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CHARLES E. H. LUEDDE
2000 EQUITABLE BUILDING
TEN SOUTH BROADWAY
ST. LOUIS, MISSOURI 63102

December 2, 2002

U. S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549

Attention: Jonathan G. Katz, Secretary

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

Gentlemen:

As an attorney who has actively practiced in the field of securities regulation for more than thirty years - with the principal emphasis on disclosure and transactional matters rather than enforcement or litigation proceedings - and as a former member of the Commission staff, I am disturbed and embarrassed at the direction and thrust of the Commission's proposed rule relating to Implementation of Standards of Professional Conduct for Attorneys as mandated under the Sarbanes-Oxley Act of 2002.

The regulations and reports issued to date arising from Enron and other recent high-profile incidents of corporate misdeeds certainly caused me on occasion to echo Stan Sporkin's cry of "Where were the lawyers?", even as it seemed without question that the conduct there involved violated the substantive provisions of the federal securities laws as they existed "pre-Sarbanes-Oxley." Having echoed that cry, it also bears observing that the problems illustrated by Enron and the others seems to me - at least in the context of attorneys' roles in the disclosure process - to lie in the realm of "a failure to see the forest for the trees" rather than to rest on participants' recognition of "material violations" (as that term would be defined in proposed rule 205) or on any subsequent failure to urge corrective disclosure.

Notwithstanding the proposed rule's elaborate "up the line" procedures, I believe that it does little to address the core issue of whether there has been adequate disclosure of all material facts required to be disclosed or necessary to make the disclosures made not misleading. By focusing on a remote and improbable scenario it constructs an hypothetical straw man. By ignoring the real world the proposed rule risks becoming just so much window dressing without any real benefit to existing or prospective investors or to the restoration of confidence in the marketplace. This does not mean that the proposed rule is toothless and therein lies its danger. The zealous and overreaching nature of certain portions of the proposed rule results in the inclusion of provisions which threaten - by tacitly placing attorneys in the unwarranted role of expertizing the entire content of clients' disclosure documents - to make attorneys guarantors of those disclosures.

While I can applaud those portions of the Sarbanes-Oxley Act which relate to the establishment of the Public Accounting Oversight Board, which promise increased funding for the Commission and which strengthen certain remedies and sanctions, much of the Act represents hasty, ill-advised and ill-considered legislation better suited to political advantage and partisan sound-bites than to the correction of the abuses which brought the Act into existence. We must, of course, accept the existence of the Sarbanes-Oxley Act and deal with its consequences and in that context the Commission must propose and ultimately adopt standards responding to and implementing Section 307 of the Act. One would hope, however, that the Commission would approach that task in a reasoned and realistic manner.

The existence of a Commission-promulgated rule which reinforces that it is the issuer rather than management as client is appropriate. Similarly, the existence of a rule which permits or requires some form of "noisy withdrawal" in certain extraordinary circumstances involving knowing wrongful conduct by management which rests on circumstances of clear and material violations of law is not only reasonable but may aid counsel in urging broader and fairer disclosure even in cases which would not require or permit "noisy withdrawal." On the other hand, a successful rule implementing Section 307 of Sarbanes-Oxley must recognize that the role of the attorney in the disclosure process is fundamentally different than the role of auditors and must recognize that the efforts to achieve full, fair and understandable disclosure rarely involve simple black and white or bright-line tests.

The federal securities laws and regulations effectively mandate the participation of auditors in connection with the preparation and filing of registration statements under the Securities Act of 1933 and the preparation and filing of annual and quarterly reports under the Securities Exchange Act of 1934, and subjects them to potential liability as "experts" under the former. In contrast, however, the mandatory participation of attorneys is vastly limited and applies to specifically delineated matters (such as the due authorization and valid issuance and enforceability of the securities being registered). While attorneys routinely participate on a broader basis in connection with the disclosures made in the context of registration statements and reports, that participation is voluntarily "suffered" by the client. Attorneys do not regularly provide to the Commission or to investors opinions on disclosure issues or the fairness of the disclosures contained in registrations and reports. Indeed, formal opinions on such matters are rarely requested by or provided to issuers. Although underwriters or other parties to the issuance of securities in a transactional context may request and receive an opinion concerning the attorney's overall review of disclosures (both in terms of material compliance as to form of required disclosures and as to "Rule 10b-5 fairness"), such opinions tend to be hedged and limited in scope and are intended to provide little more than "cold comfort."

Unless the Commission is prepared to mandate attorneys' broader participation in the disclosure process - and I do not suggest that such a course is wise or that the Commission has the authority to do so - the Commission must in framing the rules mandated by Section 307 of Sarbanes-Oxley avoid taking action which would be counterproductive to the intent of the Act. Clients are free to exclude the participation of attorneys from much of the process and, if the rules significantly change the role or the cost of attorneys' participation in the process, such exclusion may be an unintended and undesired by-product.

I should note that I am not undertaking to comment generally on the portions of the proposed rule set forth in §§ 205.3, 205.4 and 205.5 as they relate either to the "up the ladder mechanics" or to issues of privilege and professional ethics. I am certain that such issues (including the extent to which the rule is applicable to attorneys actively involved in representing clients in enforcement, administrative or investigative contexts) will be more comprehensively addressed by the organized Bar and other commentators.

Section 205.3(b)(1)

It is at least worth noting in passing that this section - which is the key operative section of the proposal - focuses exclusively on a duty arising from the attorney's awareness of evidence of a material violation (as defined). As such, the proposed rule does not seem to provide or impose a professional disciplinary standards for situations in which that awareness does not exist, with the perhaps cynical result that ignorance or incompetence is the "defense." Put another way, the attorney who scratches at the underlying facts and becomes concerned but concludes - perhaps erroneously - that the issue does not rise to a possible material violation is at a greater risk of sanction and discipline than one who proceeds along blithely, perhaps accepting the client's selection of facts without investigation.

While the section as drafted appears to work in the context of taking a recognized issue and beginning the process of bringing it to the client for consideration, it does nothing to promote recognition. This illustrates my contention that the benefits of the elaborate rule may be more illusory than real.

Section 205.6(a)

Notwithstanding the statements and rationale set forth in the third paragraph under the caption "Section 205.6 Sanctions" in item IV.B of the release, I believe that the provisions set forth in Section 205.6(a) of the proposed rule go far beyond the intent, authority and clear language of Section 307 of the Sarbanes-Oxley Act.

The principal thrust of this provision seems to be that a failure to report up the ladder, or a failure to withdraw, or a withdrawal not accompanied by the contemplated notices gives rise to a substantive violation of the federal securities and resulting penalties rather than merely subjecting the attorney to disciplinary sanction such as a bar from future practice before the Commission. Even though I am inclined to believe, as expressed below, that defects with the concept and definition of "material violation" may mean that the triggering of this section is extremely remote, I do not believe that the consequence of equating such a lapse to a substantive violation properly flows under the Act.

As drafted, Section 205.6(a) seeks to establish automatic "aider and abettor" liability under standards that would not otherwise support such a conclusion. Further, it seems to me that the application of potential civil penalties (even if not arising in the context of a private right of action) runs counter to the approach to liability set forth in Section 11 of the Securities Act of 1933: as stated above, the role of the attorney in the disclosure process is not that of an "expert" and is fundamentally different than the role of the auditors. Attorneys are not engaged to audit a client's affairs and should not be subjected to fines or damages, even if civil in nature, as the rule would permit.

In those circumstances in which it is established that an attorney is an active participant in a client's violation of the securities law, existing law already provides the Commission with an adequate basis to proceed with the full force of its enforcement powers, remedies and sanctions. Proceedings arising as a result of a violation of proposed rule 205 should be handled solely as disciplinary proceedings under Rule 1.02(e) and such treatment avoids the issue of implied private rights of action. In response to the question raised in the Release, the Commission should include in its final proposal an appropriate "safe harbor" provision.

Section 205.3(d)(i)(C) (and counterparts)

Given that the scope of the attorney's participation in the disclosure process is generally not set forth in the document or otherwise identified, the feasibility of the proposed method of "disassociation" seems questionable.

Section 205.2(a)

Whatever definition is ultimately adopted for purposes of the final form of rule 205 should be limited and clearly applicable solely to this rule and solely for the purpose of encouraging "up the ladder" resolution of disclosure issues. As discussed more fully below, the Commission risks becoming a clearing house for professional discipline which diverts its attention from its primary mission.

I have mixed feelings about whether an attorney acting in the role contemplated by 205.3(b)(6) should be deemed to be practicing before the Commission, but simply from a drafting standpoint if that provision remains I believe it should be referenced in the context of 205.2(a).

Section 205.2(a)(4)

The Release's statement that the definition in 205.2(a) is based upon the current definition contained in Rule 102(f), seems at best disingenuous since the scope of the current proposal encompasses a far broader class of attorneys and, indeed, a group so potentially large as to risk having the mechanics set forth in the Rule become completely unworkable. While this may be due to some misperception that potential "whistle blowers" are an endangered species or constitute a currently favored political interest group, I would suggest that in the proposed rule the Commission's net has been cast so wide that it is unworkable.

As drafted the proposed rule would include, for example, an attorney who participated in the drafting of an agreement or document being filed as an exhibit even though that attorney might not otherwise have any background or exposure to the securities laws or any participation in or review of the resulting filing.

I see little benefit to the inclusion in the scope of the definition of attorneys whose "practice specialties [are] other than securities laws" except to the extent that their participation is equivalent to that of providing an "expertized" portion of a registration statement under the Securities Act. Absent such a level it is unlikely that they would possess the "awareness of a material violation" as contemplated by Section 205.3(b)(1) and the appropriateness and need for the Commission to assert oversight as to their professional conduct seems questionable.

As noted earlier, there is an absence of any defined role for attorneys in the disclosure process. It seems that the definition attempts to address this in an awkward way: is an attorney who provides guidance to a client on the disclosure requirements under Regulation S-K (but who does not participate in gathering data, drafting or reviewing the resulting disclosure) within the definition?

The focus of the proposed rule should, I would suggest, be upon those attorneys whose involvement in the disclosure process puts them in a position to evaluate and assess the question of whether the document as a whole fairly presents the material information and does not omit information necessary to make the disclosures not misleading.

Finally, and simply as a matter of practicality, I question whether the Commission's attempt to utilize a broad definition - and thereby at least potentially have the capacity to bar a larger portion of the practicing bar from "practice before the Commission" - is reasonably suited to the disciplinary power sought. Given the relative anonymity (vis a vis the Commission) of many attorneys who participate disclosure process - and given the fact that much of that role can in fact be performed without status as an attorney - unless there is active corresponding discipline from state bar organizations, Commission sanctions may be illusory.

Section 205.2(a)(5)

As the Commission itself acknowledges in the context of the Release:

An attorney ordinarily does not appear and practice before the Commission if his or her representation of an issuer involves no business or communication with the Commission, no participation in any way in a Commission process, and no assistance in the preparation of at least a portion of a document filed with or submitted to the Commission.

In light of that statement, the purpose of clause (5) of the definition seems unclear. The point does not seem to be discussed in the Release. In repeated readings I have questioned whether the Commission may have intended to converse of the provision, but that appears unlikely. Since the proposed rule relates only to public companies (including those in registration to become public companies), and since the premise upon which the rule is based is that an issuer is failing to make a disclosure that an attorney believes necessary, it is difficult to conceive of a situation in which the attorney who has identified a "material violation" would be advising that no report, registration or the like is to be filed.

I would suggest that clause (5) be eliminated from the proposal. (The concept of clause (5) seems to have greater relevance as a possible addition to Rule 102(f), but to do so would be counter to the Commission's position reflected in the Release.)

Section 205.2(f)

Although the purpose of this provision is clarified in the Release, the provision standing alone seems to suggest that no client relationship is necessary in order to be included.

It seems to me that the Commission's intent might be better served by drawing upon the traditional "controlling, controlled by or under common control with" concept so that an attorney retained or employed by a person who controls, is controlled by or under common control with the issuer and who otherwise participates in statements or disclosures being filed would be included. This limitation would make it clear that an attorney representing another party (e.g., a selling shareholder or underwriter) is not deemed to be involved in the representation of the issuer notwithstanding his participation in the disclosure process.

Section 205.2(h)

Unlike the concepts of materiality utilized in certain portions of Regulation S-X and other accounting standards, determinations of "materiality" in the context of federal securities disclosure involve subjective considerations and assessments and are heavily dependent on the available facts and information. Even in Regulation S-K there are few, if any, bright line tests. Further, assessments of materiality may often include consideration of economic or political facts or trends outside the control of the issuer but which nevertheless may impact its current and future prospects. The measurement of materiality is not an objective science.

In light of that, the definition of "material" set forth in the proposed rule seems generally consistent with its traditional securities law usage and the analysis of whether adequate disclosure has been made. I am not, however, certain that the definition is particularly satisfactory or helpful as a precursor to the definition of "material violation" as I discuss below. In addition, while materiality is primarily tied to purchase and sale investment decisions as it arises in the context of Rule 10b-5, it would seem that the breadth of possible disclosure documents relating to this rule requires that decisions which affect shareholder voting issues also be included.

Applying the concept of materiality and the definition of "material" to information, I would suggest that (perhaps solely in the context of this rule) the Commission should include an instruction or note making it clear that the failure of an issuer to respond fully to each applicable disclosure requirement set forth in Regulation S-K and its counterparts does not necessarily result in a "material violation" of the securities laws. Although I recognize that the Commission staff often takes the position that each "required disclosure" is necessarily "material," such an approach in the context of this rule seems inappropriate. As I observed earlier, even when attorneys deliver opinions in transactional contexts addressing disclosure compliance the opinion is formulated to address the material disclosure requirements rather than certifying full and absolute compliance. A failure to provide such a limitation on the scope of materiality may result in a trivialization of the rule and legitimate disclosure concerns.

Section 205.2(i)

The proposed definition of "material violation" seems, at first blush, to be curiously circular or deceptively simple. As suggested in my prior comment, however, the definition does not really seem to function properly given the manner in which the term "material" is defined. Using the definition set forth in (h), we arrive at the following:

[A] "material violation" means a violation of the securities laws about which a reasonable investor would want to be informed before making an investment decision....

I do not find that to be particularly helpful and I rather doubt that was the result that the Commission intended. It seems to me that our hypothetical reasonable investor is more likely to be concerned about whether the omitted or erroneous information is material in the context of the definition in clause (h) rather than with whether the resulting "violation" is material.

Further, in the context of a potential breach of fiduciary duty, an evaluation of materiality may depend in part upon the question of whether one approaches the significance of the issue in the context of the impact upon the issuer's operations and financial condition or if one's analysis relates to an election of directors.

Perhaps the Commission merely intends that a "material violation" is the converse of that old saw - the "technical violation" - often a minor but indefensible infraction not involving significant penalties. But such an approach shifts the focus from the materiality of the disclosure in question to the materiality of the damages or consequences. I would suggest that such a result seems inconsistent with the intent of Section 307 of the Sarbanes-Oxley Act.

Finally, it is worth noting that even within the proposed rule we seem to be confronted with levels of "material violations": §205.3(d) triggers the notice and withdrawal provisions only as to those material violations which are "...likely to result in substantial injury to the financial interest or property of the issuer or of investors." This causes one to wonder if such a violation should be defined as a "really material violation."

* * * *

The comments reflected herein represent solely the views, comments and concerns of the undersigned and do not necessarily represent the views of the undersigned's firm or the members or clients of such firm.

Yours very truly,

Charles E. H. Luedde

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