M E M O R A N D U M

The following is the response of the Nashville Bar Association ("NBA") to the SEC's proposed rules to implement the Sarbanes-Oxley Act provisions concerning standards for professional conduct for attorneys.

The Securities and Exchange Commission has solicited comments on a proposed rule that would establish standards for professional conduct for attorneys who appear and practice before the Commission on behalf of issuers. Section 307 of the Sarbanes-Oxley Act of 2002 requires the Commission to promulgate 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 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 issue 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.

The NBA has at least two concerns about the proposed rule.

First, we have a concern that the proposed rule goes far beyond establishing standards of professional conduct, and, instead, has created vague and complex "legislation" of its own that would potentially expose attorneys to criminal prosecution for ethical violations. In our opinion, the proposed rule has not implemented Congress's mandate to set forth minimum standards for professional conduct for attorneys (in other words, the Rules of Ethics) but has, instead, promulgated a vague, substantive law (including a new crime that applies only to attorneys that are "appearing and practicing before the Commission").

Second, the NBA is of the opinion that the Commission's proposed regulations exceed the authority Congress granted the Commission in section 307 of the Sarbanes-Oxley Act.

A. The Rule is vague and creates a new crime, applicable only to attorneys

As will certainly be pointed out by several others who comment on this proposed rule, the rule itself is vague in many respects. An attorney is required to report "evidence of a material violation." "Evidence of a material violation" is defined as "information that would lead an attorney reasonably to believe that a material violation has occurred, is occurring, or is about to occur." Proposed Section 205.2(e). The attorney is not required to have actual knowledge or specific evidence of a violation. It appears that an attorney must "report up" even in instances where the attorney may merely suspect there might be a violation. It is unclear as well, as to whether an attorney is required to affirmatively seek out, probe or investigate in order to find evidence of a suspected violation.

Similarly, "material violation" is defined as "a material violation of the securities laws, a material breach of fiduciary duty, or a similar material violation." Obviously, these concepts are very vague. Many types of conduct are potentially encompassed by this extremely vague phrase.

The definition of "material" is similarly broad and vague. "Material" is defined as "conduct or information about which a reasonable investor would want to be informed before making an investment decision."

There are several other terms and concepts in the proposed Rule that are vague and overbroad. In light of the vagueness of the proposed Rule, Section 205.6 is especially troublesome. Section 205.6(a) states as follows:

A violation of this part by an attorney appearing and practicing before the Commission in the representation of an issuer shall be treated for all purposes in the same manner as a violation of the Securities Exchange Act of 1934 (15 U.S.C. § 78(a) et seq.), and any such attorney shall be subject to the same penalties and remedies, and to the same extent as for a violation of the Act.

Consequently, a "willful" violation of the proposed rule would be a crime, specifically, a felony. 15 U.S.C. § 77(x) provides that "any person who willfully violates any provisions of this subchapter, or the rules and regulations promulgated by the Commission under the authority thereof . . ." shall be guilty of a felony. Consequently, in order to protect themselves from an array of sanctions that even include criminal prosecutions, attorneys will be forced to report almost any negative information "up the ladder" within the corporation. This, of course, will make it very difficult for attorneys to obtain information that would have ordinarily been covered by the attorney-client privilege. Employees will be very reluctant to report to attorneys as a result.

Moreover, and more importantly, this Rule takes a very vague rule of professional conduct and converts it into a "statute" that criminalizes violations of the rule.

B. The proposed regulations exceed the authority granted by Congress

The Commission's proposed regulations exceed the authority Congress granted the Commission in section 307 of the Sarbanes-Oxley Act. It is black letter administrative law that an administrative agency's rulemaking power is not the power to make law but the power to adopt regulations that give effect to the will of Congress. See, e.g., Sundance Associates, Inc. v. Reno, 139 F.3d 804, 808 (10^th Cir. 1998). As set forth above, section 307 directs the Commission to promulgate a rule requiring attorneys representing issuers before the Commission (which includes attorneys who advise issuers with respect to filings with the Commission) to (1) report evidence of material violations to the chief legal counsel of the issuer; and (2) in the event the chief legal counsel does not take adequate remedial steps, to report to the audit committee of the board, a board committee of outside directors or to the board.

While there are a number of problems with the proposed regulations, which are addressed above, the regulations do more than simply establish rules applicable to attorneys who represent issuers before the Commission. Instead, the proposed regulations impose onerous requirements upon the "chief legal officers" who receive the reports of "evidence of a material violation" and in certain circumstances require outside counsel to withdraw from representation of the client and give the Commission notice of that fact via a "noisy withdrawal." See sections 205(b)(3) & 205(d). Because section 307 simply authorized the Commission to promulgate regulations requiring counsel to report violations to the chief legal officer of their clients, the provisions of the rule imposing disclosure requirements upon attorneys and upon chief legal officers exceed the Commission's authority.

More importantly, as discussed above in more detail, the proposed regulation makes a violation of the "ethics" rule a felony. In doing so, the Commission exceeded its authority. Congress's clear intent in section 307 was to direct the Commission to establish rules of professional conduct for attorneys who represent issuers before the Commission. There is nothing in the language of section 307 to suggest that Congress authorized the Commission to criminalize violations of those rules of professional conduct. Therefore, the Commission exceeded its authority in making a violation of those rules of professional conduct a felony.