April 7, 2003

Mr. Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, NW
Washington, D.C.  20549-0609

Dear Secretary Katz:

On behalf of the 1.4 million active and 600,000 retired members of the International Brotherhood of Teamsters (IBT), we are pleased to comment on Securities and Exchange Commission (SEC) file S7-45-02, “Implementation of Standards of Professional Conduct for Attorneys.”  Section 307 of the Sarbanes-Oxley Act mandates that the Commission adopts rules in the interest of protecting investors by setting minimum standards of conduct for those attorneys that practice and appear before the Commission.  We are pleased to see that the Commission has already adopted rules that would require attorneys to report material violations up-the-ladder within the issuer.  However, the SEC has asked for comment as to whether the attorney should also be required to report a material violation of U.S. securities laws, or an issuer’s response to such evidence, outside the issuer.  We believe that the attorney should be required to not only report a suspected material violation to the issuer, but the attorney should also be required to report that he or she is withdrawing from representation of the issuer to the Commission for professional reasons.

In the wake of corporate debacles at companies such as Enron, WorldCom, and Tyco, investors’ confidence in the U.S. equity markets is at an all-time low. The scandals have affected pensioners, current employees and the financial markets at large.  Attorneys from these corporations have played an important and expanding role in the internal processes and governance of issuers, ensuring compliance with applicable reporting and disclosure requirements and, in some cases, have directly contributed to the failure of these corporations to comply with U.S. securities laws while playing these integral roles. 

At its very basis, the Commission’s proposal is about making sure lawyers, in addition to the accountants and executives in the company do not violate the law and, more importantly, ensure that the law is being followed.  We would support the commission’s original proposal to require attorneys practicing before the Commission to make a “noisy withdrawal” from the case if the attorney believes that the company has committed a material violation of securities laws, and after the attorney has reported the violation to the managing and responsible officers and no appropriate action has been taken, to rectify the situation.

The noisy withdrawal proposal is clearly consistent with the Commission’s mandate under Section 307 and is necessary to effectuate the up-the-ladder reporting rule because it addresses the situation where an issuer inappropriately refuses to implement remedial measures.  Some commenters have suggested that the noisy withdrawal requirement would cause clients/issuers to exclude their attorneys from meetings where information was exchanged that could lead an attorney to believe that a material violation has occurred.  We do not believe that this argument is persuasive.  Many corporate transactions require the use of lawyers for their expertise in financial and legal matters, and it is extremely unlikely that attorneys could or would be excluded from these transactions simply because of the proposed rule.  As others have pointed out, “clients will not fail to confide in lawyers because the complexity of many transactions requires full disclosure to attorneys regardless of confidentiality.”[1]

As the “Cheek Report,” commissioned by the American Bar Association (ABA), stated there has been “…a disturbing series of recent lapses in corporations involving false or misleading financial statements and alleged misconduct by executive officers.”[2]  Further, attorneys representing these corporations bear some of the blame for the failure.[3]  The IBT believes that real and constructive safeguards must be in place to ensure that investors are protected.  The noisy withdrawal provision of the proposal requires that when an attorney has notice of a material violation of a securities law, has reported this violation to the corporation itself, and the corporation has done nothing with this information within a reasonable time frame, the attorney must withdraw from the case and then give notice of the withdrawal to the Commission.  We believe that this is the correct response and that the matter should not be left to state or local bar disciplinary processes.  As the recent stream of corporate governance disasters has shown, these processes are woefully inadequate and have failed to provide any protection for investors.

In addition, the attorney should be required, not merely permitted, to make a noisy withdrawal from the case where the attorney has not received an appropriate response to reported evidence of a material violation and the attorney believes that the reported material violation has occurred, is occurring, or is about to occur.  Further, the final rule should not distinguish between outside attorneys and those directly employed by the issuer.  Both should be required to comply with the noisy withdrawal requirements.   

The SEC’s alternative proposal to the noisy withdrawal requirement fails to provide any protection for investors.  The SEC alternative requires action by the attorney only when the attorney reasonably concludes that there is substantial evidence that a material violation is ongoing or about to occur and is likely to cause substantial injury to the issuer.  Further, the proposal mandates that the issuer, rather than the attorney, report to the Commission and attorney’s written notice of withdrawal or failure to receive an appropriate response from the corporation.  The proposal requires a higher evidentiary standard for withdrawal of the attorney than for reporting up-the-ladder to the issuer.  Our Union believes that this threshold is far too high.  The SEC alternative would significantly limit the circumstances when an attorney must withdraw from representation of the issuer.

Regardless of which proposal the Commission finally adopts, the IBT believes issuers must be required to report the written resignation of attorneys for “professional reasons” on form 8-K.  This would give investors valuable information about the issues that are affecting the corporation directly.  The Commission has requested comment specifically on the question as to whether there are any circumstances where an issuer should not be required to disclose an attorney’s written notice of resignation under the rule.  The IBT believes that an attorney resignation should be excluded from this reporting requirement only when the attorney has made his or her concerns known to the independent directors of the corporation, these directors have consulted an independent outside attorney, and the independent directors have concluded that there was no material violation of U.S. securities regulations.  Even in these circumstances, however, the corporation should still be required to notify the Commission of the resignation in writing.

Thank you for the opportunity to comment on this very important issue of corporate governance.  If you have any question regarding our comments, please contact the IBT’s Office of Corporate Affairs at (202) 624-8100.

Sincerely,

James P. Hoffa
General President
International Brotherhood of Teamsters