Comments of Osler, Hoskin & Harcourt LLP on S7-45-02

Osler, Hoskin & Harcourt LLP

December 18, 2002

SENT BY E-MAIL TO: rule-comments@sec.gov

U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549-0609

Attention: Jonathan G. Katz, Secretary

Ladies and Gentlemen:

File No. 33-8150.wp
Proposed Rule: Implementation of Standards of Professional Conduct for Attorneys
(Release Nos. 33-8150; 34-46868; IC-25829; File No. S7-45-02)

This letter sets forth our comments on the proposed rule titled "Implementation of Standards of Professional Conduct for Attorneys", as published in the releases referred to above (the "Proposed Rule"). Our firm is also named as a signatory to the comment letter on the Proposed Rule submitted on behalf of numerous firms by Sullivan & Cromwell.

About Our Firm

We are a Canadian law firm with offices in the cities of Toronto, Ottawa, Montreal and Calgary. Our firm also maintains a small office in New York, from which we principally provide Canadian legal advice to U.S.-based clients with business interests in Canada. Each lawyer in our firm is either a member of the Law Society of Upper Canada (the regulatory body governing lawyers in the Province of Ontario), or the corresponding regulatory body in the Province in which he or she practices. Although approximately fifteen of our lawyers are also admitted to practice in the State of New York, and several others are admitted to practice in other states, they generally do not provide any U.S. legal advice. Each lawyer in our firm would be an "attorney" as defined by the Proposed Rule, since that definition includes "...any person who is... qualified to practice law in any jurisdiction, domestic or foreign...".

Since the Sarbanes-Oxley Act of 2002 (the "Act") was signed into law at the end of July, we have observed our Canadian clients' endeavours to understand its impact, assess its implications and comply with its requirements. They have generally done so with the assistance of their U.S. counsel, and often also with our involvement. Unlike U.S. domestic issuers, these Canadian issuers must also be mindful of simultaneously complying with the requirements of Canadian securities laws, the rules of the Toronto Stock Exchange, the provisions of their governing Canadian corporate statutes, and the fiduciary duties arising under Canadian law to which their directors and officers are subject. We have, of necessity, developed considerable familiarity with the Act and the related proposed and final rules of the Commission.

Our Clients and the Scope of Our Services

Many of our clients are Canadian issuers whose securities are listed on the New York Stock Exchange or trade on NASDAQ. As foreign private issuers, they generally satisfy their periodic reporting obligations under the Securities Exchange Act of 1934 through use of the Canada-U.S. Multijurisdictional Disclosure System ("MJDS"), filing their annual reports with the Commission on Form 40-F and submitting quarterly financial statements, press releases and other materials on Form 6-K. We are also often involved, together with U.S. co-counsel, in preparing disclosure documents filed with the Commission by a Canadian issuer for use in cross-border securities offerings. It is our role to ensure compliance with Canadian legal requirements. It falls to our U.S. co-counsel to provide advice regarding compliance with U.S. federal securities laws. Nevertheless, under the Proposed Rule it appears that we might be "appearing and practicing before the Commission" because that term includes:

...preparing, or participating in the process of preparing, any statement, opinion, or other writing which the attorney has reason to believe will be filed with or incorporated into any registration statement, notification, application, report, communication or other document filed with or submitted to the Commissioners, the Commission, or its staff...

Even if we are simply asked to review a press release for the purpose of ensuring compliance with an issuer's timely disclosure obligations under Canadian law, at appears that we might be "appearing and practicing before the Commission" because we know that the press release must, and will, be submitted to the Commission as a report on Form 6-K. Further, we often prepare agreements governed by Canadian law that will be filed with the Commission as an exhibit to a registration statement or periodic report, which would also appear to trigger the application of the Proposed Rule.

Our Perspective on the Proposed Rule

Various commentators have noted that the Act marks a somewhat radical departure from prior Commission policy and practice regarding foreign private issuers. Congress has seen fit to impose requirements on foreign private issuers that go well beyond the disclosure obligations previously mandated by U.S. federal securities laws. Through the Act, the United States effectively imposes substantive corporate governance requirements on the Canadian issuers that are subject to it. The Proposed Rule goes even further, in that it would have the effect of regulating the lawyer-client relationship between non-U.S. lawyers and their non-U.S. clients. Further, as acknowledged in the proposing releases, the "noisy withdrawal" requirement to provide notification to the Commission of a lawyer's withdrawal "...goes beyond what the Act expressly directed the Commission to do".

We are supportive of the objectives of the Proposed Rule. We believe that lawyers in all jurisdictions have an important role to play in protecting the integrity of the capital markets as one component of their professional obligation. But we are of the view that this component must be balanced among others, such as the obligation to act as an advocate of our client's interests and to protect client confidentiality.

Our particular concern regarding the Proposed Rule is the extent to which it may give rise to conflicts with existing rules of professional conduct governing lawyers. The potential for such conflict is recognized by Section 205.1, which states:

"Where the standards of a state where an attorney is admitted or practices conflict with this part, this part shall govern."

As a matter of U.S. law, the Proposed Rule may have the power to abrogate the professional obligations of lawyers under the laws of the U.S. states. In contrast, the members of our firm are subject to the Rules of Professional Conduct of the Law Society of Upper Canada (the "LSUC Rules"), or similar rules of a regulatory body in another Canadian province. An Ontario lawyer must at all times comply with the LSUC Rules, notwithstanding any requirements to the contrary emanating from another jurisdiction.

Potential Conflict with Existing Canadian Professional Obligations

Our principal concern regarding the potential for conflict between the Proposed Rule and the LSUC Rules arises from Section 205.3(d), the "noisy withdrawal" requirement. It would be applicable to a Canadian lawyer representing a Canadian issuer subject to U.S. periodic reporting obligations if:

the Canadian issuer did not have a "qualified legal compliance committee";
the Canadian lawyer had become aware of evidence of a material violation, and had reported it "up the ladder";
the Canadian lawyer did not receive an appropriate response, or did not receive a response to the report in a reasonable time; and
the Canadian lawyer 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.

In those circumstances, the Canadian lawyer would be affirmatively required to:

withdraw forthwith from representing the issuer, indicating that the withdrawal is based on professional considerations;
give written notice to the Commission of the withdrawal, indicating it was based on professional considerations; and
promptly disaffirm to the Commission any document filed with or submitted to the Commission that the lawyer has prepared or assisted in preparing, if the lawyer reasonably believes that document is or may be materially false or misleading.

The Law Society of Upper Canada does permit the disclosure of confidential information without a client's consent in certain exceptional circumstances, but only to prevent death or serious bodily harm. Protecting property or financial interests does not justify violating the sanctity of the attorney-client privilege under its rules, presumably because damage to these interests can be retroactively compensated through a monetary damages award. Section 2.03(3) of the LSUC Rules states:

Where a lawyer believes upon reasonable grounds that there is an imminent risk to an identifiable person or group of death or serious bodily harm, including serious psychological harm that substantially interferes with health or well-being, the lawyer may disclose, pursuant to judicial order where practicable, confidential information where it is necessary to do so in order to prevent the death or harm, but shall not disclose more information than is required. [emphasis added]

There is a commentary to Section 2.03(3) of the LSUC Rules which goes on to state:

A lawyer employed or retained to act for an organization, including a corporation, confronts a difficult problem about confidentiality when he or he becomes aware that the organization may commit a dishonest, fraudulent, criminal, or illegal act.
The problem is sometimes described as the problem of whether the lawyer should "blow the whistle" on his or her employer or client. Although the Rules of Professional Conduct make it clear that the lawyer shall not knowingly assist or encourage any dishonesty, fraud, crime, or illegal conduct..., it does not follow that the lawyer should disclose to the appropriate authorities an employer's or client's proposed misconduct.
Rather, the general rule, as set out above, is that the lawyer shall hold the client's information in strict confidence, and this general rule is subject to only a few exceptions. Assuming the exceptions do not apply, there are, however, several steps that a lawyer should take when confronted with the difficult problem of proposed misconduct by an organization. The lawyer should recognize that his or her duties are owed to the organization and not to the officers, employees, or agents of the organization. The lawyer should therefore ask that the matter be reconsidered, and the lawyer should, if necessary, bring the proposed misconduct to the attention of a higher (and ultimately the highest) authority in the organization despite any directions from anyone in the organization to the contrary. If these measures fail, then it may be appropriate for the lawyer to resign in accordance with the rules for withdrawal from representation (rule 2.09). [emphasis added]

From this commentary, it appears that the "up the ladder" reporting obligations contemplated by Section 307 of the Act and Section 205.3(b) of the Proposed Rule are consistent with the LSUC Rules. The potential conflicts arise as a consequence of the "noisy withdrawal" requirements, and their inherent discordance with a lawyer's fundamental duties of confidentiality and loyalty to the client.

The duty of confidentiality is set forth in Section 2.03 of the LSUC Rules, and it states:

A lawyer at all times shall hold in strict confidence all information concerning the business and affairs of the client acquired in the course of the professional relationship and shall not divulge any such information unless expressly or impliedly authorized by the client or required by law to do so.

The commentary to this section says:

A lawyer cannot render effective professional service to the client unless there is full and unreserved communication between them. At the same time, the client must feel completely secure and entitled to proceed on the basis that, without any express request or stipulation on the client's part, matters disclosed to or discussed with the lawyer will be held in strict confidence.

It goes on to say:

The rule prohibits disclosure of confidential information because confidentiality and loyalty are fundamental to the relationship between a lawyer and client and legal advice cannot be given and justice cannot be done unless clients have a large measure of freedom to discuss their affairs with their lawyers. However, there are some very exceptional situations identified in the following subrules where disclosure without the client's permission might be warranted because the lawyer is satisfied that truly serious harm of the types identified is imminent and cannot otherwise be prevented. These situations will be extremely rare, and, even in these situations, the lawyer should not disclose more information than is required.

In our view, it is very likely that there would be circumstances where the notice to the Commission required by Section 205.3(d) of the Proposed Rule, or the requirement thereunder to disaffirm a document, would violate a Canadian lawyer's duty of confidentiality under Section 2.03 of the LSUC Rules. The very fact that the lawyer has withdrawn from representing the issuer "based on professional considerations" may, in the circumstances, be confidential information that cannot be disclosed without the client's consent, unless required by law. And it is not at all clear that disclosure is "required by law" for a Canadian lawyer in this context, since the Proposed Rule is not a Canadian law.

The requirement to withdraw set forth in Section 205.3(d) of the Proposed Rule would also likely lead to conflicts with the LSUC Rules that govern the manner in which a lawyer must withdraw from his or her representation of a client.

Section 2.09(1) of the LSUC Rules states that: "A lawyer shall not withdraw from representation of a client except for good cause and upon notice to the client appropriate in the circumstances." It is not clear that a duty to withdraw arising under a rule of the Commission would constitute "good cause" as a matter of Canadian law.

The commentary to Section 2.09(1) states:

No hard and fast rules can be laid down as to what will constitute reasonable notice before withdrawal. Where the matter is covered by statutory provisions or rules of court, these will govern. In other situations, the governing principle is that the lawyer should protect the client's interests to the best of the lawyer's ability and should not desert the client at a critical state of a matter or at a time when withdrawal would put the client in a position of disadvantage or peril.

Further, Section 2.09(8) of the LSUC Rules states that:

When a lawyer withdraws, the lawyer shall try to minimize expense and avoid prejudice to the client and shall do all that can reasonably be done to facilitate the orderly transfer of the matter to the successor lawyer.

If one of our clients were involved in a material violation of law that was ongoing or about to occur, we are concerned that the "noisy withdrawal" requirements of the Proposed Rule would be inconsistent with our obligations under Section 2.09(1) and the commentary thereto, and under Section 2.09(8). Further, Section 205.3(d) of the Proposed Rule appears to require a complete withdrawal from all representation of the issuer, in all matters, by all members of the firm. It is entirely possible that a litigation lawyer within our firm could be on the eve of trial for a completely unrelated matter on behalf of the client before a Canadian court. The rules of that court may well prohibit a withdrawal from representation at that stage of the proceeding.

Recommendations for Revisions to the Proposed Rule

With respect, although we are supportive of the objectives of the Proposed Rule, we believe that the professional standards governing Canadian lawyers in advising their Canadian clients should be set in Canada. We also recognize, however, that an increasing number of issuers retain non-U.S. lawyers to provide them with advice regarding U.S. federal securities laws, and that the Commission has a legitimate interest in regulating the professional standards of those lawyers.

Accordingly, we urge the Commission to exempt foreign attorneys from the application of the Proposed Rule or, at a minimum, from the mandatory "noisy withdrawal" requirements of the Proposed Rule. A "foreign attorney" for this purpose might include an attorney who is admitted, licensed, or otherwise qualified to practice law in any jurisdiction outside the United States, unless the scope of his or her retainer by the issuer includes responsibility for providing advice regarding U.S. federal securities laws.

We understand that the Commission wishes to give full effect to the intent of Congress expressed in Section 307 of the Act. However, we submit that an accommodation recognizing the need for foreign lawyers to comply with the professional obligations imposed by the regulatory bodies within their own countries would not undermine this objective.

Yours very truly,

Osler, Hoskin & Harcourt LLP
Canadian Lawyers