13 is explicit in this regard that a lawyer for an organization

owes his duties to the organization which is his client and not to any of the constituents. 26 I

would say that simply because the rule aims at protection of investors, does not imply that the

rule imposes duties on the lawyer vis-à-vis the investing public, or shareholders in general. The

rules, in my opinion do not superimpose new duties on the lawyer but in fact seek to regulate

attorney conduct in such manner that it would thereby promote investor protection. There was

some confusion in this regard under the Proposed Rule, but I believe that it has been abundantly

clarified under the Final Rule that the lawyer‟s duties continue to run to the organization. The

Final Rule makes it clear that the lawyer “owes his or her professional and ethical duties to the

issuer as an organization”, and does not owe a legal obligation to the constituents of an issuer,

including shareholders .27 The SEC has also deleted from the Final Rule the reference to the



25
   Over 80% of the states have adopted the Model Rules, subject to various non-uniform amendments.
26
   It is important to not lose sight of this vital distinction-that the lawyer‟s client is the organization, and his duties
therefore run to the client organization, and not to its constituents-officers, employees, creditors or shareholders.
27
   See, 205.3(a) of the Final Rule, supra n.9 that provides:


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                                                 Preliminary Draft of Note for Circulation and Comment


attorney being obligated to act in the best interest of shareholders, to clarify that the SEC was not

creating a fiduciary duty to shareholders that does not currently exist. This point is further

buttressed by Section 205.7 which has been added to the Final Rule and expressly states that

nothing in this part is intended to or does create a private right of action against attorneys or any

other person under any provision of this part. Thus, there can remain no doubt as to the fact that

the lawyer owes his duties to the client organization alone. At another level, I would also argue

that it is part of the lawyer‟s duty to his client to ensure that the client and its officers are acting

in compliance with law, even if this has the incidental effect of reducing the stock, or other value

of the issuer, because of the adverse consequences associated with “noisy withdrawal”.


     Model Rule 1.13 that we discussed above, also provides that if a lawyer learns that an officer,

employee, or other person associated with the organization is engaged in, or intends to engage in,

a violation of a legal obligation to the organization, or a violation of law which reasonably might

be imputed to the organization, and is likely to result in substantial injury to the organization, the

lawyer shall proceed as is reasonably necessary in the best interests of the organization. This

includes reporting matter to highest authority in the organization, resigning in case of

unsatisfactory response, but not “reporting-out” 28 confidential information. 29 Thus, this rule

clearly cannot be our basis for supporting “noisy withdrawal”; we need to look elsewhere for

deriving authority for “noisy withdrawal”-with this purpose in mind, I first turn to Model Rule

1.2 which in Section (d) prohibits a lawyer from counseling/assisting a client to engage in

“(a) Representing an Issuer. An attorney appearing and practicing before the Commission in the representation of an
issuer owes his or her professional and ethical duties to the issuer as an organization. That the attorney may work
with and advise the issuer's officers, directors, or employees in the course of representing the issuer does not make
such individuals the attorney's clients.”
28
   This phrase will be used in this paper to denote reporting/disclosure that is done outside the organization in
contradistinction to “up-the-ladder reporting” (or “in-house reporting”) that is done solely within the organization.
29
   See also, Section 96 of the Restatement of the Law Governing Lawyers (ALI 2000) (the “Restatement”), which is
substantially similar to Model Rule1.13.


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                                                  Preliminary Draft of Note for Circulation and Comment


conduct that the lawyer knows is criminal or fraudulent, but permits a lawyer to discuss the legal

consequences of any proposed conduct with a client, and to counsel/assist a client in making a

good faith effort to determine the validity or application of the law. 30 The Comment to this

Model Rule recognizes how sometimes withdrawal alone may be insufficient, and that the

lawyer may be required to disaffirm documents-this is nothing but “noisy withdrawal”.31 Along

similar lines, Model Rule 1.16(a)(1) requires a lawyer to decline or withdraw from representation

of a client if the representation will result in violation of the rules of professional conduct, and

this rule can also be interpreted as warranting “noisy withdrawal” in order to give complete

effect to a lawyer‟s withdrawal.

     One of the biggest criticisms against this rule has been that “noisy withdrawal” would violate

the confidentiality principle that is codified in Model Rule 1.6, which essentially prohibits a

lawyer from revealing information relating to the representation of a client except in specified

circumstances. The exceptions include disclosures made “to comply with other law or a court

order”32, or “to prevent death or serious bodily injury” 33. There is however no exception that is

worded to explicitly permit the lawyer to reveal confidential information to a third party for

preventing, or remedying the consequences of a crime/fraud that has, or is likely to cause

substantial injury to the financial interests or property of another. However, the Comment 34 to

this rule states that in cases where the client crime/fraud or the effects thereof are impending or


30
   See also, Section 94(2) of the Restatement, which is generally to the same effect.
31
   See, Section 10 of the Comment to Model Rule 1.2, which reads: “In some cases, withdrawal alone might be
insufficient. It may be necessary for the lawyer to give notice of the fact of withdrawal and to disaffirm any opinion,
document, affirmation or the like.” This Section was so adopted at the February 2002 Mid-Year Meeting of the
ABA House of Delegates, along with certain other changes to the Model Rules and their accompanying Comments.
32
   See, Model Rule 1.6 (b)(4).
33
   See, Model Rule 1.6 (b)(2).
34
   Section 14 (earlier 16) of the Comment to MR 1.6 reads: “After withdrawal the lawyer is required to refrain from
making disclosure of the client‟s confidence, except as otherwise provided in MR 1.6. Neither this rule nor MR
1.8(b) nor MR 1.16(d) prevents the lawyer from giving notice of the fact of withdrawal, and the lawyer may also
withdraw or disaffirm any opinion, document, or affirmation, or the like.”


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                                                  Preliminary Draft of Note for Circulation and Comment


ongoing, the lawyer may give notice of his withdrawal and disaffirm documents, which amounts

to “noisy withdrawal”, though like the SEC rule it does not use this phrase. The same result

follows from reading other Model Rules with Section (b)(4) of this Rule that permits disclosure

of confidential information “to comply with other law..”, which can be interpreted to permit (and

sometimes even require)“noisy withdrawal” even in the context of past crime/fraud.

       This ties in with our discussion of Model Rule 4.1 that prohibits a lawyer from knowingly

failing to disclose a material fact when disclosure is necessary to avoid assisting a criminal or

fraudulent act by a client (as per Model Rule 1.2), unless such disclosure is prohibited by Model

Rule 1.6. The Comment to this rule is similar-it states that, “sometimes it may be necessary for

the lawyer to give notice of the fact of withdrawal and to disaffirm an opinion, document,

affirmation or the like. In extreme cases, substantive law may require a lawyer to disclose

information relating to the representation to avoid being deemed to have assisted the client‟s

crime or fraud. If the lawyer can avoid assisting a client‟s crime or fraud only by disclosing this

information, the under Section (b) the lawyer is required to do so, unless the disclosure is

prohibited by Rule 1.6” 35. However, we saw that Model Rule 1.6 has an exception for disclosure

when done to comply with other law. Thus, in my opinion, the confidentiality rule undoubtedly

permits the lawyer to do “noisy withdrawal” to avoid assisting the client‟s crime or fraud, and

thereby comply with other law, and this duty may become mandatory when read with Model

Rules 1.2, 1.16 and 4.1.

       To complete this discussion, we need to be aware of the legislative history of this rule also.

In 1981-82, the Kutak Commission proposed that Model Rule 1.6 expressly permit disclosure by

lawyers “(i) to prevent the client from committing a criminal or fraudulent act that the lawyer

believes is likely to result in……substantial injury to the financial interests or property of
35
     See, Section 3 of the Comment to Model Rule 4.1.


                                                        15
                                                  Preliminary Draft of Note for Circulation and Comment


another…” However this proposal was rejected, and the ABA House of Delegates at its August

2001 meeting, voted against a similar Ethics 2000 Commission proposal that would have

permitted a lawyer to reveal information relating to the representation of a client to the extent the

lawyer reasonably believes necessary “to prevent the client from committing a crime or fraud

that is reasonably certain to result in substantial injury to the financial interests or property of

another and in furtherance of which, the client has used or is using the lawyer‟s services.” The

ABA similarly rejected in 1981-1982 and 199136, the “rectification” proposal to amend Model

Rule 1.6 that would have permitted a lawyer to disclose explicitly, to the extent the lawyer

reasonably believed necessary, a client‟s crime/fraud, in order to rectify its consequences and not

merely to prevent its continuation, regardless of whether it was ongoing or entirely a thing of the

past.37 Recently the Ethics 2000 Commission again proposed but then withdrew its proposal that

would have allowed disclosure: “to prevent, mitigate or rectify substantial injury to the financial

interests or property of another that is reasonably certain to result or has resulted from the

client‟s commission of a crime or fraud in furtherance of which the client has used the lawyer‟s

services..” The ABA Task Force on Corporate Responsibility 38 , in its preliminary report 39

(“Cheek Committee Report”), dated July 16, 2002, has recommended that the ABA reconsider

and adopt the Ethics 2000 Commission‟s proposals to amend the Model Rules to allow

disclosure “to prevent or rectify the consequences of a crime or fraud in which the client has

used or is using the lawyer‟s services,” and that is reasonably certain to result, or has resulted,

36
   After much debate in the House of Delegates, the proposal was again defeated by a vote of 251 to 158. See 60
U.S.L.W. 2122 (August 20, 1991).
37
   (ii) “to rectify the consequences of a client‟s criminal or fraudulent act, in the furtherance of which the lawyer‟s
services had been used”. See proposed MR 1.6(b)(2), Final Draft of the Proposed Model Rules of Professional
Conduct, May 30, 1981.
38
   In March 2002, then-ABA president Robert Hirshon appointed a task force chaired by Jim Cheek, a former ABA
Business Law Section Chairman, to “examine systemic issues relating to corporate responsibility arising out of
Enron and other Enron-like situations.”
39
   American Bar Association, Preliminary Report of the American Bar Association Task Force on Corporate
Responsibility 1 (2002).


                                                          16
                                              Preliminary Draft of Note for Circulation and Comment


“in substantial injury to the financial interests or property of another.”40 The Cheek Committee

Report also recommends requiring disclosure under Model Rule 1.6 to prevent clients from

committing crimes, including violation of the federal securities laws, in furtherance of which the

client has used the lawyer‟s services, and which are reasonably certain to result in substantial

financial injury.41 Some people have suggested that this debate should be appropriately resolved

within the ABA 42 , but given the legislative history of Model Rule 1.6 and the ABA‟s

demonstrated unwillingness to amend it, I would say that it is unreasonable to expect the SEC to

wait indefinitely for the ABA to adopt the appropriate amendments.

     Till now, all proposals for amending Model Rule 1.6 to carve out an exception to the client

confidentiality rule that would permit disclosure for preventing/rectifying client crime/fraud that

has, or is likely to cause substantial injury to the financial interests or property of another (and

thus also permit “noisy withdrawal” under the same circumstances), have been defeated time and

again. Notwithstanding the absence of such express provisions, a combined reading of Model

Rules 1.6, 1.2 (d), 1.16(a)(1) and 4.1 and comments thereto, clearly shows that if a lawyer

knows, or has reason to believe that her services or work product are being used, or are intended

to be used by a client to perpetuate a fraud: (i) he must withdraw from further representation of

the client as per Model Rule 1.16, else he would be assisting the client in committing

crime/fraud, in violation of Model Rule 1.2(d); and (ii) the lawyer in such a situation may, and

would probably be required to disaffirm documents prepared in the course of representation that

are being, or will be used in the furtherance of the crime/fraud, even though such a “noisy

withdrawal” has the collateral effect of inferentially revealing client confidences. In addition to

refusing to perform any further work for the client, disavowal of the work product may be

40
   Ibid at 31.
41
   Ibid at 32.
42
   Schwartz, B., and Freedman, J., “The SEC wants Noisier Lawyers”, 228 New York Law Journal 5 (2002).


                                                     17
                                                 Preliminary Draft of Note for Circulation and Comment


necessary to give effect to the lawyer‟s withdrawal from representation of the client, and to avoid

assisting the client fraud as mandated by Model Rule 1.2(d). This is also expressly permitted by

the Comments to 1.6, 1.2 (d) and 4.1, as elaborated above. Whenever “noisy withdrawal” is

permissible, the client cannot pre-empt the lawyer‟s right to do so by firing him, before he has

the opportunity to resign.

     To summarize the position under the ABA ethical rules, I am of the opinion that “noisy

withdrawal” would be mandatory if it is necessary to give full effect to a lawyer‟s withdrawal,

such that he is no longer seen as assisting/counseling the client in any way, in the commission of

a future or ongoing crime/fraud. This does not violate the confidentiality rule, which permits

disclosure to comply with other law. Thus, I believe that an SEC rule that mandates “noisy

withdrawal” under certain circumstances would not run afoul of the ABA ethical rules-definitely

not in the case of future crime/fraud, even in the context of preventing substantial injury to

financial interests. The issue becomes murkier when we talk of permitting “noisy withdrawal”

under the ABA Model Rules in case the fraud/crime has been completed, but for that also a case

can be made out under the “comply with other law” exception to the confidentiality rule.

         The same result was reached by the ABA Committee in its Formal Opinion 92-36643.

Under the facts presented to it44, the Committee interpreted Model Rule 1.6 to warrant “noisy

withdrawal” in a situation where the client had declared its intention to engage in further
43
   ABA Formal Op. 92-366, delivered on August 8, 1992.
44
   This opinion involved a lawyer who had been the principal outside corporate counsel for the client for the past
three years, negotiated and drafted loan documents pursuant to which the client obtained a $ 5 million unsecured
loan from a bank. Unknown to the lawyer, the company‟s CEO and treasurer had for the past three years been
committing fraud, and now confessed to the fraud to the lawyer, but no one else. They represented to the lawyer that
they had ceased committing the fraud but refused to issue corrected financial statements that would disclose the
prior fraud. They further told the lawyer that while he should remain their counsel publicly, they intended to hire a
new counsel but not inform the succeeding lawyer of the fraud, so that they could continue to use the false financial
statements to obtain new loans, or continue transactions with the defrauded bank, which would necessarily entail
reliance by the third party on the lawyer‟s opinion vouching for the principal assets reflected in the financial
statements, which he now knew to be false. As permitted by Model Rule 1.13, the lawyer informed the third member
of the client‟s board of directors, who was not involved in the fraud, of these facts, who took no action. The lawyer
thereafter wanted to withdraw, and disaffirm the tainted document(s), and this opinion is on whether he could.


                                                         18
                                                  Preliminary Draft of Note for Circulation and Comment


fraudulent conduct that would implicate the lawyer‟s past services, and the lawyer knew this.

Most importantly, the Committee also reached the conclusion that under certain circumstances

noisy withdrawal might be necessary to effectuate the lawyer‟s withdrawal from representation

of the client. It however felt that if client fraud had involved use of lawyer‟s services or work

product but the effects of that fraud are not ongoing, then the lawyer may withdraw but not

disavow the product.45



(2) Position under State High Courts‟ Ethical Rules

         Unlike the ABA, many states have suitably amended their counterpart to Model Rule 1.6

to incorporate the Kutak and Ethics 2000 Commissions‟ proposals. What this means is, that a

vast majority of states46 have ethical rules that permit, or require disclosure of client confidences

by the lawyer to the extent necessary to prevent, mitigate or rectify the consequences of a client

crime or fraud that is likely to result in substantial financial harm to another.47 At any rate, thirty-

seven states48 permit, and four49 require disclosure to prevent client from committing crime/fraud

under the state counterparts of Model Rule 1.6. In case of past crime/fraud related disclosure,

eighteen states either permit or require disclosure to rectify prior criminal fraud in which the

attorney‟s services were used, and forty require disclosure to rectify a prior fraud on a tribunal.50


45
   ABA Formal Op. 92-366, delivered on August 8, 1992.
46
   Comments of Morrison & Forrester and eight other law firms, Exhibit B (listing jurisdictions whose ethics rules
permit or require attorneys to disclose clients‟ past and/or ongoing fraud).
47
   See, Hazard, G.C., and Hodes, W.W., The Law of Lawyering, App.4, 1259-66 (1990).
48
   See, Comments of nine law firms including Morrison & Forrester. See also, Section 67, Cmt.f of the Restatement.
49
   See for example, New Jersey Rule of Professional Conduct 1.6(b) that requires an attorney to reveal confidential
“information relating to the representation of a client to the proper authorities….to the extent the lawyer reasonably
believes necessary to prevent the client: (1) from committing a criminal, illegal or fraudulent act that the lawyer
reasonably believes is likely to result in….substantial injury to the financial interest or property of another” or (2)
such an act that “the lawyer reasonably believes is likely to perpetrate a fraud upon a tribunal; Wisconsin Supreme
Court Rule 20:1.6 is similar; Florida Rule of Professional Conduct 4-1.6 requires a lawyer to reveal confidential
information “to the extent the lawyer reasonably believes necessary…..to prevent a client from committing a crime.”
50
   Morgan, T.D., and Rotunda, R.D., Model Code of Professional Responsibility, Model Rules of Professional
Conduct, and Other Selected Standards 146.


                                                         19
                                                   Preliminary Draft of Note for Circulation and Comment


Thus, unlike the ABA Model Rules, several states explicitly permit disclosure even in the

context of past crime/fraud with no ongoing effect. It can be argued though, that the SEC

requires (as opposed to merely permitting) “noisy withdrawal” in certain cases, unlike most

states, which have a permissive rule. However, l would argue as I did under the Model Rules

above, i.e., under certain circumstances this permissive language gives rise to a mandatory duty

to give complete effect to the lawyer‟s withdrawal in compliance with other ethical rules.



(3) Position under the SEC Final Rule- Section 205.3(d)(2)

         Section 205.3(d)(2) 51 in the SEC‟s Final Rule has significant bearing over this entire

issue because it permits, but does not require, an attorney appearing and practicing before the

SEC to disclose confidential information relating to the representation of an issuer, to the extent

the attorney reasonably believes necessary (1) to prevent the issuer from committing a material

violation 52 that the lawyer reasonably believes is likely to result in substantial injury to the

financial interest or property of the issuer or investors; (2) to prevent the issuer from perpetrating

a fraud upon the SEC; or (3) to rectify the consequences of an issuer‟s material violations that

caused or may cause substantial injury to the issuer‟s financial interest or property in furtherance

of which the attorney‟s services were used.



51
   See, Final Rule, supra n.9, at 205.3(d)(2) that reads:
“(2) An attorney appearing and practicing before the Commission in the representation of an issuer may reveal to the
Commission, without the issuer‟s consent, confidential information related to the representation to the extent the
attorney reasonably believes necessary:
(i) To prevent the issuer from committing a material violation that is likely to cause substantial injury to the financial
interest or property of the issuer or investors;
(ii) To prevent the issuer, in a Commission investigation or administrative proceeding from committing
perjury……or committing any act proscribed in 18 U.S.C. 1001 that is likely to perpetrate a fraud upon the
Commission; or
(iii) To rectify the consequences of a material violation by the issuer that caused, or may cause, substantial injury to
the financial interest or property of the issuer or investors in furtherance of which the attorney‟s services were used.”
52
   The Proposed Rule had used the phrase „illegal act‟ instead of „material violation‟, and „perjury‟, which was so
changed in the final rule to make its application narrower and more specific.


                                                           20
                                                 Preliminary Draft of Note for Circulation and Comment


        From our discussion above, we know that this Section corresponds substantially to the

Model Rule 1.6 counterpart in several states53, as also the Kutak and Ethics 2000 Commissions‟

proposals. This Section embodies an exception, albeit permissive, to the principle of

confidentiality which I would argue, is substantively not very dissimilar to what a permissive

“noisy withdrawal” rule seeks to achieve. Like I said earlier, in essence, the doctrinal

underpinnings of both are the same-a kind of exception to the confidentiality rule, they just play

out differently-one permitting disclosure explicitly, and the other implicitly through notification

to outsiders (here the SEC), of the withdrawal and disaffirmance of relevant documents/opinions.

        In response to the rule when it was initially proposed, there were comments mainly to the

effect that such a rule would:(i) undermine the client-lawyer relationship of trust and confidence,

and impede lawyers‟ ability to effectively counsel clients 54; (ii) conflict with ethical rules in

those states which bar disclosure of such confidential information, particularly that relating to

past material violations55. Commenters suggested that the rule be altered to limit disclosure to

cases where it was likely to have a material impact on the issuer‟s securities,56 or was related to

ongoing/impending client crime/fraud57, or there was risk of death or bodily harm58, or to defer

adopting this rule until further discussion, or till state supreme courts amended their rule59.



53
   See discussion above.
54
   See, Comments of Joseph T. McLaughlin, at 2; Comments of the Los Angeles County Bar Association, at 2.
55
   See, Comments of Eleven Persons or Law Firms, at 8-9; Comments of the American Bar Association, at 33;
Comments of 77 law firms, at 2; Comments of Latham & Watkins, at 5-6; Comments of Theodore Sonde, at 2;
Comments of Schiff Hardin & Waite, at 7-8; Comments of Sheldon M. Jaffe, at 7-9; Comments of Emerson
Electric, at 2; Comments of the Federal Bar Council, at 9-10 & n.9; Comments of JP Morgan & Chase, at 11 & n.3
(citing treatise for proposition that only six states permit disclosure to rectify past fraud).
56
   See, Comments of the Los Angeles County Bar Association, at 2; Comments of Edward C. Brewer, III at 8; See
also, Comments of the Association of the Bar of the City of New York, at 5 (supporting disclosure of materials facts
to avoid assisting a criminal or fraudulent act by the client, or to correct prior representations made by the lawyer
and believed by the lawyer still to be relied upon by a third person where the lawyer has discovered that the opinion
or representation was based on materially inaccurate information or is being used to further a crime or fraud).
57
   See, Comments of Theodore Sonde, at 2.
58
   See, Comments of the American College of Trial Lawyers, at 6.
59
   See, Comments of Conference of Chief Justices, at 4.


                                                        21
                                                   Preliminary Draft of Note for Circulation and Comment


         Having seen the conceptual similarity between this Section and “noisy withdrawal”, it

should come as no surprise that these are the exact same arguments raised against the latter.60 We

have previously addressed the second issue concerning comparison with the existing ethical rules

regulating attorney conduct, and will address the first issue in a separate (third) section of this

paper. Similarly, the points in favor of this Section hold equally good in the context of “noisy

withdrawal”-some feel it gives teeth to the ethical rules61, others opine that the confidentiality

interests of a corporate client are not infringed by lawyer disclosure under the circumstances

required by the Section62, or that many states already provide for similar disclosures63.

         Despite the arguments against this rule, the SEC chose to adopt it, permitting thereby

explicit disclosure of confidential information. It should therefore, in my opinion, be a no-brainer

to allow permissive “noisy withdrawal” under the same circumstances, at the minimum. Whether

this reporting-out can also be mandatory is another issue, which we will deal with shortly.

         To summarize this section, the concept of “noisy withdrawal” is not an alien one to the

lawyers, and I have tried to establish that contrary to allegations, it is far from inconsistent with

the ethical rules, though concededly it is not identical to that proposed by the SEC. Even though

it is not explicitly provided for in any of the Model Rules, it is contemplated in varying degrees,

in several of their Comments, in most states‟ ethical rules, and has even been read into the Model

Rules by the ABA Committee in its Opinion 92-366. It thus seems strange to me, that the ABA

having itself evolved this ingenuous concept of “noisy withdrawal” is opposing it so


60
   Others comments included that if an attorney practicing before the SEC was subject to this permissive disclosure
provision, he would have a corollary duty to explain to the client at the outset this limitation on the “normal” duty of
confidentiality. See, Comments of the Federal Bar Council, at 14.
61
   See, for example, Comments of Manning G. Warren III, at 1; Comments of Douglas A. Schafer, Comments of
Elaine J. Mittleman at 2; Comments of Thomas Ross et al., at 6-8.
62
   The Section addresses a situation where the lawyer reasonably believes that agents of an issuer are engaged in
serious illegality that the issuer has failed to remedy; in that situation, an instruction by an officer or even the board
of the issuer to remain silent cannot be regarded as authorized. See, Comments of William H. Simon, at 3.
63
   See earlier discussion.


                                                           22
                                                  Preliminary Draft of Note for Circulation and Comment


vociferously. In addition, the SEC has already adopted Section 205.3(d)(2) in its Final Rules,

which in my opinion is not so different from adopting a “noisy withdrawal” rule.



II. Whether the proposed standard and manner of effectuating “noisy withdrawal” is

appropriate, or requires modification

a) “Triggering” Standard-Objective or Subjective?

The “noisy withdrawal” provisions in Section 205.3 (d) 64 of the “noisy withdrawal”

proposal are triggered when the „reporting‟ attorney:

         a. has received either no response (within a reasonable time), or an inappropriate

             response to reported evidence of a material violation; and

         b. reasonably believes that a material violation has occurred, is ongoing, or is

             about to occur, as the case may be; and is accordingly likely to have resulted

             in, or to result in, substantial injury to the financial interest or property of the

             issuer or of investors. 65

         If a “noisy withdrawal” rule is adopted, it becomes crucial to determine the appropriate

triggering standard for this rule, and whether the proposed standard is appropriate or not.


64
  See, Proposing Release, supra n.10, at Section 205.3(d)(1) that concerns situations in which the reported material
violation is ongoing, or about to occur. It provides:
“(1) Where an attorney who has reported evidence of a material violation under Section 3(b) of this section rather
than Section 3(c) of this section does not receive an appropriate response, or has not received a response in a
reasonable time, to his or her report, and the attorney reasonably believes that a material violation is ongoing or is
about to occur and is likely to result in substantial injury to the financial interest or property of the issuer or of
investors……”
See, Proposing Release, supra n.10, at Section 205.3(d)(2) that concerns situations in which the reported material
violation has already occurred and is not ongoing. It provides:
“(2) Where an attorney who has reported evidence of a material violation under Section (b) rather than Section (c)
of this section does not receive an appropriate response, or has not received a response in a reasonable time, to his
or her report under Section (b) of this section, and the attorney reasonably believes that a material violation has
occurred and is likely to have resulted in substantial injury to the financial interest or property of the issuer or of
investors but is not ongoing….”




                                                         23
                                                 Preliminary Draft of Note for Circulation and Comment


(i)   The current definition of “reasonably believes” incorporates a largely subjective

standard that needs to be replaced by an essentially objective standard

        Initially, the Proposed Rule defined “reasonably believes” to mean, “that an attorney,

acting reasonably, would believe the matter in question”66. This was a modification of the Model

Rules‟ definition of “reasonably believes”, i.e., „the lawyer believes the matter in question and

the circumstances are such that the belief is reasonable‟67. The SEC stated that it intended this

phrase to denote a purely „objective‟ standard-devoid of any subjective element, in

contradistinction to its usage in the Model Rules, but it was open to a different definition of this

phrase.68 In their comments to the SEC, few people supported this objective standard69, most

opposing it as being too onerous and problematic. Several asked the SEC to use the Model

Rules‟ definition of “reasonably believes”70 that incorporates a subjective element, while others

urged it to adopt a higher triggering standard that requires the lawyer‟s “actual knowledge” 71 of

the fact in question. It was, and continues to be argued in support of this “actual knowledge”

standard (also defined in the Model Rules72), that it would solve the problem of imposing a

“reasonable” securities law expert standard on all lawyers (even those who were not expert in




66
   See, Proposed Rule, supra n.7, at Section 205.2 (l).
67
   See, Model Rule 1.0(i).
68
   The SEC even posed the question whether the definition of “reasonable belief” by New Jersey‟s Supreme Court,
for example, might be clearer: “Reasonable belief for purposes of Rule of Professional Conduct 1.6 is the belief or
conclusion of a reasonable lawyer that is based upon information that has some foundation in fact and constitutes
prima facie evidence of the matters referred to in Sections (b) or (c)”?
69
   See, Comments of Susan P. Koniak et al., at 12-13.
70
   See, Comments of Palmer & Dodge, Attachment at 2. Another group of commenters also suggested that SEC use
language similar to the Model Rule definition, namely the conclusion of “a prudent and competent attorney, acting
reasonably under the same circumstances” that a response was appropriate. See, Comments of Susan P. Koniak et al.,
at 12-13, 15; See also, Comments of the SIA/TBMA, at 18 (urging that the SEC modify this Section to protect an
attorney whose judgment that an issuer‟s response was appropriate was “reasonable under the circumstances”).
71
   See, Comments of Covington & Burling, at 3; See also, In the Matter of William R. Carter, Charles J. Johnson Jr.,
1981 SEC LEXIS 1940, 47 SEC 471 at 512- SEC used an actual knowledge standard to trigger a duty to report.
72
   See, Model Rule 1.0 (k).


                                                        24
                                                 Preliminary Draft of Note for Circulation and Comment


securities laws).73 After taking into consideration these comments, the SEC in the Final Rule

abandoned its earlier definition in favor of the Model Rule definition of “reasonably believes”

that is modified only to the extent of emphasizing that the range of possible reasonable beliefs

regarding a matter may be broad, limited only by beliefs that are unreasonable. The changed

definition of “reasonably believes” now seen in the Final Rule is “that an attorney believes the

matter in question and that the circumstances are such that the belief is not unreasonable.”74

         The SEC has emphasized that this definition is no longer used in conjunction with the

phrase, “evidence of a material violation,”- that is used in the SEC rules to denote a completely

objective standard-thus dispensing with the earlier proposal that intended to completely exclude

the subjective element from “reasonable belief”. It is necessary to see the two elements of this

new definition in conjunction-the first part- “attorney believes the matter” seems to connote a

largely subjective standard, qualified only by the second part-“circumstances are such that the

belief is not unreasonable”, which seems to bring in the objective element. To me, it looks like

this definition could possibly be interpreted as saying that, for the attorney to “noisily withdraw”,

he needs to subjectively believe the matter in question, and only the propriety of the attorney‟s

“noisily withdrawal” is going to be judged against some sort of objective standard. This is

different from just introducing a subjective element into a largely objective standard-in fact quite

the converse-the triggering test here looks quite similar to the “actual knowledge” test, albeit

with a lower threshold of subjective element („belief‟ as opposed to „knowledge‟), and differing

also insofar as it incorporates the “objective” element, but seemingly only as a defense. This is



73
   See, Comments of the American Corporate Counsel Association, at 10. This concern was also expressed by those
who asserted that foreign lawyers, in particular, would not have sufficient practical knowledge of United States laws
to determine what constitutes an appropriate response. See, for example., Comments of Nagashima Ohno &
Tsunematsu, at 7; See also, Comments of the SIA/TBMA, at 13 (reporting attorney‟s judgment should be evaluated
in light of that attorney‟s training, experience and position).
74
   See, Final Rule, supra n.9, at Section 205.2 (m).


                                                         25
                                                 Preliminary Draft of Note for Circulation and Comment


one way of interpreting this definition, but it also quite likely that this was not the reading SEC

intended to give “reasonably believes”. It might instead have actually meant to impose an

objective standard that takes into consideration the lawyer‟s context. To illustrate, if a reasonable

lawyer in the position of the lawyer in question (say, “X”) with X‟s expertise and experience,

would think there is a material violation occurring or about to occur, such as would warrant

“noisy withdrawal”, but X does not subjectively believe so, then his belief would be regarded as

unreasonable. I would call this a sensible approach, but if it is indeed the intended one, then it

would be better to say it in a less convoluted and unambiguous manner, as explained below (b).

        Before we turn to that, I would like to present one more in favor of adopting an

essentially objective threshold. Admittedly, „in-house reporting‟ is different from „reporting out‟

to the SEC, and I understand the argument made about how the gravity of the latter step merits

application of a different, slightly higher triggering standard than the purely “objective” standard

incorporated in “evidence of material violation” that triggers the attorney‟s up-the ladder

reporting.75 However, having a subjective standard would be largely self-defeating because it

gives the lawyers a clear escape route-they can easily say that they did not “believe” the matter

in question, thus their “noisy withdrawal” duties were never triggered. Furthermore, an “actual

knowledge” standard, or any other that incorporates a subjective element, would tend to pose

cumbersome evidentiary hurdles.

(ii) Add a rider to the triggering standard which clarifies that lawyer‟s context will be

taken into consideration, but dispense with existing rider which was added to emphasize

that all conduct/beliefs are valid except if unreasonable

75
   In the comments to the Proposed Rules, several people argued that even the reporting-up-the-ladder obligation
within the client should be triggered only upon “significant,” “substantial” or “clear and convincing” evidence, or a
similar heightened standard. See, for example, Comments of the Securities Industry Association (SIA), at 10.
However, in the Final Rules, the SEC has clarified that such reporting duty continues to be governed by an objective
standard, as incorporated in the definition of “evidence of material violation”.


                                                        26
                                                        Preliminary Draft of Note for Circulation and Comment


           If the purpose of altering the original definition found in the Proposed Rule was only to

overcome the problem of imposing a standard “securities law expert” standard on all lawyers,

then the SEC could, and still can achieve the same result by qualifying the “reasonable person”

standard in the definition, as being that of a reasonable person of the experience, qualifications

and expertise of the lawyer in question. When supplemented with this rider, the original SEC

triggering standard seems more appropriate.

           Moreover, it has been seen that the SEC altered the Model Rules definition of

“reasonably believes” to emphasize that the range of possible reasonable beliefs regarding a

matter may be broad, limited only by beliefs that are unreasonable. To similarly emphasize that a

range of conduct may be reasonable, the SEC adopted a modified version of the Model Rule 76

definition of “reasonable” or “reasonably”, which denotes conduct that would not be

unreasonable for a prudent and competent attorney modified only.77 Thus, given the above rider

which takes into consideration the varying responses of lawyers depending upon their varied

background, it remains no longer necessary for the SEC to separately emphasize that a wide

spectrum of reasonable beliefs and conduct is conceivable under these rules, and it can thus

adopt the unaltered Model Rule definitions. Even if these differences stem from things other than

differences in backgrounds, it should not be a problem. It is quite easy to contemplate business

situations where there exist a wide array of entirely plausible responses or behavior that could all

meet the criteria of being reasonable. The possibility of having such a myriad of diverse, yet

reasonable conduct and beliefs in the context of corporate management is well encoded in the

judicially evolved concept of “business judgment rule”. Under this rule, the courts refuse to

second-guess the decisions of the Board of directors, treating them with deference as long as they


76
     See, Model Rule 1.0(h).
77
     See, Final Rule, supra n.9, at Section 205.2(l).


                                                             27
                                             Preliminary Draft of Note for Circulation and Comment


were disinterested, exercised due care and were acting in good faith. While the business

judgment rule in itself is not applicable to lawyers and their decisions of “noisy withdrawal”, I

use it simply to illustrate that it is well recognized by all (including, surely a body as specialized

as the SEC) that business decisions cannot be easily straight jacketed into legal or illegal, instead

often involve close calls and grey areas where more than one option could reasonably be taken.

There is thus no need in my opinion, for the SEC to alter the Model Rules by adopting additional

language to stress this undisputed point of “reasonable” incorporating a multitude of courses of

conduct/beliefs-besides being a mere surplusage, it tends to confuse matters. If the SEC wants

however, it can state this in the explanatory notes, or articulate it in the definition separately as a

clarification of the fact that there need not be a single reasonable conduct, or belief, in the

context of business decisions, but not do so by using “unreasonable” as a reference point in the

way it does now for reasons explained in point (a).

(iii) Employ the “reasonably should know” phraseology as defined in Model Rules but

qualified by rider explained above

            I have argued above that the first SEC triggering standard, defined in the first Proposed

Rules, is the appropriate threshold to employ when qualified by the stated rider. That standard,

though couched in the “reasonably believes” phraseology, resembles more closely the

“reasonably should know” definition of the Model Rules78, that refers to an objective standard,

namely one where „a lawyer of reasonable prudence and competence would ascertain the matter

in question‟. One possible explanation for the SEC choosing to employ the “reasonably believes”

language might lie in the usage of the different standards in the relevant Model Rules. For

example, Model Rule 1.2(d) provides that the client shall not counsel/assist a client in conduct

that the lawyer knows is criminal or fraudulent. Similarly, Model Rule 1.13(b) provides that if a
78
     See, Model Rule 1.0(j).


                                                   28
                                                Preliminary Draft of Note for Circulation and Comment


lawyer knows that an officer, employee etc of a client organization has committed a legal

violation. Model Rule 4.1 also stipulates that a lawyer shall not knowingly fail to disclose a

material fact under circumstances provided therein. These three rules thus adopt the “actual

knowledge” standard. In contrast, Model Rule 1.6 allows the lawyer to reveal confidential

information to the extent the lawyer reasonably believes necessary to prevent reasonably certain

death or substantial bodily harm. It thus follows that the Model Rules when dealing with matters

of attorney withdrawal and disclosure of confidential information, do not anywhere use a

standard completely devoid of any subjective element, like the one first proposed by the SEC.

Hence, the SEC might have felt compelled to adopt the “reasonably believes” language to make

it more acceptable to the lawyers. It does seem appropriate however, that the phrase which is

eventually used to connote the triggering standard, have the same meaning under both the SEC

and Model Rules, so as have a uniform understanding and application of the phrase. This could

easily be achieved by resorting to the “reasonably should know” definition, qualified by the rider

that we discussed. I think this standard would effectively tackle the problem of attorneys

attaching different significance to the same evidence due to difference in training, experience,

position and seniority, both in relation to securities work generally, and the client in question.79

In sum, this standard, if defined as suggested, will be more effective and pragmatic in terms of

administration and enforcement of the Rules.

        Another point to be factored into ascertaining the appropriate triggering standard is what

the consequences are, for a lawyer who mistakenly, albeit in good faith, “noisily withdraws”. I

would say none, in keeping with the scheme of the Final Rules that creates a „safe harbor‟

provision for attorneys acting in good faith in the event that they violate inconsistent standards


79
   See, Comments of the Business Law Section of the New York State Bar Association on a critique of the objective
standard, though in a different context.


                                                       29
                                                   Preliminary Draft of Note for Circulation and Comment


imposed by a state or other United States jurisdiction.80 That apart, in reality it is highly unlikely

for the SEC in hindsight to determine that a lawyer‟s “noisy withdrawal” was unwarranted, and

the reverse situation is more likely.

         The next section of the paper deals with a number of sub-issues-all relating to the

dynamics of actually “noisily withdrawing”, and it draws substantially upon Part I of the paper.



b)Whether it is necessary to draw a distinction between material violations that are ongoing or

impending and those that are past and have no continuing effect, and the related questions of:

c) Whether such a rule should be mandatory or merely permissive

         As already seen, the proposed rule distinguishes between material violations that are

ongoing or impending and those that are past and have no continuing effect, and makes “noisy

withdrawal” mandatory for the former and permissive for the latter. Thus, the questions posed

above are inextricably intertwined and need to be tackled together.

         First, we need to reiterate that the legislative history of Model Rule 1.6 clearly establishes

that the ABA has always been acutely conscious of the distinction between a crime/fraud that has

a subsisting effect and that does not, and in relation to the latter, it has remained completely

opposed to adopting the “rectifiable consequences” proposal. All other things being equal, “noisy

withdrawal” for a material violation (or a “crime/fraud” as the case may be), that is: (i) ongoing

or impending would be permissive in the least, and sometimes even mandatory under the Model

Rules but always mandatory under the proposed SEC rule; and (ii) past with no continuing effect




80
  Interestingly, in response to concerns raised by several commenters, new Section 205.6(c) has been introduced in
the Final Rule, which provides that attorneys, who comply in good faith with this part, shall not be subject to
discipline for violations of inconsistent standards imposed by a state or other United States jurisdiction. See, Section
205.6 of the Final Rule, supra n.9.


                                                          30
                                                   Preliminary Draft of Note for Circulation and Comment


would be permissive under the SEC rule but arguably not permitted under the Model Rules81.

Some argued that the SEC should make the “noisy withdrawal” rule permissive in both cases

because this would be in accordance with the ethical rules. 82 However, we have seen that in the

context of ongoing/future material violations, even the Model Rules may require, and not merely

permit “noisy withdrawal” in order to give full effect to the attorney‟s withdrawal in compliance

with the ethical rules. The same reading can be given to the state ethical rules, which also in most

cases permit disclosure in this context, in fact much more explicitly than the Model Rules.

         It is interesting to note that the SEC, in providing for explicit disclosures adopts a

“permissive” approach for all types of material violations, and in so doing, seems to surprisingly

abandon its differentiated approach seen earlier in connection with “noisy withdrawal”. This can

probably be explained by the qualitative difference between expressly revealing confidential

information and an implicit disclosure inherent in “noisy withdrawal”-the former meriting a

more restrained “permissive” approach. Thus, this should not be looked upon as an argument in

favor of making “noisy withdrawal” permissive in all cases, also.

         The other difference that we saw in the respective approaches of the ABA and the SEC,

is that the ABA in its Model Rules and interpretation thereof seems to turn a blind eye to past

client crime/fraud and creates no explicit exception to the confidentiality rule in relation thereto,

whereas the SEC allows for “noisy withdrawal” even in case of past material violations.

However, the SEC can find support in “comply with other law” exception to the confidentiality

rule, as well as in the express exception to the confidentiality rule that exists in many states for

rectifying past client crime/fraud. Further, if the SEC Final Rule will continue to permit express

disclosures of confidential information for rectifying the consequences of past material

81
  See, the earlier discussion on how it may be permissive even in this context under the Model Rules.
82
  Comment of the American Corporate Counsel Association, at 7 (noting that permissive disclosure standards are
“more in line with a majority of state professional rules of conduct”). See, generally discussion on this issue earlier.


                                                          31
                                                 Preliminary Draft of Note for Circulation and Comment


violations, like it does now, then it makes little sense in not extending that logic to “noisy

withdrawal”. More importantly, if the purpose of Section 307, and of the SEC rules there under

is the protection of investors, and restoring investor confidence, then the basic principles of

statutory interpretation, namely looking at statutory purpose and the “mischief rule” would seem

to dictate the conclusion that “noisy withdrawal” should equally be permitted for past material

violations. In most cases, however, even if the material violation in question has already

occurred, it is likely to have effects that are still ongoing, such that it would rightfully merit the

“preventing future harm” analysis, in which case the right of “noisy withdrawal” is clearly

undisputed. This is particularly true of material violations relating to securities laws where the

continuous disclosure and reporting requirements mandated of an issuer make it highly probable

that even a past material violation could be arguably seen as having a continuing/impending

effect, especially when there is no clear standard on when a material violation will be regarded as

“ongoing”. While arguing that the SEC should retain this permissive/mandatory distinction for

past/ongoing material violations respectively, I believe that for the distinction to be meaningful,

SEC should clarify exactly when a material violation will be regarded as ongoing, including

related proof requirements. 83



d) Whether the rule should be limited to circumstances narrower than “material violations”

         Another major point of contention is that the SEC Rule is not limited to a crime/fraud,

which is the favored phraseology in most state ethical rules, but instead uses the term “material

violation”, which term encompasses securities law violation, breach of fiduciary duty, or similar



83
  See, Comments of nine law firms (including Morrison & Forrester), at 11 stating that “the Proposing Release and
the Proposed Rule leave it unclear as to when a material violation of securities law or breach of fiduciary duty will
be deemed ongoing so as to trigger mandatory withdrawal and disaffirmance obligations under Section 205.3(d).”


                                                         32
                                                   Preliminary Draft of Note for Circulation and Comment


violation84, and arguably goes well beyond the scope of “crime/fraud”. In other words, the state

ethics rules typically do not permit noisy withdrawal under these broader set of circumstances,

but require some underlying crime or fraud85, and most even require that this crime/ fraud have

implicated the lawyer‟s services.86 Thus follows a two pronged attack against this proposal-one,

that the rule should only be triggered when a lawyer‟s services have been implicated, and two, it

should be confined to a material violation that rises to the level of crime/fraud. To elaborate, it is

argued that because a securities violation, breach of fiduciary duty, or similar violation could be

the result of acts or omissions that may not amount to a crime/fraud, SEC would impose

requirements potentially at odds with these state bar rules.87 However, the SEC can again find

refuge in the recent amendment to Model Rule 1.6 that expressly allows confidential information

to be disclosed in order „to comply with other law‟-a phrase that is unquestionably even broader

than „material violation‟. In my opinion, notwithstanding the SEC‟s authority to do so, one might

question the wisdom of applying “noisy withdrawal” duties to the entire gamut of things

currently covered by „material violation‟. Thus, the SEC should consider possibly limiting its

definition in the context of “noisy withdrawal” to material violations that amount to crime/fraud,

and implicate the lawyer‟s services, irrespective of whether it retains the broader definition for

the purposes of “up-the-ladder” reporting. The definition of “fraud” for the purposes of these

Rules should track the Model Rules‟ definition of “fraud” which “denotes conduct that is

fraudulent under the substantive or procedural law of the applicable jurisdiction and has a

84
   See, definition of “material violation” in Section 205.2(i), Final Rule, supra n.9, that provides: “(i) Material
violation means a material violation of an applicable United States federal or state securities law, a material breach
of fiduciary duty arising under United States federal or state law, or a similar material violation of any United States
federal or state law.”
85
   See, Comments of Latham & Watkins that list eight states which further limit noisy withdrawal to circumstances
in which the client acts with criminal intent-Illinois, Iowa, Maine, Nebraska, Ohio, Oregon, Tennessee, and
Washington. Some states like Louisiana are similar to the position in the Model Rule.
86
   See, Comments of Latham & Watkins that cites- Veasey, E.N., “Ethics 2000: Thoughts and Comments on Key
Issues of Professional Responsibility in the Twenty-First Century”, 5 Del. L. Rev. 1, at 10-11 (2002).
87
   See, Comments of Latham & Watkins, at 5.


                                                          33
                                                Preliminary Draft of Note for Circulation and Comment


purpose to deceive”88. This being a federal regulation would include securities fraud under the

federal securities laws89, and other conduct considered fraudulent under federal law.



e) Whether the rule should distinguish between retained attorneys and employed attorneys

        It is argued that “noisy withdrawal” for employed attorneys should only be permissive,

and not mandatory even for ongoing material violations. I would however argue that if different

standards were made applicable to retained and employed attorneys for purposes of this rule, it

would render the rule meaningless. To illustrate, if less stringent rules were applied for one

compared to the other, issuers would simply use that as a loophole and “employ” attorneys, who

have the less onerous “noisy withdrawal” and related responsibilities. Moreover, an in-house

attorney, because of his employment with the client, will often be in a far better position than a

retained attorney, to detect material violations and to take suitable action. The only difference

that exists now, is that the employed attorney is not required to resign in cases where the retained

attorney is,90 but that seems a sensible difference, given the fact that the employed attorney is

working solely for the issuer, and not multiple clients like a retained attorney, and mandating

him to resign would probably run afoul of his constitutional rights. However, I recognize that

this very reason-that employed attorney serves only the issuer-would make his position

extremely precarious. The attorney is ostensibly protected by the whistleblower protections, but

his “noisy withdrawal” would make it practically impossible for him to continue with the client

thereafter, resulting probably in a de facto resignation. Thus, while effective enforcement of

these rules dictates that we give no additional concessions to the employed attorney, the severe

fallout of the rules on an employed attorney necessitate a serious reconsideration of the matter. It

88
   See, Model Rule 1.0 (d).
89
   See, for example Section 10 (b), Securities Exchange Act of 1934 and the SEC Rule 10b-5 issued under that.
90
   See, Proposing Release, supra n. 10, at Section 205.3 (d).


                                                       34
                                                  Preliminary Draft of Note for Circulation and Comment


is a tough balancing act to perform between the interests of the employed attorney and of the

investing public. However, I would argue that the somewhat harsh consequences for the

employed attorney can be mitigated to a large extent by effectively using the QLCC-that

provides an attorney retained or employed by an issuer, an alternative reporting procedure. has

An attorney who reports evidence of a material violation to such a QLCC would have satisfied

his reporting obligation and not be required to assess the issuer‟s response to the reported

evidence of a material violation. 91 Though open to both retained and employed attorneys, I

would argue that the latter are better positioned in the organization to take advantage of this

alternative route. This is because the in house attorney, compared to his retained counterpart has

a more substantial and direct involvement in the issuer‟s overall internal corporate governance

structure. Even though the QLCC is to be established by the issuer‟s Board of Directors, the in

house counsel would play a major role in the design and working of an internal legal compliance

systems like the QLCC. Thus, the employed attorney can, and should try to use his position to

ensure that the employer organization establishes a QLCC 92 , and he could then fulfill his

obligations under the SEC Rules by reporting to the QLCC, and reporting-out, if any, would then

be the responsibility of the QLCC. The retained attorney in contrast, while having the same

option, will not generally have the same degree of involvement or say in, if and how the client

should set up the QLCC, though once set up, it can be used to the same extent by them. Thus,

while the practical effects of these rules could be seen as being more onerous for employed

attorneys, I would argue that there is also an offsetting, inbuilt leverage point (in the provision of

QLCCs) that can be used more favorably by them.



91
  See, Final Rule, supra n. 9, at Section 205.3(c).
92
  The issuer does not have to establish a separate corporate structure for the QLCC, and its audit or other committee
can serve as a QLCC, provided it meets the requisite criteria under the rules, and consents to act as QLCC.


                                                         35
                                                    Preliminary Draft of Note for Circulation and Comment


         A problem specific to retained attorneys arises when such attorney is from a large or

multinational law firm. The conflict of interest rules would usually require the withdrawing

attorney‟s knowledge to be imputed to the entire firm, but it is recommended that such

imputation be limited to only the representation that concerns the lawyer‟s “noisy withdrawal”,

or related representations that involve the lawyer‟s disaffirmed opinion, or documents. To impute

the conflict to unrelated representations of the issuer, by that law firm would only be disruptive.

         On a balance of arguments, I would not favor introducing a distinction between retained

and employed attorney in the “noisy withdrawal” provisions.



f) Whether the successor attorney should be notified that the previous attorney withdrew on

“professional considerations”

         Under the existing proposal, the successor counsel is to be notified that the previous

counsel withdrew for “professional considerations”, and those opposing this provision argue that

it would make it practically impossible for the client to find a lawyer to replace the withdrawing

counsel. Further, this requirement could create a strong coercive effect vis-à-vis the client

because a lawyer could use this as a threat to force a client to acquiesce in his advice, which

advice might be wrong or highly debatable.93 On the other hand, this proposal is supported by

some on the ground that it provides additional incentives for issuer compliance without raising

other, more problematic issues like confidentiality.94 Most importantly, this provision comes into

play only when a withdrawing attorney has already reported-out to the SEC, and to thereafter

question the propriety of notifying a successive lawyer, who would be “within the issuer”

structure, seems almost superfluous.


93
     See, Comments of seventy-seven law firms.
94
     See, Comments of Debevoise & Plimpton, at 5.


                                                         36
                                                  Preliminary Draft of Note for Circulation and Comment




     IV. Whether a “noisy withdrawal” requirement would be self-defeating in purpose

        It is important to remember that the mandate of Section 307 and the proposed SEC rule

there under is to act “in the public interest and for the protection of investors.” Hence, the utility

of the “noisy withdrawal” rule needs to be analyzed against the backdrop of such policy interests.

        The core principles of attorney-client privilege and a lawyer‟s obligation to preserve client

confidentiality, subject only to limited exceptions, have developed as a bedrock policy of our

adversarial legal system. This paper is not meant to question the moral or philosophical

foundations of these norms, or ethics in general. It assumes the underlying rationale of these

concepts, namely that for clients to have access to effective legal representation and obtain the

best legal advice, full and frank communications between attorney-client needs to be facilitated,

without the chilling effect of possible disclosure to third parties. An incidental but important

benefit that follows, is that it enhances the ability of lawyers to counsel legal compliance.

        It is being argued that the “noisy withdrawal” proposal would, tantamount to interfering

with this relationship of trust and confidence between clients and attorneys, and thereby

undermine the ability of lawyers to advise and persuade their clients to comply with legal

requirements, resulting in more (and not less) harm to the investing public.The commenters also

point out that a noisy withdrawal obligation has previously been imposed on accountants 95 and

not on attorneys, and that even the Supreme Court96 has acknowledged that a difference exists

between the role(s) each plays with respect to issuers.



95
   See, Comments of Debevoise & Plimpton that cite Sec. Exch. Act of 1934 § 10A(b)(3) (requiring an accounting
firm that has found evidence of an illegal act by the issuer, with respect to which act appropriate remedial action is
not taken by the issuer, to report the illegal act to the SEC or to resign the engagement and then make such report).
96
   See, Comments of Debevoise & Plimpton, where it cites Couch v. United States, 409 U.S. 322, 335 (1973) and
points out that in denying the petitioner‟s assertion of accountant-client privilege, the Court had noted that an
accountant serves a “public watchdog function,” and “owes ultimate allegiance to the corporation‟s creditors and


                                                         37
                                                  Preliminary Draft of Note for Circulation and Comment


      As already discussed, providing notice to the SEC that the attorney has withdrawn “for

professional considerations”, and disaffirming specific documents amounts to an implicit

disclosure of confidential information. The related fear is that issuers might not even consult

qualified attorneys regarding close issues of whether or not to disclose information in a filing

because the attorney might engage in a noisy withdrawal 97 even though all that may have been

involved was a matter of business judgment as to the materiality of certain information. It is thus

alleged that clients will hesitate to confide fully or candidly in their counsel, and instead proceed

either without any, or with ineffective legal advice. The SEC explicitly states in the Proposing

Release that it does not “want the rule to discourage issuers from seeking and obtaining effective

and creative legal advice”. However, not everyone agrees with the SEC arguing that the

proposed rules will discourage corporate clients from raising disclosure or legality questions with

their attorneys for fear that if they disagree with lawyer‟s resolution of the question, the lawyer

would “noisily withdraw”, thus inviting SEC suspicion. However, it is difficult to imagine how

the clients can conduct their business and accomplish their goals, without the counsel of a

lawyer, especially in an area as specialized as securities laws. The “noisy withdrawal” proposal

in stating that notifying the SEC “does not breach the attorney-client privilege”98, purports to

provide blanket protection from waiver of privilege with regard to information revealed in the

course of a noisy withdrawal.99 The SEC declares this to be “largely settled law”, based on the

fact that nearly forty states have adopted the Kutak Commission proposal, which states that noisy

withdrawal, “to the extent an attorney reasonably believes necessary to prevent a criminal or

fraudulent act or to rectify the consequences of a criminal or fraudulent act in which the


stockholders, as well as to the investing public,” while an attorney serves as a “confidential adviser and advocate, a
loyal representative whose duty it is to present the client‟s case in the most favorable possible light.”
97
   See, Comments of Debevoise & Plimpton, at 4-5.
98
   See, Proposing Release, supra n.10, at Section 205.3(d)(3).
99
   See, Comments of Latham & Watkins, at 5.


                                                         38
                                                 Preliminary Draft of Note for Circulation and Comment


attorney‟s services were used,” does not constitute a “disclosure” for privilege purposes. 100 This

is an entirely separate issue, of whether “noisy withdrawal” constitutes a waiver of the attorney-

client privilege-selective or otherwise, and if so, whether such waiver is valid against the world

at large. Without going into these questions, which are outside the scope of this paper, suffice it

be to say, that it is illusory to say that “noisy withdrawal” does not constitute any “disclosure”-it

clearly does.101

        Several people are therefore vociferously opposing this rule, on the grounds, that it would

chill the norm of zealous advocacy, and be counterproductive. While not entirely misplaced,

these concerns could be allayed by the lawyers adopting a sensible and pragmatic approach in

adhering to these rules. Lawyers need to be conscious of the long tradition of judicial deference

given to decisions of organizations under the “business judgment rule”, and not second-guess the

client at every opportunity. They should not give in to “knee-jerk” reactions and resort to “noisy

withdrawal” every time they have a difference of opinion with the issuer‟s officers. “Noisy

withdrawal” should be looked upon as the last resort, and be limited to such parties, and to such

extent, as is necessary to accomplish its purpose.102 That is to say, in furthering the policy behind

Section 307 and the SEC rules, of enhancing investor protection, we should not sacrifice the

policy underlying client confidentiality. It is imperative to strike a balance such that we make

lawyers more accountable for their clients‟ wrongdoings but without impairing zealous advocacy

so that lawyers can counsel their clients to comply with the law and serve as their ethical

advisers through this process of continuous consultation and representation.

100
    Ibid., citing Hazard, G.C., “Rectification of Client Fraud: Death and Revival of a Professional Norm”, 33 Emory
L.J. 271, 301-07 (1984). (“The basic proposition [of the Kutak Commission]... is this: [a]n act or statement of the
attorney that does not reveal the content of client confidential information does not constitute a disclosure of such
information.”).
101
    See, earlier discussion on this point.
102
    For example, if the purpose can be served by notifying the client‟s new lawyers that the lawyer is disavowing
documents he prepared in the past for the client, then the withdrawing lawyer should not notify such disaffirmance
to others including the party that is being, or is likely to be injured. See, ABA Formal Op. 92-366.


                                                        39
                                                   Preliminary Draft of Note for Circulation and Comment




Alternatives to “Noisy Withdrawal”103

         The proposed alternative to “noisy withdrawal” does not contain any SEC notification

or/and disaffirmation requirements, but instead requires the issuer to report to the SEC, the notice

of attorney withdrawal and the circumstances related thereto, failing which, the attorney can

inform the SEC of the same. This might be seen by some as an improvement over the “noisy

withdrawal” proposal, as the reporting mandated under this is to be done by the client, and not

the attorney, thus the attorney-client privilege is being waived (if at all) by the client, which is

the holder of the privilege in the first place, and the confidentiality rules remains sacrosanct.104

However, it requires these disclosures be made publicly in the forms and manner specified in the

103
    See, the alternative proposed Section 205.3(d), Proposing Release, supra n.10, that reads:
“(d) Actions required where there is no appropriate response within a reasonable time.
           (1) Where an attorney who has reported evidence of a material violation under Section (b) of this section
           rather      than Section (c) of this section (i) does not receive an appropriate response, or has not received
           an appropriate response in a reasonable time, and (ii) has followed the procedures set forth in Section
           (b)(3) of this section, and (iii) reasonably concludes that there is substantial evidence of a material
           violation that is ongoing or about to occur and is likely to cause substantial injury to the financial interest
           or property of the issuer or of investors:
                     (A) An attorney retained by the issuer shall withdraw from representing the issuer, and shall
                     notify the issuer, in writing, that the withdrawal is based on professional considerations.
                     (B) An attorney employed by the issuer shall cease forthwith any participation or assistance in any
                     matter concerning the violation and shall notify the issuer, in writing, that he or she believes that
                     the issuer has not provided an appropriate response in a reasonable time to his or her report of
                     evidence of a material violation under Section (b) of this section.
           (2) An attorney shall not be required to take any action pursuant to Section (d)(1)(A) or (B) of this section
           if the attorney would be prohibited from doing so by order or rule of any court, administrative body or
           other authority with jurisdiction over the attorney, after having sought leave to withdraw from
           representation or to cease participation or assistance in a matter. An attorney shall give notice to the
           issuer that, but for such prohibition, he or she would have taken such action pursuant to Section (d)(1)(A)
           or (B), and such notice shall be deemed the equivalent of such action for purposes of this part.
           (3) An attorney employed or retained by an issuer who has reported evidence of a material violation under
           this part and reasonably believes that he or she has been discharged for so doing shall notify the issuer’s
           chief legal officer (or the equivalent thereof) forthwith.
           (4) The issuer’s chief legal officer (or the equivalent thereof) shall notify any attorney retained or employed
           to replace an attorney who has given notice to an issuer pursuant to Section (d)(1), (d)(2) or (d)(3) of this
           section that the previous attorney has withdrawn, ceased to participate or assist or has been discharged, as
           the case may be, pursuant to the provisions of this Section.”
104
    See, Davis, A.E., “Professional Responsibility: SEC‟s New Sarbanes-Oxley Proposals on „Noisy Withdrawal‟”,
229 New York Journal 3 (2003)- “The new, alternative proposal seeks to satisfy the purists‟ longings to prevent
revelation of client confidences in any form by instead forcing the client to incriminate itself, thereby avoiding the
need to have the lawyer incriminate the now former client….And in the end, from the client‟s point of view, there is
evidently no difference whatever between the two alternatives, except procedural [who pulls the trigger].”


                                                           40
                                           Preliminary Draft of Note for Circulation and Comment


Rule, and would thus place a very high burden on the client. Further, the client left on its own,

could very easily make some ostensible response to satisfy the reporting attorney so that the

client‟s reporting duty is not triggered in the first place, or even if it is, it may simply choose not

to report and convince the attorney (who is permitted but not mandated to report) to not report

also. Thus, for these reasons among others, the alternative does not really seem viable.



Concluding Remarks

     To summarize, I would suggest that the scope of “material violation” should be limited to

only those that tantamount to a crime/fraud, in the commission of which the withdrawing

attorney has played a role, and not be extended to cover breaches of fiduciary duties or like

violations. At the same time, I believe that “noisy withdrawal” should be mandatory for

ongoing/future material violations and permissive only for those that are past with no ongoing

effect, as currently proposed by the SEC, though I recognize that the SEC will probably be under

great pressure to make the rule permissive in all circumstances. In relation to the triggering

standard, I favor a largely objective test along the lines first proposed by the SEC, with a

qualifying statement that takes into account attorneys‟ differences in terms of position,

experience, qualifications, training and the like, though it seems unlikely that such standard

would be adopted by the SEC, which would probably continue with its present standard or an

even higher “actual knowledge” one. It is quite possible that if the SEC does eventually adopt a

“noisy withdrawal” rule, it would probably not be entirely in its currently proposed form, but a

somewhat watered down version of it. It would be most unfortunate, however, if the SEC

backtracks completely on its “noisy withdrawal” proposal in favor of adopting the proposed, or

another alternative.




                                                  41
                                          Preliminary Draft of Note for Circulation and Comment


       In conclusion, I want to say that the “noisy withdrawal” issue should not be seen in

isolation, but within the overall picture of achieving greater corporate compliance with

applicable laws and guidelines, and restoring investor confidence. Notwithstanding the wisdom

and feasibility (or the lack of it) of the “noisy withdrawal” rule, I wish to emphasize that such a

rule can only be effective if enforced in conjunction with enhanced corporate governance

standards, including effective legal compliance systems. Moreover, if the appropriate systems,

like the QLCC are in place (and working) within the client-organization, then the problem should

most likely get resolved within the client, and there should be no need for the attorney to resort

to “noisy withdrawal”. This rule should be looked upon as a healthy deterrent vis-à-vis

actual/potential wrongdoings by clients and not as chilling zealous advocacy. The “noisy

withdrawal” rule concededly represents some change in status quo for lawyers (I would argue

not a big change in light of the position, under the current ethical rules that we discussed),

however law is dynamic and needs to be constantly questioned, reviewed and changed, as need

be, to meet the challenges and needs of our times. Instead of fighting this change, lawyers should

embrace this additional responsibility vested in them by virtue of their honorable position in

society, and the important function that they serve in it. They should see this rule as

supplementing their duties as a facilitator in the process of corporate compliance, and as an

empowering agent in the client-attorney communication, and not the reverse. There may be other

equally, if not more effective means of regulating lawyers, including arguing for liability of

attorneys, under Section 10(b) of the Securities Exchange Act, 1934, and SEC Rule 10b-5, as

well as other federal securities laws. However, I would still argue that “noisy withdrawal” has its

own independent utility and merit within this endeavor of using lawyers to attain more law-

abiding organizations.




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