[Federal Register Volume 68, Number 25 (Thursday, February 6, 2003)]
[Proposed Rules]
[Pages 6324-6337]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-2520]



  Federal Register / Vol. 68, No. 25 / Thursday, February 6, 2003 / 
Proposed Rules  

[[Page 6324]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 205, 240 and 249

[Release Nos. 33-8186; 34-47282; IC-25920; File No. S7-45-02]
RIN 3235-AI72


Implementation of Standards of Professional Conduct for Attorneys

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is 
soliciting comments on proposed rules setting standards of 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 prescribe minimum standards of professional 
conduct for attorneys appearing and practicing before the Commission in 
any way in the representation of issuers. The Commission in a companion 
release has adopted rules under Section 307. The Commission also is 
extending the comment period for certain other rules under Section 307. 
In particular, the Commission is extending the comment period for the 
provisions regarding an attorney's notification to the Commission (more 
commonly referred to as ``noisy withdrawal'') when an attorney, after 
reporting evidence of a material violation up-the-ladder of the 
issuer's governance structure, reasonably believes an issuer's 
directors have either made no response (within a reasonable time) or 
have not made an appropriate response. This release solicits additional 
comments on the ``noisy withdrawal'' provisions previously proposed and 
proposes an alternative approach. This release also solicits additional 
comments on the rules that the Commission adopted under Section 307.

DATES: Comments should be received on or before April 7, 2003.

ADDRESSES: To help us process and review your comments efficiently, 
comments should be sent by hard copy or by e-mail, but not by both 
methods.
    Comments sent by hard copy should be submitted in triplicate to 
Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450 
Fifth Street, NW, Washington, DC 20549-0609. Alternatively, comments 
may be submitted electronically to the following e-mail address: [email protected]. All comment letters should refer to File No. S7-45-
02; this file number should be included on the subject line if e-mail 
is used. All comment letters received will be available for public 
inspection and copying in the Commission's Public Reference Room at the 
same address. Electronically submitted comments will be posted on the 
Commission's Internet Web site (http://www.sec.gov).\1\

FOR FURTHER INFORMATION CONTACT: Laura Walker, Office of the General 
Counsel, U.S. Securities and Exchange Commission, 450 Fifth Street, NW, 
Washington, DC 20549. Phone: (202) 942-0835.

SUPPLEMENTARY INFORMATION: The Commission is proposing amendments to 
Rule 205.3 \2\ of Title 17, Chapter II, of the Code of Federal 
Regulations, establishing standards of professional conduct for 
attorneys who appear and practice before the Commission in the 
representation of issuers, under the Securities Act of 1933,\3\ the 
Securities Exchange Act of 1934,\4\ the Investment Company Act of 
1940,\5\ the Investment Advisers Act of 1940,\6\ and the Sarbanes-Oxley 
Act of 2002.\7\ The Commission also is proposing new Rules 13a-17 \8\ 
and 15d-17 \9\ and amendments to Rules 13a-11 \10\ and 15d-11 \11\ and 
Forms 20-F \12\, 40-F \13\, and 8-K \14\ under the Exchange Act.

    \1\ The Commission does not edit personal identifying 
information, such as names or electronic mail addresses, from 
electronic submissions. Interested person submitting comments should 
only submit information that they wish to make publicly available.
    \2\ 17 CFR 205.3.
    \3\ 15 U.S.C. 77a et seq.
    \4\ 15 U.S.C. 78a et seq.
    \5\ 15 U.S.C. 80a-1 et seq.
    \6\ 15 U.S.C. 80b-1 et seq.
    \7\ 15 U.S.C. 7201 et seq.
    \8\ 17 CFR 240.13a-17.
    \9\ 17 CFR 240.15d-17.
    \10\ 17 CFR 240.13a-11.
    \11\ 17 CFR 240.15d-11.
    \12\ 17 CFR 249.220f.
    \13\ 17 CFR 249.240f.
    \14\ 17 CFR 249.308.
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Table of Contents

I. Background
II. The Role of Attorneys Who Appear Before the Commission
III. Discussion of the Proposals
    A. Part 205 As Adopted
    B. Extension of Comment Period/Solicitation of Comments for 
``Noisy Withdrawal'' Provisions As Previously Proposed
    C. Alternative Proposal to ``Noisy Withdrawal''
    D. Proposed Amendments to Forms
IV. General Request for Comments
V. Paperwork Reduction Act
VI. Costs and Benefits
VII. Effect on Efficiency, Competition and Capital Formation
VIII. Initial Regulatory Flexibility Analysis
IX. Small Business Regulatory Enforcement Fairness Act
X. Statutory Basis and Text of Proposed Amendments to Parts 205, 240 
and 249

I. Background

    Section 307 of the Sarbanes-Oxley Act of 2002 (the ``Act'') 
mandates that the Commission:

shall 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.

    On November 21, 2002, the Commission proposed rules under Section 
307 to implement those provisions, including an up-the-ladder reporting 
system mandated by the Act.\15\ On January 23, 2003, the Commission 
voted to approve the up-the-ladder reporting system.\16\ In addition to 
the up-the-ladder reporting requirement, the Proposing Release proposed 
several corollary provisions in 205.3(d) that are not explicitly 
required by Section 307, but that the Commission considered potentially 
important minimum standards for attorneys appearing and practicing 
before the Commission in the representation of issuers. Under certain 
circumstances, these provisions would have permitted or required 
attorneys to withdraw from representation of an issuer, to notify the 
Commission that they have done so, and to disaffirm documents filed or 
submitted to the Commission on behalf of the issuer.
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    \15\ Release No. 33-8150 (December 2, 2002) [67 FR 71670] (the 
``Proposing Release'').
    \16\ Release No. 33-8185 (Jan. 29, 2003) (the ``Adopting 
Release''). The effective date of the rule is 180 days following 
publication in the Federal Register. Until the effective date, those 
wishing to see the text of the rule should refer to the Adopting 
Release.
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    The Commission received numerous comment letters concerning these 
``noisy withdrawal'' provisions. A number of commenters supported the 
proposal. They were of the view that the ``noisy withdrawal'' proposal 
is

[[Page 6325]]

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.\17\ One commenter not only thought the 
Commission's proposed rule was sound, but opined that ``considerably 
more demanding reporting obligations would be consistent with the most 
plausible interpretation of corporate interests in 
confidentiality.''\18\ Other commenters supported the proposal but 
recommended certain modifications.\19\
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    \17\ See, e.g., Comments of Susan P. Koniak, et al., at 23.
    \18\ See Comments of William Simon, at 2.
    \19\ See, e.g., Comments of Richard Painter, at 2-3.
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    On the other hand, a greater number of commenters opposed the 
``noisy withdrawal'' provisions. Some commenters objected to the 
proposal because they are of the view that the Commission does not have 
the statutory authority to require ``noisy withdrawal.'' They pointed 
to legislators'' comments that, in their view, supported the position 
that Section 307 does not require the Commission to promulgate a rule 
mandating ``noisy withdrawal.'' \20\ Other objectors were concerned 
that the provision would conflict with longstanding requirements under 
state ethics laws and therefore would infringe on the jurisdiction of 
state ethics-setting bodies.\21\ One commenter argued that such a 
provision would subject attorneys to conflicting liability claims, 
whether or not they complied with the rule. Several commenters from 
outside the United States stated that compliance with the ``noisy 
withdrawal'' requirement would cause them to violate the laws of their 
home jurisdiction.\22\ Finally, several commenters believed that the 
rule would not further the Commission's goals because it would cause 
clients to exclude attorneys from meetings where information was 
exchanged that could lead an attorney to believe a material violation 
had been committed.\23\
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    \20\ See Comments of Attorneys' Liability Assurance Society, 
Inc., at 8; Comments of Frederick Lipman, at 1-3.
    \21\ See Comments of the Conference of Chief Justices, at 3; 
Comments of Attorneys' Liability Assurance Society, Inc., at 8.
    \22\ See, e.g., Comments of Shearman & Sterling, at 3-7.
    \23\ See Comments of Attorneys' Liability Assurance Society, 
Inc., at 8.
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    The vast majority of commenters suggested that the Commission defer 
action on a rule mandating ``noisy withdrawal'' and provide interested 
parties an additional opportunity to comment. Their principal concerns 
were that: The rule raises novel issues with respect to establishing 
ethical rules for attorneys that require reporting to a third party; 
the rules are complex and the period of time provided under Section 307 
did not allow adequate time for the preparation of comments or for the 
Commission to consider those comments; and because Section 307 requires 
the Commission only to issue the up-the-ladder reporting requirements 
within 180 days, the Commission need not issue a ``noisy withdrawal'' 
provision at the time it adopts the up-the-ladder reporting system and 
can postpone its consideration of the issue.
    In light of these comments, the Commission has determined to extend 
the comment period on proposed Sec.  205.3(d) of the proposed rule.\24\ 
The Commission is soliciting comments on proposed alternative 
provisions, which prescribe attorney withdrawal in a narrower set of 
circumstances, and which require the issuer, rather than the attorney, 
to report to the Commission the attorney's withdrawal or written notice 
of failure to receive an appropriate response to a report of a material 
violation. The Commission also requests comment on whether any rules we 
are currently adopting under Section 307 should be revised if we adopt 
either of these proposals. The Commission is interested especially in 
receiving comments from interested parties outside the legal 
profession, such as issuers and investors, who might be affected by, or 
benefit from, the final rule or the proposals.\25\
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    \24\ Proposed Part 205.3(d) should not be confused with Part 
205.3(d) as adopted (``Issuer Confidences''). In the event that 
proposed Part 205.3(d), or an alternative thereto, is adopted, 
current Part 205.3(d) will be re-numbered.
    \25\ Persons who previously commented on proposed Part 205 need 
not re-submit the same comment letters. We will consider all 
relevant comment letters previously submitted, as well as any new 
comment letters we receive, in our deliberations on the rule.
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II. The Role of Attorneys Who Appear Before the Commission

    As discussed in more detail in the Proposing Release and the 
Adopting Release, attorneys play a varied and crucial role in the 
Commission's processes. Attorneys prepare, or assist in preparing, 
materials that are filed with or submitted to the Commission by or on 
behalf of issuers. Public investors rely on these materials in making 
their investment decisions. Thus, the Commission, and the investing 
public, must be able to rely upon the integrity of in-house and 
retained lawyers who represent issuers before the Commission. Attorneys 
also play an important and expanding role in the internal processes and 
governance of issuers, ensuring compliance with applicable reporting 
and disclosure requirements, including requirements mandated by the 
federal securities laws.
    The actions of some attorneys have drawn increasing scrutiny and 
criticism in light of recent events demonstrating that at least ``some 
lawyers have forgotten their responsibility.'' \26\ Moreover, existing 
state ethical rules have not proven an effective deterrent to attorney 
misconduct.\27\ The July 16, 2002 Preliminary Report of the American 
Bar Association Task Force on Corporate Responsibility (the ``Cheek 
Report'') noted that ``a disturbing series of recent lapses in 
corporations involving false or misleading financial statements and 
alleged misconduct by executive officers'' has compromised investors' 
confidence in both the ``quality and the integrity'' of public company 
governance.\28\ Indeed, the Cheek Report concluded that ``the system of 
corporate governance at many public companies has failed 
dramatically.'' Moreover, the Cheek Report acknowledges that attorneys 
representing and advising corporate clients bear some share of the 
blame for this failure.\29\
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    \26\ See remarks by Senator John Edwards, 148 Cong. Rec. at 
S6551 (July 10, 2002). See also Speech by SEC Chairman Harvey L. 
Pitt: Remarks Before the Annual Meeting of the American Bar 
Association's Business Law Section (Aug. 12, 2002) (``recent events 
have refocused our attention on the need for the profession to 
assist us in ensuring that fundamental tenets of professionalism, 
ethics and integrity work to ensure investor confidence in public 
companies''), available at http://www.sec.gov/news/speech/spch579.htm.
    \27\ See remarks by Senator Michael Enzi, 148 Cong. Rec. at 
S6555 (``I am usually in the camp that believes that [s]tates should 
regulate professionals within their jurisdiction. However, in this 
case, the [s]tate bars as a whole have failed. They have provided no 
specific ethical rule of conduct to remedy this kind of situation. 
Even if they do have a general rule that applies, it often goes 
unenforced'').
    \28\ See Cheek Report at 3-4.
    \29\ See Cheek Report at 7 (``It is a clear failure of corporate 
responsibility if executive officers aware of potential accounting 
irregularities sell millions of dollars of stock to public investors 
who are unaware of [earnings misstatements and self-dealing by 
corporate officers]. It is a clear failure of corporate 
responsibility for insiders to borrow enormous amounts from their 
companies without adequate security beyond inflated stock of the 
company itself. And it is a clear failure of corporate 
responsibility when outside directors, auditors and lawyers, who 
have important roles in our system of independent checks on the 
corporation's management, fail to avert or even discover--and 
sometimes actually condone or contribute toward the creation of--the 
grossest of financial manipulations and fraud'').

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[[Page 6326]]

III. Discussion of Proposals

    The proposals regarding ``noisy withdrawal'' contained in the 
Proposing Release, and the alternative provisions discussed below, are 
intended to further the purposes of the up-the-ladder requirement and 
enhance investor confidence in the financial reporting process. The 
proposed rules are designed to deter instances of attorney and issuer 
misconduct, and, where misconduct has occurred, reduce its impact on 
issuers and their shareholders.
    At the same time, the Commission does not want the rule to impair 
zealous advocacy, which is important to the Commission's processes. The 
Commission also does not want the rule to discourage issuers from 
seeking and obtaining appropriate and effective legal advice. In this 
regard, the Commission today is proposing for comment alternative 
provisions to the ``noisy withdrawal'' provisions contained in the 
Proposing Release.

A. Part 205 as Adopted

    In a companion release, we adopted rules under Sec.  307 of the Act 
that mandate attorneys appearing and practicing before the Commission 
in the representation of an issuer to report evidence of a material 
violation up-the-ladder within the issuer.\30\ The rules require an 
attorney to report such evidence to the issuer's chief legal officer, 
or to its chief legal officer and chief executive officer. The issuer's 
chief legal officer is required to inquire into the evidence of the 
material violation and, unless he or she reasonably believes that no 
material violation has occurred, is ongoing, or is about to occur, he 
or she must take reasonable steps to cause the issuer to adopt an 
appropriate response to the attorney's report. Unless an attorney, who 
has made a report of evidence of a material violation, reasonably 
believes that the chief legal officer or chief executive officer has 
provided an appropriate response within a reasonable period of time to 
his or her report, the attorney shall report the evidence to an 
appropriate committee of the issuer's board of directors. An attorney 
who reasonably believes that the issuer has not made an appropriate 
response shall explain his or her reasons to the issuer's chief legal 
officer, chief executive officer, or board of directors. An attorney 
retained or employed by an issuer that has established a qualified 
legal compliance committee (``QLCC'') (a committee established to 
consider and investigate attorney reports under the rule and to 
recommend appropriate responses to such reports) may, as an alternative 
to the reporting requirements described above, report evidence of a 
material violation to the QLCC.
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    \30\ See Adopting Release. While we summarize here certain 
salient aspects of the rules as adopted, for a complete discussion, 
please review the Adopting Release.
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    The final rule provides that members of the QLCC may not be 
``employed, directly or indirectly, by the issuer.'' This language, 
which is also included in Sec.  205.3(b)(3), is drawn directly from 
Sec.  307 of the Sarbanes-Oxley Act. The Commission considers it 
appropriate and consistent with the mandate of the Act, however, to 
ensure a high degree of independence in QLCC members and members of 
committees to whom reports are made. Accordingly, we anticipate that 
these provisions will be amended to conform to final rules defining who 
is an ``independent'' director under Sec.  301 of the Act, upon 
adoption of those rules.\31\ We request comment on who should be 
considered independent in this context.
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    \31\ See Standards Related to Listed Company Audit Committees, 
Release No. 33-8173 (Jan. 8, 2003).
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    The rule as adopted does not require either an attorney or an 
issuer to report evidence of a material violation, or an issuer's 
response to such evidence, outside the issuer. We request additional 
comment on the rule as adopted. Commenters should consider whether any 
aspects of the rule, as adopted, should be revised if we adopt any of 
the proposals discussed in this release. If yes, how should they be 
revised? If not, why not?

B. Extension of Comment Period/Solicitation of Comments for ``Noisy 
Withdrawal'' Provisions as Previously Proposed

    As explained in the Proposing Release, proposed Sec.  205.3(d) 
addresses what we hope is the rare situation in which an attorney 
reasonably believes an issuer has either made no response (within a 
reasonable time) or has not made an appropriate response to reported 
evidence of a material violation. The proposed section distinguishes 
between material violations that have already occurred and are not 
ongoing, and material violations that are either ongoing or are about 
to occur. The proposed section also distinguishes between outside 
attorneys retained by an issuer and in-house attorneys employed by an 
issuer. The section requires an attorney to withdraw from representing 
an issuer and/or to disaffirm documents filed with the Commission in 
some circumstances; it also requires a withdrawing attorney to notify 
the Commission in writing of his or her withdrawal.
    As proposed in the Proposing Release, Sec.  205.3(d)(1) prescribes 
actions by an attorney who has not received an appropriate response to 
his or her report of a material violation and who believes that a 
material violation is ongoing or about to occur.\32\ It states:
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    \32\ Proposed Sec.  205.3(d) would follow Sec. Sec.  205.3(b) 
and (c) as adopted, which set forth the duty of an attorney to 
report evidence of a material violation up-the-ladder of the 
issuer's governance structure, and, if appropriate, to explain to 
the issuer his or her reasons for believing that the issuer has not 
made a timely or appropriate response.

    (d) Notice to the Commission where there is no appropriate 
response within a reasonable time. (1) Where an attorney who has 
reported evidence of a material violation under paragraph 3(b) of 
this section rather than paragraph 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:
    (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;
    (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
    (B) Promptly disaffirm to the Commission, in writing, any such 
opinion, document, affirmation, representation, characterization, or 
the like; and
    (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.

    Proposed Sec.  205.3(d)(2) concerns situations in which the 
reported

[[Page 6327]]

material violation has already occurred and is not ongoing. It 
provides:

    (2) Where an attorney who has reported evidence of a material 
violation under paragraph (b) rather than paragraph (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 
paragraph (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:
    (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; and
    (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; and
    (iii) The issuer's chief legal officer (or the equivalent) shall 
inform any attorney retained or employed to replace the attorney who 
has so withdrawn that the previous attorney's withdrawal was based 
on professional considerations.

    Proposed Sec.  205.3 (d)(3) restates what is largely settled law:

    (3) The notification to the Commission prescribed by this 
paragraph (d) does not breach the attorney-client privilege.

    Interested persons are invited to comment on any aspect of this 
proposal,\33\ including: (1) Whether the proposed rule should include 
any provision permitting or requiring notification to the Commission 
when an attorney receives no response or an inappropriate response or 
whether this is a matter best left to state or local bar disciplinary 
processes; (2) whether a higher standard should apply to notification 
to the Commission than to reporting up-the-ladder within the issuer 
and, if so, how much higher it should be and how should such a higher 
test be framed; (3) whether ``noisy withdrawal'' should be mandatory 
under some circumstances but permissive under others and, if so, what 
circumstances should make ``noisy withdrawal'' mandatory and what 
circumstances should make ``noisy withdrawal'' permissive, or whether 
``noisy withdrawal'' should be mandatory under all circumstances 
covered by Sec.  205.3(d) or should be permissive under all such 
circumstances; (4) whether it is appropriate to distinguish between 
material violations that are ongoing or impending and material 
violations that are past and have no continuing effect, and whether 
such a distinction would be meaningful to investors; (5) whether the 
attorney who has reported evidence of a material violation to which the 
issuer has not made an appropriate response must know that the reported 
material violation has occurred, is occurring, or is about to occur 
before the attorney is required, or permitted, to make a ``noisy 
withdrawal''; (6) whether an attorney should be required, or permitted, 
to make a ``noisy withdrawal'' where the attorney has not received an 
appropriate response to reported evidence of a material violation, and 
the attorney reasonably believes that the reported material violation 
has occurred, is occurring, or is about to occur; (7) whether there is 
an appropriate basis for a ``noisy withdrawal'' under circumstances in 
which an attorney reasonably believes that the reported material 
violation is likely to have occurred, be ongoing, or be about to occur; 
(8) whether there is an appropriate basis for a ``noisy withdrawal'' 
under circumstances in which the attorney reasonably believes that it 
is reasonably likely that the reported material violation has occurred, 
is ongoing, or is about to occur; (9) whether substantial injury to the 
financial interest of investors is an appropriate prerequisite to a 
``noisy withdrawal''; (10) whether substantial injury to the financial 
interest of the issuer client is an appropriate prerequisite to a 
``noisy withdrawal'' and, if so, whether such substantial injury to a 
financial interest must be reasonably certain, likely, or merely 
possible; (11) whether the rule should distinguish between outside 
attorneys and those employed by the issuer and, if so, under what 
circumstances, how, and why; (12) whether an attorney who is employed 
by an investment adviser or manager and who is appearing and practicing 
before the Commission in the representation of the investment company 
should be treated as an outside attorney retained by the investment 
company under proposed paragraph (d)(1)(i) or should be treated as an 
in-house attorney under proposed paragraph (d)(1)(ii); (13) whether the 
rule should specify the content of a disaffirmance of an opinion or 
representation; (14) whether the rule should require that any 
disaffirmance be in writing; (15) whether there are any other actions 
the rule should require an attorney to take when the attorney does not 
receive an appropriate response to his or her report of evidence of a 
material violation (e.g., should an in-house attorney be required to 
cease participating in or assisting in any matter relating to the 
violation); (16) what is the appropriate length of time to permit an 
attorney to make a ``noisy withdrawal''; (17) whether it is important 
to require any successor attorney to be notified that the previous 
attorney withdrew based on ``professional considerations'' and, if so, 
whether there is a better way to require such notification be made than 
is proposed in paragraph (d)(1)(iii); (18) whether such notification 
should be required where ``noisy withdrawal'' is merely permissive; 
(19) whether it is important to provide a ``safe harbor'' from civil 
suits for the attorney who notifies the Commission that he or she has 
withdrawn based on professional considerations under proposed paragraph 
(d) and/or disaffirmed a document; and (20) whether the ``noisy 
withdrawal'' provisions would create conflicts with applicable law for 
any attorneys (foreign or U.S.) not excluded by the definition of 
``non-appearing foreign attorney'' (section 205.2(j) of the rule as 
adopted). Should ``noisy withdrawal'' apply to these attorneys? If not, 
why not? If the provisions would create conflicts for these attorneys, 
please describe the conflicts and how they appropriately may be 
resolved.
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    \33\ See also the solicitation of comments in the Proposing 
Release.
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    The Commission is particularly interested in learning commenters' 
views on how common it is for attorneys to alert their issuer-clients' 
management or directors to evidence of violations of law but to receive 
either no response or an inappropriate response. How often would 
attorneys be required to make a ``noisy withdrawal'' under this 
provision, if adopted? Should we revise the provision so that attorneys 
must make a ``noisy withdrawal'' less often or more often? If so, how?

[[Page 6328]]

C. Alternative Proposal to ``Noisy Withdrawal''

    In response to comments received to date on Sec.  205.3(d) as 
proposed in the Proposing Release and described above, the Commission 
also proposes, and solicits comments on, the following alternative 
proposal. The alternative proposal does not contain ``noisy 
withdrawal'' and disaffirmation requirements and requires attorney 
action only where 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.
    Section 205.3(e) of the alternative proposal requires an issuer 
(rather than its attorney) to report to the Commission an attorney's 
written notice of withdrawal or failure to receive an appropriate 
response, as described in Sec.  205.3(d) of the alternative proposal. 
In connection with Sec.  205.3(e) of the alternative proposal, the 
Commission also proposes to amend Forms 8-K, 20-F, and 40-F to require 
issuers to disclose publicly an attorney's written notice of withdrawal 
within two business days of that notice.\34\ Section 205.3(f) of the 
alternative proposal permits (but does not require) an attorney to 
inform the Commission of his or her withdrawal if the issuer does not 
comply with paragraph (e).
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    \34\ On June 17, 2002, the Commission proposed to shorten the 
current deadlines for filing Form 8-K to two business days. 
``Additional Form 8-K Requirements and Acceleration of Filing 
Date,'' Release No. 33-8106. The Commission is still considering 
that rulemaking proposal and may address it separately from this 
release.
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1. Requiring an Attorney to Provide Written Notice of Withdrawal to the 
Issuer Where the Attorney Does Not Receive an Appropriate Response to 
His or Her Report of a Material Violation
    Alternative proposed Sec.  205.3(d) requires an attorney retained 
by the issuer who has reported evidence of a material violation and has 
not received an appropriate or timely response to withdraw from 
representing the issuer and to notify the issuer, in writing, that the 
withdrawal is based on professional considerations. In the same 
circumstances, an attorney employed by the issuer is required to cease 
participating or assisting in any matter concerning the violation and 
to notify the issuer, in writing, that he or she believes the issuer 
has not provided an appropriate response.
    Unlike the original proposed Sec.  205.3(d)(1), this proposed 
paragraph does not require a withdrawing attorney to notify the 
Commission of his or her withdrawal, and it does not require an 
attorney to disaffirm documents filed with the Commission. The proposed 
paragraph also does not require an attorney to withdraw or cease 
participation or assistance in a matter if he or she would be 
prohibited from doing so by order or rule of a court, administrative 
body, or other authority with jurisdiction over the attorney. 
Alternative proposed Sec.  205.3(d) provides:

    (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 paragraph (b) of this section 
rather than paragraph (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 
paragraph (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 paragraph (b) of this section.
    (2) An attorney shall not be required to take any action 
pursuant to paragraph (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 
paragraph (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 paragraph 
(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 
paragraph.

    Interested persons are invited to comment on any aspect of 
alternative proposed section 205.3(d), including: (1) Whether requiring 
a different and higher evidentiary standard for withdrawal than for 
reporting up-the-ladder of the issuer, such as requiring an attorney to 
``conclude'' there is ``substantial evidence,'' will make the 
circumstances in which an attorney must withdraw (triggering an 
issuer's notification of the Commission) too narrow adequately to 
protect investors; (2) whether requiring an attorney to make a 
separate, more definitive, determination that evidence shows that a 
material violation ``is'' ongoing or ``is'' about to occur (rather than 
is likely to be ongoing or is likely to occur) too narrows the 
circumstances in which an attorney must withdraw (triggering an 
issuer's notification of the Commission) and fails adequately to 
protect investors; (3) whether requiring an attorney to make a separate 
determination of whether ``substantial injury'' is likely will make the 
circumstances in which an attorney must withdraw (triggering an 
issuer's notification to the Commission) too narrow adequately to 
protect investors; (4) whether the proposed alternative's requirement 
that the attorney make all three determinations addressed in the three 
preceding questions (higher level of evidence, more definitiveness, and 
substantial injury) so narrows the circumstances in which an attorney 
would withdraw (and an issuer would notify the Commission) so that the 
withdrawal and reporting requirements would be rendered ineffective; 
(5) whether an issuer's ability under the adopted rule to respond 
appropriately to a report of evidence of a material violation by 
retaining or directing an attorney to assert a colorable defense 
(should one exist), with the consent of the board of directors, would 
mitigate issuer concerns about withdrawal being required in situations 
where no violation actually has occurred; (6) whether failing to apply 
mandatory withdrawal (triggering an issuer's notification of the 
Commission) to past violations fails adequately to protect investors; 
(7) whether requiring an attorney to make a determination as to whether 
a violation ``has occurred'' or whether it ``is ongoing'' adequately 
protects investors; (8) whether the proposed rule should include a 
provision permitting or requiring withdrawal from representation when 
an attorney does not receive an appropriate response to his or her 
report of a material violation; (9) whether alternative proposed 
section (d) is more compatible with existing state standards

[[Page 6329]]

governing attorney conduct than the ``noisy withdrawal'' and 
disaffirmation requirements of proposed section 205.3(d)(1)-(3) 
described above and, if so, how; (10) whether alternative proposed 
section (d) is otherwise preferable to original proposed Sec.  
205.3(d)(1)-(3) as described above and in the Proposing Release; (11) 
whether alternative proposed section (d) is more compatible with 
foreign law governing attorney conduct than the ``noisy withdrawal'' 
and disaffirmation requirements of proposed Sec.  205.3(d)(1)-(3) 
described above; if so, why; if not, why not; (12) whether an attorney 
who has reported evidence of a material violation to which the issuer 
has not made an appropriate response must know that the reported 
material violation is occurring or is about to occur before the 
attorney is required to withdraw or cease participation or assistance 
on a matter; (13) whether an attorney who is required to withdraw under 
this paragraph should be required to withdraw from all representation 
of the issuer, or only from representation on the matter concerning the 
material violation; (14) whether investors and issuers will receive 
adequate protection if the rule does not require attorneys to disaffirm 
any opinion, affirmation, representation or the like in a document the 
attorney or issuer filed with the Commission and that the attorney 
reasonably believes is or may be (or is reasonably likely to be) 
materially false or misleading; (15) whether investors and issuers will 
receive adequate protection if the rule contains no requirement that 
either an attorney or an issuer notify the Commission when the attorney 
withdraws or gives the issuer notice that he or she has not received an 
appropriate response to a report of a material violation; (16) whether 
an attorney who is prohibited from withdrawing or ceasing participation 
or assistance in a matter by a court or administrative body or other 
authority with jurisdiction over the attorney should be required to 
give notice to the issuer that, absent such prohibition, he or she 
would have taken such action or whether such a requirement is likely to 
be inconsistent with the attorney's continuing representation of the 
issuer; and (17) whether the proposal's withdrawal requirements would 
conflict with the obligations of attorneys not excluded by the ``non-
appearing foreign attorney'' definition under applicable foreign law or 
professional standards of conduct.
2. Requiring an Issuer to Report an Attorney's Written Notice of 
Withdrawal
    As noted above, the Commission received many comments opposing the 
``noisy withdrawal'' provisions of the proposed rule. One commenter 
suggested that the requirement would ``risk destroying the trust and 
confidence many issuers have up to now placed in their legal counsel, 
creating divided loyalties and driving a wedge into the attorney-client 
relationship,'' \35\ and others expressed similar views.\36\ Several 
commenters believed that the rule would not further the Commission's 
goals because it would cause clients to exclude attorneys from 
discussions that might prompt the attorney to begin the up-the-ladder 
reporting process.\37\ Foreign lawyers and law associations expressed 
concerns, both in written comments and at the Commission's December 17, 
2002 Roundtable on the International Impact of the Proposed Rules 
Regarding Attorney Conduct, that the ``noisy withdrawal'' requirements 
of the proposed rule would conflict with the laws and principles of 
confidentiality and attorney-client privilege recognized in certain 
foreign jurisdictions.\38\ Some foreign commenters stated that it 
violated principles of international comity for the Commission to 
exercise jurisdiction over the legal profession outside the U.S.\39\
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    \35\ Comments of the American Bar Association, at 26.
    \36\ See, e.g., Comments of 77 Law Firms, at 2; Comments of the 
American College of Trial Lawyers, at 2.
    \37\ See, e.g., Comments of Attorneys' Liability Assurance 
Society, Inc., at 8.
    \38\ See, e.g., Comments of the International Bar Association, 
at 5-6; Comments of the Law Society of England and Wales, at 1; 
Comments of the Japanese Federation of Bar Associations, at 3-4.
    \39\ See Comments of De Brauw Blackstone Westbroek, at 2; 
Comments of Stibbe, at 2.
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    Accordingly, the Commission solicits comments on an alternative 
proposal that would require an issuer, rather than an attorney, to 
disclose publicly an attorney's withdrawal under the rule. The 
Commission believes that this alternative approach to ``reporting 
out,'' by placing the responsibility on the issuer for such disclosure, 
addresses a number of the commenters' concerns noted above (those 
related to attorney-client privilege and those of foreign lawyers), yet 
provides some assurance that issuers will respond appropriately to 
reports of material violations by attorneys. Requiring issuers to 
report attorney withdrawals in a public filing with the Commission may 
also provide protection to investors by alerting them to the 
possibility of ongoing material violations by issuers. At least one 
commenter proposed requiring issuers, rather than attorneys, to report 
attorney resignations on Form 8-K, arguing that the proposed ``noisy 
withdrawal'' requirement ``does little to warn investors about what is 
going on at the issuer.'' \40\ In addition, the Commission invites 
comment on whether, from a corporate governance perspective, there may 
be advantages to vesting the obligation to ``report out'' an attorney's 
withdrawal for professional considerations in the board of directors of 
an issuer.
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    \40\ Comments of Jeffrey L. Schultz, at 2.
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    Proposed Sec.  205.3(e) would require an issuer who has received 
notice from an attorney under alternative proposed Sec.  205.3(d) to 
report the notice and the circumstances related thereto in an 
appropriate filing with the Commission. Proposed section 205.3(e) 
provides:

    (e) Duties of an issuer where an attorney has given notice 
pursuant to paragraph (d). (1) Where an attorney has provided an 
issuer with a written notice pursuant to paragraph (d)(1), (d)(2), 
or (d)(3) of this section, the issuer shall, within two business 
days of receipt of such written notice, report such notice and the 
circumstances related thereto on Form 8-K, 20-F, or 40-F, as 
applicable.

    Proposed Sec.  205.3(e) provides that the filing must be made by 
the issuer on Form 8-K, 20-F or 40-F, as applicable. Accordingly, the 
Commission is proposing to amend Forms 8-K, 20-F and 40-F to require 
issuers to report an attorney's written notice under alternative 
proposed paragraph (d) of the rule. These proposed amendments are 
described below.
    In connection with proposed Sec.  205.3(e), the Commission seeks 
comment on whether any circumstances exist in which an issuer should 
not be required to disclose an attorney's written notice under the 
rule. The Commission specifically seeks comment on whether an issuer 
should be permitted not to disclose an attorney's written notice where:

a committee of independent directors of the issuer's board 
determines, based on the advice of counsel that was not involved in 
the matters underlying the reported material violation, (i) that the 
attorney providing such written notice acted unreasonably in 
providing such notice, or (ii) that the issuer has, subsequent to 
such written notice, implemented an appropriate response.

    The Commission requests comment on the following questions: (1) 
Whether an issuer should be able to determine not to report an 
attorney's notice if an independent committee of the issuer's board of 
directors determines, based on

[[Page 6330]]

the advice of counsel, that subsequent to the attorney's notice, the 
issuer has implemented an appropriate response, or whether such a 
provision would be undesirable because the rule already provides 
issuers with sufficient opportunity to implement an appropriate 
response; (2) whether an issuer should be able to determine not to 
report an attorney's notice if an independent committee of the board of 
directors determines, based on the advice of counsel, that the attorney 
providing such notice acted unreasonably, or whether this provision 
would undermine the objectives of the rule; (3) whether, if an issuer 
should be able to determine not to report an attorney's notice to the 
Commission if an independent committee of the issuer's board of 
directors makes the appropriate determination, it is necessary to 
require the committee to obtain the advice of counsel not involved in 
the matters underlying the material violation; (4) whether there should 
be an alternative standard identifying when a board of directors could 
determine not to report an attorney's notice; (5) whether, with regard 
to foreign private issuers, ``an independent committee of the issuer's 
board of directors'' is the right group to make the determination that 
an attorney had acted unreasonably in providing a notice pursuant to 
Sec.  205.3(d) or that the issuer had implemented an appropriate 
response subsequent to the notice and, if so, why? If not, what other 
bodies or groups at a foreign private issuer, or with oversight or 
audit responsibilities for the foreign private issuer, might be more 
appropriate? The Commission also requests comment on whether such an 
issuer should be required to inform the reporting attorney in writing 
of a decision by a committee of independent directors of the issuer's 
board not to report the attorney's written notice in a filing with the 
Commission.\41\
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    \41\ Such a provision may be necessary in light of the proposal 
(discussed below) to permit an attorney to notify the Commission 
where an issuer has not complied with the issuer's reporting 
requirement in proposed Sec.  205.3(e).
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    Interested persons are invited to comment on any other aspect of 
alternative proposed Sec.  205.3(e), including: (1) Whether an issuer 
should be required to report an attorney's notice under paragraph 
(d)(1), (d)(2) or (d)(3); (2) whether a requirement that an issuer 
report an attorney's notice is preferable to the ``noisy withdrawal'' 
requirement in the original proposed rule; (3) whether investors will 
receive adequate protection if neither the issuer nor the attorney is 
required to report to the Commission an attorney's withdrawal or other 
notice of failure to receive an appropriate response; (4) whether it is 
inconsistent with the attorney-client privilege to require an issuer to 
report the circumstances related to an attorney's notice under 
paragraph (d)(1) or (d)(2), and whether an issuer should instead be 
permitted to report only the fact of the attorney's notice; (5) 
whether, if issuers should be required to report the circumstances 
related to an attorney's notice, and if the rule should specify which 
circumstances must be reported, which circumstances should be reported; 
(6) whether an issuer's report to the Commission under paragraph (e) 
should be confidential (e.g., in the form of confidential 
correspondence) or public; (7) whether there are circumstances in which 
requiring a public filing under paragraph (e) could harm an issuer or 
its shareholders; (8) whether investors will receive adequate 
protection if issuer reports to the Commission under paragraph (e) are 
confidential; and (9) whether the requirement that a foreign private 
issuer report an attorney's notice of withdrawal would conflict with 
applicable foreign law or foreign principles of attorney-client 
privilege or corporate governance.
3. Permitting an Attorney To Inform the Commission Where an Issuer Has 
Not Complied With the Issuer Reporting Requirements
    Proposed Sec.  205.3(f) would permit an attorney, if an issuer had 
not complied with paragraph (e), to inform the Commission that he or 
she had provided the issuer with notice under paragraph (d)(1), (d)(2) 
or (d)(3). The Commission proposes, in this paragraph, making attorney 
notification to the Commission permissive in light of the numerous 
comments it received that were critical of ``noisy withdrawal.'' 
Proposed Sec.  205.3(f) states:

    (f) Additional actions by an attorney. (1) An attorney retained or 
employed by the issuer may, if an issuer does not comply with paragraph 
(e) of this section, inform the Commission that the attorney has 
provided the issuer with notice pursuant to paragraph (d)(1), (d)(2), 
or (d)(3) of this section, indicating that such action was based on 
professional considerations.

    Interested persons are invited to comment on any aspect of 
alternative proposed Sec.  205.3(f), and to address the following 
questions in particular: (1) Would it be more consistent with the 
protection of investors to require, rather than permit, an attorney to 
inform the Commission of his or her written notice where an issuer does 
not comply with the issuer disclosure requirement? Would mandatory, 
rather than permissive, ``reporting out'' under these circumstances 
raise the same concerns as ``noisy withdrawal?'' If not, why not? If 
so, which ones; (2) assuming an issuer were permitted not to disclose 
an attorney's written notice if an independent committee of the 
issuer's board of directors were to make an appropriate determination, 
should an attorney be permitted to inform the Commission that he or she 
has provided the issuer with notice pursuant to paragraph (d) where the 
attorney disagrees with the independent committee's determination, or 
should the attorney be permitted to inform the Commission that he or 
she has provided the issuer with notice only where the issuer fails to 
report the notice without the required determination by the independent 
committee?

D. Proposed Amendments to Forms

1. Proposed Amendment to Form 8-K
    The Commission proposes to amend Form 8-K to add a new item 
specifically designed for issuer disclosure, under alternative proposed 
Sec.  205.3(e), of an attorney's written notice under alternative 
proposed Sec.  205.3(d). Form 8-K prescribes information, such as 
material events or corporate changes, that an issuer subject to the 
reporting requirements of Sections 13(a) or 15(d) of the Exchange Act 
must disclose on a current basis. The proposed amendment to Form 8-K 
would require an issuer to report an attorney's written notice of 
withdrawal or failure to receive an appropriate response under 
alternative proposed Sec.  205.3(e) within two business days of 
receiving the written notice.
    Proposed Sec.  205.3(e) also would apply to issuers that are 
registered investment companies. Exchange Act Rules 13a-11(b) \42\ and 
15d-11(b), \43\ however, generally exempt registered investment 
companies from Form 8-K filing requirements. We recently amended those 
rules to require registered investment companies to file on Form 8-K in 
order to meet any filing obligations that might arise under Regulation 
BTR. \44\ We are today

[[Page 6331]]

proposing an additional amendment to Exchange Act Rules 13a-11(b) and 
15d-11(b) that would subject registered investment companies to Form 8-
K filing requirements for the purpose of meeting any filing obligations 
that arise under proposed section 205.3(e).
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    \42\ 17 CFR 240.13a-11(b).
    \43\ 17 CFR 240.15d-11(b).
    \44\ See Release No. 34-47225 (Jan. 22, 2003). Regulation 
Blackout Trading Restriction (BTR) under the Exchange Act (17 CFR 
245.100-104) clarifies the scope and application of Section 306(a) 
of the Sarbanes-Oxley Act of 2002, which prohibits any director or 
executive officer of an issuer from, directly or indirectly, 
purchasing, selling or otherwise acquiring or transferring any 
equity security of the issuer during a pension plan blackout period 
that prevents plan participants and beneficiaries from engaging in 
transactions involving issuer equity securities held in their plan 
accounts.
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    We solicit comments on all aspects of this proposal and the effects 
it would have on issuers and the benefits it would provide to 
investors. We ask the following additional questions: (1) Is Form 8-K 
the appropriate form to use for this type of disclosure or should the 
Commission adopt a new form exclusively for such reports; (2) should 
issuers be permitted to make such reports in their periodic filings, 
such as Form 10-Q \45\ or Form 10-K; \46\ (3) is two business days the 
appropriate amount of time in which to require issuers to make the 
filing? What other amount of time might be more appropriate and what 
factors should we consider in determining the right amount of time 
under this rule? Should the time calculation use calendar days or U.S. 
business days; (4) should we exclude registered investment companies 
from proposed requirements to disclose under section 205.3(e)? If so, 
what would be the rationale for the exclusion? If we exclude registered 
investment companies, should we require them to meet their filing 
obligations under proposed Sec.  205.3(e) in some other manner, e.g., 
by filing a new form specifically for registered investment companies, 
Form N-CSR, \47\ or some other means? With regard to the proposed Form 
8-K filing requirement, we request public comment on the applicability 
of this requirement to registered investment companies, as well as 
feasible alternatives that would reduce the reporting burdens on 
registered investment companies. In addition, we request comment on the 
utility to investors of the reports to the Commission in relation to 
the costs to registered investment companies and their affiliated 
persons of providing those reports.
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    \45\ 17 CFR 308a.
    \46\ 17 CFR 310.
    \47\ 17 CFR 249.331 and 17 CFR 274.128.
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2. Proposed Amendments to Forms 20-F and 40-F for Foreign Private 
Issuers
    With the globalization of the U.S. capital markets, there has been 
a marked increase in the number of companies from non-U.S. 
jurisdictions registering securities with the Commission. At present, 
there are over 1,300 foreign private issuers \48\ from 59 countries 
that are filing reports with the Commission under the Exchange Act, as 
compared with approximately 400 issuers from less than 30 countries in 
1990. The Commission realizes that the application of Section 307 and 
the rules we are proposing under Part 205 to foreign law firms, 
multijurisdictional law firms, foreign lawyers employed by those law 
firms and foreign registrants, raises a number of significant and 
difficult issues. We are requesting comment on a broad range of 
questions in this area, including whether foreign law firms and foreign 
lawyers should be exempt from Part 205.
---------------------------------------------------------------------------

    \48\ The term ``foreign private issuer'' is defined in Exchange 
Act Rule 3b-4(c) [17 CFR 240.3b-4(c)].
---------------------------------------------------------------------------

    Foreign private issuers that are subject to the periodic reporting 
requirements under the Exchange Act generally are not required to file 
current reports on Form 8-K. \49\ Rather, many of the disclosures 
required of foreign private issuers are made on either Form 20-F or 
Form 40-F (in the case of some Canadian issuers), which are integrated 
forms used both as registration statements for purposes of registering 
securities of qualified foreign private issuers under Section 12 of the 
Exchange Act \50\ or as annual reports under Section 13(a) \51\ or 
15(d) \52\ of the Exchange Act.
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    \49\ See Exchange Act Rules 13a-11(b) and 15d-11(b) [17 CFR 
240.13a-11(b) and 240.15d-11(b)].
    \50\ 15 U.S.C. 78l.
    \51\ 15 U.S.C. 78m(a).
    \52\ 15 U.S.C. 78o(d).
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    Our rules pertaining to attorney conduct apply to attorneys for 
foreign private issuers, and we believe that foreign private issuers 
should have the same reporting duties as those proposed for domestic 
issuers in the alternative proposed section 205.3(e). Accordingly, we 
propose to require foreign private issuers to file a report on either 
Form 20-F or 40-F, as applicable, in order to make these disclosures. 
The proposal to amend these forms is designed to respond to comments we 
received from foreign attorneys and regulators stating that the 
original proposed ``noisy withdrawal'' requirement may conflict with 
foreign standards of attorney conduct. The proposed amendments to these 
forms would require an issuer to report to the Commission an attorney's 
written notice of withdrawal or failure to receive an appropriate 
response. The foreign private issuer would be required to make the 
disclosure by filing the form within two business days of the 
attorney's written notice. The proposed amendments provide that a 
filing for this purpose may consist only of the facing page of the 
form, the information required under the appropriate item of the form, 
and a signature page; issuers would not be required to file a complete 
Form 20-F or 40-F each time they made a disclosure of an attorney's 
written notice. \53\
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    \53\ Similarly, the report would not need to be certified by the 
issuer's principal executive officer or principal financial officer 
under Exchange Act Rules 13a-14 and 15d-14 [17 CFR 240.13a-14 and 
240.15d-14].
---------------------------------------------------------------------------

    We solicit comments on all aspects of this proposal and the effects 
it would have on foreign private issuers and the benefits it would 
provide to investors. Furthermore, we ask the following additional 
questions: (1) Is it appropriate to require a filing on Form 20-F or 
40-F in order to meet these new disclosure requirements, or should we 
require that this disclosure be made on some other form? Would it be 
more appropriate to require that this disclosure be made on Form 6-K? 
\54\ Should the Commission create a separate disclosure form (similar 
to Form 8-K) for these reports by foreign private issuers; (2) will 
there be any additional consequences to requiring that this disclosure 
be made on Form 20-F or 40-F; (3) would this type of mandatory 
disclosure requirement impose undue burdens on foreign companies that 
have chosen to register their securities in the United States? What 
might those burdens be? Would it discourage foreign companies from 
registering their securities in the United States? If so, would a broad 
exception for foreign companies disadvantage U.S. companies? Would such 
an exception lead U.S. companies to relocate off-shore; (4) is two 
business days the appropriate amount of time to allow foreign private 
issuers to make the required filing? What other amount of time might be 
more appropriate and what factors should we consider in determining the 
right amount of time under this rule? Should the time calculation use 
calendar days or U.S. business days? Would it be sufficient to require 
foreign private issuers to report this information on an annual basis 
in their annual reports on Form 20-F or 40-F; (5) should we allow any 
exceptions for certain foreign private issuers to this new proposed 
rule in light of the differing regulatory regimes for foreign attorneys 
and foreign private issuers? Which foreign private issuers would need 
such an exception and when should it be granted? How would

[[Page 6332]]

any exceptions we might grant affect the benefits to investors that 
would otherwise accrue from the application of this rule to foreign 
private issuers; (6) would the disclosure requirements of proposed 
paragraph (e) effect a waiver of the attorney-client privilege by a 
foreign private issuer or present other special problems for foreign 
private issuers under applicable foreign law?
---------------------------------------------------------------------------

    \54\ 17 CFR 249.30b. See generally Release No. 33-8106, 
``Proposed Rule: Additional Form 8-K Disclosure Requirements and 
Acceleration of Filing Date'', for a discussion of the types of 
information reported on Form 6-K and for our solicitation of comment 
as to whether the requirements of that form should be otherwise 
modified.
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IV. General Request for Comments

    The Commission requests comments on the rules and amendments 
proposed in this release, whether any further changes to our rules or 
forms are necessary or appropriate to implement the objectives of our 
proposed amendments, and on other matters that might have an effect on 
the proposals contained in this release.

V. Paperwork Reduction Act

    The proposed rules and form amendments contain ``collection of 
information'' requirements within the meaning of the Paperwork 
Reduction Act of 1995 (``PRA''). \55\ We are submitting the proposed 
rules and form amendments to the Office of Management and Budget 
(``OMB'') for review in accordance with the PRA. \56\ The title for the 
proposed collection of information with respect to the proposed amended 
Rule 205.3 is ``Notifications Under Part 205.'' The titles for the 
collections of information with respect to the proposed form amendments 
are ``Form 20-F'' (OMB Control No. 3235-0288), ``Form 40-F'' (OMB 
Control No. 3235-0381) and ``Form 8-K'' (OMB Control No. 3235-0060).
---------------------------------------------------------------------------

    \55\ 44 U.S.C. 3501 et seq.
    \56\ 44 U.S.C. 3507(d) and 5 CFR 1320.11.
---------------------------------------------------------------------------

    The Commission has adopted rules to impose an up-the-ladder 
reporting requirement when attorneys appearing and practicing before 
the Commission become aware of evidence of a material violation by the 
issuer or any officer, director, employee or agent of the issuer. The 
information collections in the proposed amendments to the rules are 
necessary to implement the Standards of Professional Conduct for 
Attorneys prescribed by the proposed rule. Specifically, the 
collections of information are intended to ensure that in the rare 
cases in which issuers do not act appropriately after being informed of 
possible violations, the information would be communicated to the 
public and the Commission, so that the Commission could take 
appropriate action. The collection of information is, therefore, an 
important component of the Commission's program to discourage 
violations of the federal securities laws and promote ethical behavior 
of attorneys appearing and practicing before the Commission.
    The respondents to the proposed collections of information would be 
lawyers, issuers, and officers, directors and committees of issuers. We 
cannot estimate with precision how many attorneys will be subject to 
the ``noisy withdrawal'' requirements, if adopted. There are 
approximately 18,200 issuers that may employ or retain attorneys that 
would be subject to the rule. \57\ These issuers may employ in-house 
attorneys, outside counsel, or a combination of both. We believe, 
however, that it will be the rare occasion when, as a last resort, a 
disclosure will be made to the Commission. In the vast majority of 
cases, we expect that problems will be resolved at the corporate level, 
and the Commission will not be notified. We therefore estimate for the 
purposes of the PRA that approximately 10 attorneys, CLOs, CEOs, or 
QLCCs will make one disclosure to the Commission per year. Depending on 
the circumstances, the disclosure could consist of a notice of 
withdrawal (and, in some cases, a similar notice to the issuer and a 
CLO's notice to successor attorneys), a notice of material violations, 
a notice of discharge, a notice of disaffirmation, a disaffirmation, or 
some combination thereof. The burden hours for the disclosure will 
obviously vary depending on the circumstances. We believe that none of 
the components of the disclosure, however, would require a significant 
amount of time to compile. We therefore estimate, for purposes of the 
PRA, that on average, each disclosure would require 10 burden hours. 
Under these assumptions, this aspect of the collection of information 
would impose approximately 100 annual burden hours. Assuming half the 
burden hours will be incurred by outside counsel at a rate of $300 per 
hour, the total cost would be $15,000.
---------------------------------------------------------------------------

    \57\ This estimate is based, in part, on the total number of 
operating companies that filed annual reports on Form 10-K (8,484), 
Form 10-KSB (3,820), Form 20-F (1,194) or Form 40-F (134) during the 
2001 fiscal year, and an estimate of the average number of issuers 
that may have a registration statement filed under the Securities 
Act pending with the Commission at any time (100). In addition, we 
estimate that approximately 4,500 investment companies currently 
file periodic reports on Form N-SAR.
---------------------------------------------------------------------------

    Lawyers under the alternative proposal would not be required to 
report out, but they would be required, if they do not receive an 
appropriate response to a report of a material violation, to notify the 
issuer in writing that their withdrawal is based on professional 
considerations or that they believe that the issuer has not provided an 
appropriate response in a reasonable time period to their report. In 
addition, in the cases where a lawyer provides notice to an issuer, the 
CLO will be required to notify the successor attorney of the 
predecessor lawyer's withdrawal. For purposes of the PRA, we estimate 
that 10 lawyers or CLOs will make such written notifications each year 
and that each notification will require one hour. Proposed Sec.  
205.3(f) permits, but does not require, a withdrawing attorney to 
notify the Commission if the issuer does not comply with proposed Sec.  
205.3(e). For purposes of the PRA, we estimate that five lawyers will 
make a voluntary submission under Sec.  205.3(f) and that each report 
would impose a burden of 10 hours.
    We therefore estimate that this collection of information will have 
a total annual burden of 100 hours if the ``noisy withdrawal'' proposal 
is adopted and a total annual burden of 60 hours if the alternative 
proposal is adopted.
    As we stated above, we estimate that there are approximately 18,200 
issuers that would be subject to the proposed rule. We cannot estimate 
with precision how many issuers will be subject to the alternative 
rule's requirements or, if adopted, how frequently they will be 
required to notify the Commission that their attorney has notified them 
that they withdrew or that they did not receive an appropriate response 
to a report of a material violation. Under those circumstances, the 
issuer must file a form with the Commission. We estimate for the 
purposes of the PRA that approximately eight U.S. issuers, one Canadian 
issuer and one foreign private issuer per year will make one disclosure 
to the Commission. We estimate, for purposes of the PRA, that on 
average, each disclosure would require five burden hours. Under these 
assumptions, this aspect of the collection of information would impose 
approximately 40 annual burden hours to file Form 8-K, five hours to 
file Form 40-F and five hours to file Form 20-F. We assume that 25% of 
the burden hours for issuers that file on Form 8-K, and 75% of the 
burden hours for issuers that file on Form 20-F or 40-F, will be 
incurred by outside counsel at a rate of $300 per hour. \58\ Using 
these assumptions, we estimate this aspect of these collections of 
information would result in a cost of $5,250.
---------------------------------------------------------------------------

    \58\ This allocation of the burden is consistent with our recent 
PRA submissions for Exchange Act Reports. See, e.g., Release No. 33-
8098 (May 10, 2002) [67 FR 35620].

---------------------------------------------------------------------------

[[Page 6333]]

    Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits 
comments to: (i) Evaluate whether the proposed collections of 
information are necessary for the proper performance of the functions 
of the agency, including whether the information will have practical 
utility; (ii) evaluate the accuracy of the Commission's estimate of the 
burden of the proposed collections of information; (iii) determine 
whether there are ways to enhance the quality, utility, and clarity of 
the information to be collected; and (iv) evaluate whether there are 
ways to reduce the burden of the collections of information on those 
who are to respond, including through the use of automated collection 
techniques or other forms of information technology.
    Persons submitting comments on the collections of information 
requirements should direct the comments to the Office of Management and 
Budget, Attention: Desk Officer for the Securities and Exchange 
Commission, Office of Information and Regulatory Affairs, Washington, 
DC 20503, and should send a copy to Jonathan G. Katz, Secretary, 
Securities and Exchange Commission, 450 Fifth Street, NW., Washington, 
DC 20549-0609, with reference to File No. S7-45-02. Requests for 
materials submitted to OMB by the Commission with regard to these 
collections of information should be in writing, refer to File No. S7-
45-02, and be submitted to the Securities and Exchange Commission, 
Records Management, Office of Filings and Information Services. OMB is 
required to make a decision concerning its review of the collections of 
information between 30 and 60 days after publication of this release. 
Consequently, a comment to OMB is assured of having its full effect if 
OMB receives it within 30 days of publication.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collections of information unless it displays a 
currently valid control number. Compliance with the collections of 
information requirements is, as described above, in some cases 
mandatory and in some cases voluntary depending upon the circumstances. 
There is no mandatory record retention period. Responses to the 
requirements to make disclosures to the Commission will not be kept 
confidential.

VI. Costs and Benefits

    We are proposing amendments to section 205.3 and Forms 8-K, 20-F 
and 40-F to more fully implement Section 307 of the Sarbanes-Oxley Act 
and recently adopted Part 205. Part 205 affects all attorneys who 
appear and practice before the Commission in the representation of an 
issuer and who become aware of evidence of a material violation of the 
federal securities laws, a material breach of fiduciary duty, or a 
similar material violation by the issuer or an officer, director, agent 
or employee of the issuer that has occurred, is ongoing, or is about to 
occur. We are sensitive to the costs and benefits of our proposal. We 
discuss these costs and benefits below.
    Part 205 imposes an up-the-ladder reporting requirement for 
attorneys representing an issuer before the Commission who become aware 
of potential misconduct of which a reasonably prudent investor in the 
issuer would want to be informed. It is expected that, in the vast 
majority of instances of such reports, the situation will be addressed 
and remedied before it causes significant harm to investors. Where the 
potential impropriety is ongoing and not taken care of internally 
following a report mandated by the rule, we are proposing an 
alternative means of providing notice to the Commission and the public. 
Previously, we have proposed that the attorney, if retained by the 
issuer, effectuate a ``noisy withdrawal'' from representation of the 
issuer and disaffirm to the Commission any tainted documents, which 
will alert the Commission to investigate the issuer. In this release we 
are proposing that the attorney would have to inform the issuer and the 
issuer would be required to inform the Commission.

A. Benefits

    Many commenters on our original proposal noted that a ``noisy 
withdrawal'' may violate the attorney-client privilege, chill the 
zealous advocacy of lawyers and create an incentive for issuers not to 
seek legal advice on certain matters. Our alternative therefore allows 
the attorney to withdraw without notifying the Commission. Instead, the 
issuer must report the attorney's withdrawal to the Commission in a 
public filing. Thus, the Commission and the public obtain the benefit 
of the information of the attorney's withdrawal (at least when the 
issuer acts properly) where a violation of the law is likely, the 
lawyer may preserve the attorney-client privilege and the issuer has 
the opportunity to remedy the situation before disclosure is required. 
In addition, attorneys licensed in foreign jurisdictions would not be 
required to violate applicable professional obligations. These benefits 
are difficult to quantify. Interested persons are invited to comment 
upon this benefits analysis. Are there other foreseeable benefits? What 
is the likely economic impact of these benefits? Can the benefits be 
quantified in any meaningful way? If so, how, and what conclusions 
should be drawn?

B. Costs

    The proposed form amendments will impose costs on issuers. Issuers 
would be subject to the additional cost of preparing and filing a brief 
report to the Commission on Forms 8-K, 20-F or 40-F, as applicable. 
This may require the issuer to report its own potentially illegal act 
to the Commission (although an issuer accused of wrongdoing may be less 
likely to report itself than the withdrawing attorney may be). 
Investors may treat the news that an attorney has resigned as proof of 
wrongdoing before any formal proceedings are brought. The issuer's cost 
of capital may increase. Unlike the ``noisy withdrawal'' proposal, this 
proposal would not require the attorney to disaffirm any corporate 
filings that he or she participated in drafting, which would provide 
clearer information about what the withdrawal signifies.
    Issuers that receive notice that their lawyers have withdrawn for 
professional considerations will be required to file a Form 8-K (or 
comparable forms by foreign private issuers). For purposes of the PRA, 
we estimated that ten issuers will file such a report each year and 
that each form will impose a burden of five hours. Using estimates 
derived from our Paperwork Reduction Analysis, we estimate that the 
incremental impact of our proposals will result in a total cost of 
$8,825.\59\ In addition, the withdrawing lawyer will be required to 
notify the issuer and may notify the Commission. For purposes of the 
PRA, we estimated that lawyers will make ten such required 
notifications and five such permissive notifications a year, for a 
combined burden of 60 hours. Assuming a cost of $300 an hour, this 
paperwork burden imposes a cost of $18,000.
---------------------------------------------------------------------------

    \59\ For purposes of the Paperwork Reduction Act, we estimate 
that the proposals would result in 32.5 burden hours and $5,250 in 
external costs. Assuming a cost of $110/hour for in-house 
professional staff, the total cost of the burden would be $8,825. 
The $110/hour estimate is derived from The SIA Report on Management 
and Professional Earnings for the Securities Industry (Oct. 2001).
---------------------------------------------------------------------------

    Interested persons are invited to comment upon this costs analysis. 
Are there other foreseeable costs? What is the likely economic impact 
of these costs? Can the costs be quantified in any meaningful way? If 
so, how, and what conclusions should be drawn? Interested persons are 
invited to address

[[Page 6334]]

all aspects of costs and benefits attributable to proposed Part 205. 
The Commission requests data to quantify the expected costs and the 
value of the anticipated benefits.

VII. Effect on Efficiency, Competition and Capital Formation

    Section 23(a)(2) of the Exchange Act (15 U.S.C. 78w(a)(2)) requires 
us, when adopting rules under the Exchange Act, to consider the impact 
that any new rule would have on competition. Section 23(a)(2) prohibits 
us from adopting any rule that would impose a burden on competition not 
necessary or appropriate in furtherance of the purposes of the Exchange 
Act. In addition, Section 2(b) of the Securities Act,\60\ Section 3(f) 
of the Exchange Act,\61\ and Section 2(c) of the Investment Company Act 
\62\ require us when engaging in rulemaking where we are required to 
consider or determine whether an action is necessary or appropriate in 
the public interest, to consider, in addition to the protection of 
investors, whether the action will promote efficiency, competition and 
capital formation.
---------------------------------------------------------------------------

    \60\ 15 U.S.C. 77b(b).
    \61\ 15 U.S.C. 78c(f).
    \62\ 15 U.S.C. 80a-2(c).
---------------------------------------------------------------------------

    The proposals should boost investor confidence in the financial 
markets. We anticipate that these proposals would enhance the proper 
functioning of the capital markets and promote efficiency by reducing 
the likelihood that illegal behavior would remain undetected and 
unremedied for long periods of time. Proposed section 205.3(d)-(f) 
would apply to all issuers and attorneys appearing before the 
Commission and is therefore unlikely to affect competition.
    Interested persons are invited to comment upon any aspect of this 
analysis. We request comment on whether proposed section 205.3(d)-(f), 
if adopted, would impose a burden on competition. For example, would 
U.S. lawyers face a competitive disadvantage because attorneys 
practicing outside the U.S. would not be required to comply with the 
proposal's withdrawal requirements to the extent that such compliance 
is prohibited by applicable foreign law? Commenters are requested to 
provide empirical data and other factual support for their views if 
possible.

VIII. Initial Regulatory Flexibility Analysis

    This Initial Regulatory Flexibility Analysis has been prepared in 
accordance with 5 U.S.C. 603.

A. Reasons for the Proposed Action

    We are proposing section 205.3 to more fully implement Section 307 
of the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7245 et seq.) (``the 
Act'') and recently adopted Part 205 of Title 17 of the Code of Federal 
Regulations.

B. Objectives

    Section 307 of the Act requires the Commission to prescribe 
``minimum standards of professional conduct for attorneys appearing and 
practicing before the Commission in any way in the representation of 
issuers.'' The standards must include a rule requiring an attorney to 
report ``evidence of a material violation of securities laws 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); and, if they do not respond 
appropriately to the evidence, requiring the attorney to report the 
evidence to the audit committee, another committee of independent 
directors, or the full board of directors. This proposal is designed to 
address those circumstances where the attorney withdraws from 
representation due to professional considerations. We originally 
proposed to require the attorney to report such a withdrawal to the 
Commission; we are still considering that option. However, we are now 
also proposing an alternative whereby the withdrawing attorney would 
notify the issuer and the issuer would be required to notify the 
Commission. An objective is to provide notice of such an event to both 
the Commission and the public without unduly intruding on the attorney-
client relationship.

C. Legal Basis

    We are proposing the new rules and amendments under the authority 
set forth in Sections 7, 10 and 19 of the Securities Act of 1933, 
Sections 3(b), 4C, 12, 13, 15 and 23(a) of the Securities Exchange Act 
of 1934, Sections 30, 38 and 39 of the Investment Company Act of 1940, 
Section 211 of the Investment Advisers Act of 1940, and Sections 3(a), 
307 and 404 of the Sarbanes-Oxley Act of 2002.

D. Small Entities Subject to Proposed Part 205

    The proposed additions to Part 205 would affect issuers that are 
small entities. Exchange Act Rule 0-10(a) (17 CFR 240.0-10(a)) defines 
an issuer, other than an investment company, to be a ``small business'' 
or ``small organization'' if it had total assets of $5 million or less 
on the last day of its most recent fiscal year. As of October 23, 2002, 
we estimated that there were approximately 2,500 issuers, other than 
investment companies, that may be considered small entities. For 
purposes of the Regulatory Flexibility Act, an investment company is a 
small entity if it, together with other investment companies in the 
same group of related investment companies, has net assets of $50 
million or less as of the end of its most recent fiscal year.\63\ We 
estimate that there are 211 small investment companies that would be 
subject to the proposed rule. The proposed revisions would apply to any 
small entity that is subject to Exchange Act reporting requirements.
---------------------------------------------------------------------------

    \63\ 17 CFR 270.0-10.
---------------------------------------------------------------------------

    The proposed additions to Part 205 also would affect law firms that 
are small entities. The Small Business Administration has defined small 
business for purposes of ``offices of lawyers'' as those with under $6 
million in annual revenue.\64\ Because we do not directly regulate law 
firms appearing before the Commission, we do not have data to estimate 
the number of small law firms that practice before the Commission or, 
of those, how many have revenue of less than $6 million. We request 
data on that issue.
---------------------------------------------------------------------------

    \64\ 13 CFR 121.201.
---------------------------------------------------------------------------

E. Reporting, Recordkeeping, and Other Compliance Requirements

    Lawyers who believe that their issuer client is engaged in ongoing 
illegal conduct would be required to notify their client and withdraw 
from the representation. Issuers who receive such notices would be 
required to notify the Commission and the successor lawyer of the 
withdrawal. The time required for the actual preparation of a report 
would vary, but should not be extensive.

F. Duplicative, Overlapping, or Conflicting Federal Rules

    Proposed Sec.  205.3 would not duplicate, overlap, or conflict with 
other federal rules. There are no other statutory federal requirements 
that small entities make similar reports or provide similar 
information.

G. Agency Action To Minimize Effect on Small Entities

    The Regulatory Flexibility Act directs the Commission to consider 
significant alternatives that would accomplish the stated objective, 
while minimizing any significant adverse impact on small entities. In 
connection with the proposed rule, we considered the following 
alternatives: (a) The establishment of differing compliance or

[[Page 6335]]

reporting requirements that take into account the resources available 
to small entities; (b) the clarification, consolidation, or 
simplification of the reporting requirements for small entities; (c) an 
exemption from coverage of the requirements, or any part thereof, for 
small entities; and (d) the use of performance rather than design 
standards.
    The Act does not contain any exemption or other limitation for 
small entities. We believe that utilizing different reporting or other 
compliance requirements for small entities would seriously undermine 
the effective functioning of the proposed reporting regime. The 
proposed rule is designed to help restore investor confidence in the 
reliability of the financial statements of the companies they invest 
in--if small entities were not subject to such requirements, investors 
might decline to invest in their securities. Further, we see no valid 
justification for imposing different standards of conduct upon small 
law firms than would apply to others who choose to appear and practice 
before the Commission. We also believe that the proposed reporting and 
recordkeeping requirements will be at least as well understood by small 
entities as would be any alternate formulation we might propose to 
apply to them. Therefore, it does not seem necessary or appropriate to 
develop separate requirements for small entities. We nevertheless 
solicit comment on whether small entities should be subject to 
different requirements.

H. Solicitation of Comments

    Interested persons are invited to comment upon any aspect of this 
Initial Regulatory Flexibility Analysis. In particular, we request 
comments concerning: (1) The number of law practices that constitute 
small entities; (2) the number of small entities that may be affected 
by proposed section 205.3; (3) the existence or nature of the potential 
impact of the proposed rule on small entities; and (4) how to quantify 
the impact of the proposed revisions. Commenters are asked to describe 
the nature of any impact and provide empirical data supporting the 
extent of the impact. Such comments will be considered in the 
preparation of the Final Regulatory Flexibility Analysis, if the 
proposed rule is adopted, and will be placed in the same public file as 
comments on the proposed rule itself.

IX. Small Business Regulatory Enforcement Fairness Act

    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996 (``SBREFA''),\65\ we must advise the OMB as to whether the 
proposed rule constitutes a ``major'' rule. Under SBREFA, a rule is 
considered ``major'' where, if adopted, it results or is likely to 
result in an annual effect on the economy of $100 million or more 
(either in the form of an increase or a decrease); a major increase in 
costs or prices for consumers or individual industries; or significant 
adverse effects on competition, investment, or innovation. Where a rule 
is ``major,'' its effectiveness will generally be delayed for 60 days 
pending Congressional review. We request comment on the potential 
impact of the proposed rule on the economy on an annual basis. 
Commenters are requested to provide empirical data and other factual 
support for their views to the extent possible.
---------------------------------------------------------------------------

    \65\ Pub. L. 104-121, Title II, 110 Stat. 857 (1996) (codified 
in various sections of 5 U.S.C., 15 U.S.C., and as a note to 5 
U.S.C. 601).
---------------------------------------------------------------------------

X. Statutory Basis and Text of Proposed Amendments to Parts 205, 240 
and 249

    The proposals contained in this document are being proposed under 
the authority in Sections 3, 307, and 404 of the Sarbanes-Oxley Act of 
2002,\66\ Sections 7, 10 and 19 of the Securities Act of 1933,\67\ 
Sections 3(b), 4C, 12, 13, 15 and 23 of the Securities Exchange Act of 
1934,\68\ Sections 30, 38 and 39 of the Investment Company Act of 
1940,\69\ and Section 211 of the Investment Advisers Act of 1940.\70\
---------------------------------------------------------------------------

    \66\ 15 U.S.C. 7202, 7245, 7262.
    \67\ 15 U.S.C. 77g, 77j and 77s.
    \68\ 15 U.S.C. 78c(b), 78d-3, 78l, 78m, 78o and 78w.
    \69\ 15 U.S.C. 80a-29, 80a-37, 80a-38.
    \70\ 15 U.S.C. 80b-11.
---------------------------------------------------------------------------

List of Subjects

17 CFR Part 205

    Standards of conduct for attorneys.

17 CFR Parts 240 and 249

    Reporting and recordkeeping requirements, Securities.

    For the reasons set out in the preamble, the Commission proposes to 
amend Title 17, Chapter II, of the Code of Federal Regulations to read 
as follows:

PART 205--STANDARDS OF PROFESSIONAL CONDUCT FOR ATTORNEYS APPEARING 
AND PRACTICING BEFORE THE COMMISSION IN THE REPRESENTATION OF AN 
ISSUER

    1. The authority citation for Part 205 continues to read as 
follows:

    Authority: 15 U.S.C. 77s, 78d-3, 78w, 80a-37, 80a-38, 80b-11, 
7202, 7245, and 7262.

    2. Amend Sec.  205.3 by:
    a. Redesignating paragraph (d) as paragraph (g); and
    b. Adding new paragraphs (d), (e) and (f).
    The additions read as follows:


Sec.  205.3  Issuer as client.

* * * * *
    (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 paragraph (b) of this section rather than paragraph (c) 
of this section:
    (i) Does not receive an appropriate response, or has not received a 
response in a reasonable time,
    (ii) Has followed the procedures set forth in paragraph (b)(3) of 
this section, and
    (iii)Reasonably concludes that there is substantial evidence of a 
material violation that is ongoing or is 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 paragraph 
(b) of this section.
    (2) An attorney shall not be required to take any action pursuant 
to paragraph (d)(1) 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 this paragraph (d)(1) or (d)(2), 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

[[Page 6336]]

an attorney who has given notice to an issuer pursuant to paragraph 
(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 paragraph.
    (e) Duties of an issuer where an attorney has given notice pursuant 
to paragraph (d). Where an attorney has provided an issuer with a 
written notice pursuant to paragraph (d)(1), (d)(2) or (d)(3) of this 
section, the issuer shall, within two business days of receipt of such 
written notice, report such notice and the circumstances related 
thereto on Form 8-K, 20-F, or 40-F (Sec. Sec.  249.308, 220f or 240f of 
this chapter), as applicable.
    (f) Additional actions by an attorney. An attorney retained or 
employed by the issuer may, if an issuer does not comply with paragraph 
(e) of this section, inform the Commission that the attorney has 
provided the issuer with notice pursuant to paragraph (d)(1), (d)(2), 
or (d)(3) of this section, indicating that such action was based on 
professional considerations.
* * * * *

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 
1934

    3. The authority citation for Part 240 is amended by adding the 
following citations in numerical order to read as follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i, 
78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5, 
78w, 78x, 78ll, 78mm, 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-37, 80b-
3, 80b-4 and 80b-11, unless otherwise noted.
* * * * *
    Section 240.13a-11 is also issued under Secs. 3(a) and 307, Pub. 
L. 107-204, 116 Stat. 745.
* * * * *
    Section 240.13a-17 is also issued under Secs. 3(a) and 307, Pub. 
L. 107-204, 116 Stat. 745.
* * * * *
    Section 240.15d-11 is also issued under Secs. 3(a) and 307, Pub. 
L. 107-204, 116 Stat. 745.
* * * * *
    Section 240.15d-17 is also issued under Secs. 3(a) and 307, Pub. 
L. 107-204, 116 Stat. 745.
* * * * *
    4. Section 240.13a-11 is amended by revising paragraph (b) to 
read as follows:


Sec.  240.13a-11  Current reports on Form 8-K (Sec.  249.308 of this 
chapter).

* * * * *
    (b) This section shall not apply to foreign governments, foreign 
private issuers required to make reports on Form 6-K (17 CFR 249.306) 
pursuant to Sec.  240.13a-16, issuers of American Depositary Receipts 
for securities of any foreign issuer, or investment companies required 
to file reports pursuant to Sec.  270.30b1-1 of this chapter under the 
Investment Company Act of 1940, except where such investment companies 
are required to file:
    (1) Notice of a blackout period pursuant to Sec.  245.104 of this 
chapter, or
    (2) A notice regarding an attorney withdrawal pursuant to Sec.  
205.3(e) of this chapter.
    5. Add Sec.  240.13a-17 to read as follows:


Sec.  240.13a-17  Reports of foreign private issuers pursuant to Sec.  
205.3(e) of this chapter.

    Every foreign private issuer which is subject to Sec.  240.13a-1 
shall make reports pursuant to Sec.  205.3(e) of this chapter. If a 
foreign private issuer is filing a report on Form 20-F (Sec.  249.220f 
of this chapter) or Form 40-F (Sec.  249.240f of this chapter) solely 
to provide information pursuant to Sec.  205.3(e) of this chapter, the 
foreign private issuer is not required to include the certifications 
required by Sec.  240.13a-14 in such report.
    6. Section 240.15d-11 is amended by revising paragraph (b) to read 
as follows:


Sec.  240.15d-11  Current reports on Form 8-K (Sec.  249.308 of this 
chapter).

* * * * *
    (b) This section shall not apply to foreign governments, foreign 
private issuers required to make reports on Form 6-K (17 CFR 249.306) 
pursuant to Sec.  240.15d-16, issuers of American Depositary Receipts 
for securities of any foreign issuer, or investment companies required 
to file periodic reports pursuant to Sec.  270.30b1-1 of this chapter 
under the Investment Company Act of 1940, except where such investment 
companies are required to file:
    (1) Notice of a blackout period pursuant to Sec.  245.104 of this 
chapter, or
    (2) A notice regarding an attorney withdrawal pursuant to Sec.  
205.3(e) of this chapter.
    7. Add Sec.  240.15d-17 to read as follows:


Sec.  240.15d-17  Reports of foreign private issuers pursuant to Sec.  
205.3(e) of this chapter.

    Every foreign private issuer which is subject to Sec.  240.15d-1 
shall make reports pursuant to Sec.  205.3(e) of this chapter. If a 
foreign private issuer is filing a report on Form 20-F (Sec.  249.220f 
of this chapter) or Form 40-F (Sec.  249.240f of this chapter) solely 
to provide information pursuant to Sec.  205.3(e) of this chapter, the 
foreign private issuer is not required to include the certifications 
required by Sec.  240.15d-14 in such report.

PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934

    8. The authority citation for Part 249 is amended by revising the 
sectional authority for Sec. Sec.  249.220f, 249.240f and 249.308 to 
read as follows:

    Authority: 15 U.S.C. 78a, et seq., unless otherwise noted.
* * * * *
    Section 249.220f is also issued under secs. 3(a), 202, 208, 301, 
302, 306(a), 307, 401(a), 401(b), 406 and 407, Pub. L. 107-204, 116 
Stat. 745.
    Section 249.240f is also issued under secs. 3(a), 202, 208, 301, 
302, 306(a), 307, 401(a), 406 and 407, Pub. L. 107-204, 116 Stat. 
745.
    Section 249.308 is also issued under 15 U.S.C. 80a-29, 80a-37 
and secs. 3(a), 306(a), 307, 401(b) and 406, Pub. L. 107-204, 116 
Stat. 745.

* * * * *
    9. Amend Form 20-F (referenced in Sec.  249.220f) by:
    a. Adding a paragraph on the cover page before the line beginning 
with the phrase ``Commission file number'';
    b. Adding paragraph (d) to General Instruction A;
    c. Removing the word ``annual'' in each place where it appears in 
paragraphs (a) and (b) of General Instruction D;
    d. Adding Item 16E; and
    e. Removing the phrase ``[annual report]'' in the paragraph after 
``Signatures'' and adding in its place ``[report]''.
    The additions read as follows:

    Note: The text of Form 20-F does not, and this amendment will 
not, appear in the Code of Federal Regulations.

Form 20-F

* * * * *

Or

[ ] Report Pursuant to Rules 13a-17 and 15d-17 Under the Securities 
Exchange Act of 1934

    Commission file number * * *
* * * * *

General Instructions

A. Who May Use Form 20-F and When It Must Be Filed

* * * * *
    (d) A foreign private issuer must file a report on this Form within 
two business days after receipt of an attorney's written notice 
pursuant to 17

[[Page 6337]]

CFR 205.3(d)(1), (d)(2) or (d)(3). Such filing may consist only of the 
following: the facing page, the information required by Item 16E of 
this Form and the signature page. If such filing is made solely to 
provide information pursuant to 17 CFR 205.3(e), the foreign private 
issuer is not required to include the certifications required by 17 CFR 
240.13a-14 or 17 CFR 240.15d-14 in the report.
* * * * *
Item 16E. Receipt of an Attorney's Written Notice Pursuant to 17 CFR 
205.3(d)
    Upon receipt of written notice from an attorney (as defined in 17 
CFR 205.3(d)), provide the information specified in 17 CFR 205.3(e). 
You do not need to provide the information called for by this Item 16E 
unless you are using this form pursuant to General Instruction A.(d).
* * * * *
    10. Amend Form 40-F (referenced in Sec.  249.240f) by:
    a. Revising the line on the cover page that begins with the phrase 
``For the fiscal year ended'';
     b. Adding paragraph (5) to General Instruction A;
    c. Adding paragraph (15) to General Instruction B;
    d. Removing the word ``annual'' in each place where it appears in 
paragraphs (7) and (8) of General Instruction D;
    e. Removing the phrase ``[annual report]'' in the paragraph after 
``Signatures'' and in its place adding ``[report]''; and
    f. Removing the word ``annual'' in the first sentence of 
Instruction A to ``Signatures.''
    The revisions and additions read as follows:

    Note: The text of Form 40-F does not, and this amendment will 
not, appear in the Code of Federal Regulations.

Form 40-F

* * * * *
    For the fiscal year ended * * *

Or

[ ] Report Pursuant to Rules 13a-17 and 15d-17 Under the Securities 
Exchange Act of 1934

    Commission file number * * *
* * * * *

General Instructions

A. Rules as to Use of Form 40-F

* * * * *
    (5) If the Registrant uses Form 40-F to file reports with the 
Commission pursuant to Section 13(a) of the Exchange Act (15 U.S.C. 
78m(a)) and Rule 13a-3 thereunder (17 CFR 240.13a-3) or pursuant to 
Section 15(d) of the Exchange Act (15 U.S.C. 78o(d)) and Rule 15d-4 
thereunder (17 CFR 240.15d-4), the Registrant must file a report on 
this Form 40-F within two business days after receipt of an attorney's 
written notice pursuant to 17 CFR 205.3(d)(1), (d)(2) or (d)(3). Such 
filing may consist only of the following: the facing page, the 
information required by General Instruction B.(15) of this Form 40-F 
and the signature page. If such filing is made solely to provide 
information pursuant to 17 CFR 205.3(e), the Registrant is not required 
to include the certifications required by 17 CFR 240.13a-14 or 17 CFR 
240.15d-14 in the report.
* * * * *

B. Information To Be Filed on This Form

* * * * *
    (15) Receipt of an Attorney's Written Notice Pursuant to 17 CFR 
205.3(d). Upon receipt of written notice from an attorney (as defined 
in 17 CFR 205.3(d)), provide the information specified in 17 CFR 
205.3(e). You do not need to provide the information called for by this 
General Instruction B.(15) unless you are using this form pursuant to 
General Instruction A.(5).
* * * * *
    11. Form 8-K (referenced in Sec.  249.308) is amended by:
    a. Removing the word ``and'' after the phrase ``Rule 15d-11'' and 
in its place adding a comma and adding the phrase ``and for reports of 
an attorney's written notice required to be disclosed by 17 CFR 
205.3(e)'' before the period at the end of General Instruction A;
    b. Adding a sentence to the end of General Instruction B(1); and
    c. Adding Item 13 under ``Information to be Included in the 
Report.''
    The additions read as follows:

    Note: The text of Form 8-K does not, and this amendment will 
not, appear in the Code of Federal Regulations.

Form 8-K

* * * * *

General Instructions

* * * * *

B. Events To Be Reported and Time for Filing of Reports

    1. * * * A report on this form pursuant to Item 13 is required to 
be filed within two business days after receipt of an attorney's 
written notice pursuant to 17 CFR 205.3(d)(1), (d)(2) or (d)(3).
* * * * *

Information To Be Included in the Report

* * * * *
Item 13. Receipt of an Attorney's Written Notice Pursuant to 17 CFR 
205.3(d)
    Upon receipt of written notice from an attorney (as defined in 17 
CFR 205.3(d)) provide the information specified in 17 CFR 205.3(e).

    Dated: January 29, 2003.
    By the Commission.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 03-2520 Filed 2-5-03; 8:45 am]
BILLING CODE 8010-01-P