February 18, 2003 Jonathan G. Katz, Secretary
Re: File No. S7-02-03 - Standards Relating to Listed Company Audit Committees Dear Mr. Katz: We are submitting this letter in response to the request of the Securities and Exchange Commission (the "Commission") for comments on the Commission's proposed rule (the "Proposed Rule") implementing requirements for audit committee listing standards.1 We commend the Commission and its staff for the high quality and speed of their efforts in carrying out the mandate of the Sarbanes-Oxley Act, and we appreciate the opportunity to comment on the Proposed Rule. I. Introduction Over the years, the Commission has applied a comity-based approach to non-U.S. issuers that participate in the U.S. capital markets, avoiding the imposition of burdens on such issuers inconsistent with their home jurisdiction requirements where doing so would not jeopardize the interests of U.S. investors. This policy has successfully encouraged foreign private issuers to access the U.S. capital markets and afforded U.S. investors a broader array of investment opportunities. In Section 301, Congress struck a different balance by making no distinction between U.S. and non-U.S. issuers. In keeping with this approach, the Proposed Rule would also apply to both U.S. and non-U.S. listed issuers. The Commission has, however, appropriately acknowledged that the Proposed Rule may conflict with legal requirements and corporate governance standards in non-U.S. jurisdictions.2 The Proposed Rule would include several exemptions to accommodate these conflicts, and the Commission, both in the Proposing Release and during its open meeting on January 8, 2003, requested, and has indicated that it expects, extensive comment on the proposed exemptions and application of the rule to foreign private issuers. We commend the Commission for its commitment to addressing the concerns of foreign private issuers in this area. Nevertheless, we believe that the comment process may not identify every such conflict and that additional conflicts will arise in the future as foreign corporate governance standards evolve. We believe that the static nature of the Proposed Rule would inappropriately restrict the evolution of corporate governance practices outside the United States, disregarding the sovereignty of other countries and their regulators. Additionally, the Proposed Rule may interfere with the usual and customary arrangements of foreign private issuers with unions and labor, strategic investors and others. Faced with U.S. listing standards that are inconsistent with or inappropriate in the context of home country corporate governance arrangements, foreign private issuers may avoid listing on U.S. exchanges, and those already listed may choose to delist. Based on our discussions with clients and lawyers around the world, we believe this is a very serious risk and that, in this respect, Section 301 is the most critical element of the Sarbanes-Oxley Act. Deterring U.S. listings by foreign private issuers would have a negative impact on the SROs and further disadvantage U.S. investors, and could seriously diminish the role of the U.S. securities markets in the world capital markets. As a result, we believe that the Commission should provide for additional flexibility in the application of the audit committee requirements to foreign private issuers. In Part II of this letter, we suggest:
In Part III of this letter, we propose some amendments to the specific exemptions for foreign private issuers already proposed by the Commission. In particular, we believe:
In addition to the provisions applying specifically to foreign private issuers, we recommend revisions to a number of the other provisions of the Proposed Rule. In Part IV of this letter, we discuss various aspects of the independence requirements, the most significant of which are the following:
In Parts V and VI of this letter, we address several provisions of the Proposed Rule other than the independence requirements and suggest that:
II. The Proposed Rule should allow greater flexibility for foreign private issuers. A. The Proposed Rule should provide an exemption based on conflicts with local law. The Proposed Rule includes a number of exemptions for foreign private issuers, both from the independence requirements and to address specific instances of conflicts between the Proposed Rule and non-U.S. corporate governance arrangements. We agree that conflicts between the Proposed Rule and local law should be addressed through exemptions from the relevant portion of the Proposed Rule but are concerned that whatever specific exemptions are set forth in the final rule, these exemptions will not, by their nature, cover every existing conflict. Nor will the specific exemptions in the final rule address any conflicts that may arise in the future as corporate governance practices evolve. Accordingly, we propose the inclusion of an exemption based on any conflict with local law. To preserve to the maximum extent practicable the principles of Section 301, we propose providing the SROs exemptive authority to grant narrow exemptions from only the portions of the Proposed Rule that conflict with local law. We propose that the following exemption be added as paragraph (c)(6) of the Proposed Rule: A national securities exchange or a national securities association may exempt a foreign private issuer from the requirements of paragraph (b), to the extent necessary while preserving to the maximum extent practicable the principles of §240.10A-3, upon a showing by the foreign private issuer that compliance with such requirements would conflict with or violate local law (as defined in §240.10A-3(e)). This exemption would be accompanied by the following definitions of the terms "local law" and "governmental entity" in paragraph (e): The term local law refers to the foreign private issuer's home country law (including any law, order, writ, injunction, decree, ordinance, stipulation, statute, judicial or administrative doctrine, rule or regulation promulgated, adopted or established by a foreign government, as defined in §240.3b-4(a), or governmental entity, as defined in §240.10A-3(e)), and the listing requirements of any non-U.S. exchange or inter-dealer quotation system on which the foreign private issuer is listed or quoted. We also propose a clarifying instruction reading as follows: For the purposes of §240.10A-3, a conflict with or violation of local law would include a conflict or violation applicable to the issuer or a director, including, for example, a violation of a director's fiduciary or other legal duties. Reliance on this additional exemption would be subject to the disclosure requirements of paragraph (d). The SROs should be able to exercise exemptive authority in this area. Currently, the SROs consider the application of listing standards in the context of a listing agreement with foreign private issuers and grant waivers and modifications in the event of conflicts with local law or generally accepted business practices of the foreign private issuer's home country.3 Through this process, the SROs have significant contact with these issuers, which should enable them to work closely with issuers in understanding the issues presented under local law and crafting an appropriate exemption. At the same time, we believe that limiting this exemption to actual conflicts with local law and requiring that SROs attempt to preserve "to the maximum extent practicable" the spirit of the Proposed Rule in crafting an exemption would serve to create an appropriate framework within which the SROs could operate. The Commission could also choose to exercise a greater supervisory role over this exemptive process by requiring SROs to grant exemptions only by means of a rule change, which the Commission would have the opportunity to review and approve, but we believe that this alternative approach would be disruptive for listed issuers and slow the new listing process significantly without providing any appreciable benefit to U.S. investors. B. The Commission should grant case-by-case exemptions. Even when it does not expressly conflict with the laws of non-U.S. jurisdictions, the Proposed Rule may not be compatible with the general approach to corporate governance arrangements in those jurisdictions or may be inconsistent with local custom or "best practices." The Bouton Report in France, for example, recommends that companies adhere to strict corporate governance standards, some of which conflict or are inconsistent with the Proposed Rule's audit committee requirements. In either of these cases, foreign private issuers may be discouraged from listing on U.S. exchanges or may seek to delist. Accordingly, in addition to the exemption for actual conflicts with local law proposed in Part II.A above, we believe that the Commission should establish a process for granting case-by-case no-action relief and exemptive orders where appropriate.4 The Commission has requested comment on the procedures that might be used for submitting and evaluating exemptive requests, as well as on how such a process would be coordinated between the Commission and the SROs. We believe there are at least two possibilities, and that the Commission should allow both. First, the issuer, with the consent of the SRO, could apply to the Commission for no-action or exemptive relief. The Commission, upon a finding that such relief is appropriate, would agree not to take action against, or would agree to exempt, the issuer and would notify the SRO that it need not prohibit the listing or require the delisting of such issuer for failure to comply with the applicable requirement. Second, the SRO itself could submit to the Commission an amendment to its listing requirements to accommodate the issuer and other similarly situated issuers. Such a proposed amendment could be considered and approved by the Commission following notice and comment in the same manner as the original listing standards proposed to be adopted pursuant to Section 301. This latter process would be more appropriate for conflicts affecting multiple issuers in the same jurisdiction or issuers in multiple jurisdictions. C. The Commission should delay application of the Proposed Rule to foreign private issuers and extend the comment period regarding such application. The Proposed Rule is predicated on a U.S. management structure that is inapposite in many other countries. Other countries have very different approaches to corporate governance, including the delegation of duties to committees and the oversight of auditors. Given that approaches vary widely, identifying conflicts and inconsistencies between the requirements of the Proposed Rule and non-U.S. corporate governance standards can be quite complex. Therefore, it may be very difficult for many foreign private issuers to assess and comply with the Proposed Rule's requirements, and compliance could disrupt established and functioning corporate governance arrangements. This difficulty may also deter new listings by foreign private issuers. Given the difficulty of identifying conflicts and inconsistencies between the Proposed Rule and varying corporate governance arrangements, we believe that a 30-day comment period is insufficient and that full application of the final rule by April 2004 is unrealistic. We suggest that the Commission extend the comment period and delay application of the final rule to foreign private issuers. III. Comments on the specific exemptions for foreign private issuers already proposed by the Commission. A. The Commission should clarify that the Proposed Rule does not apply to foreign governments or other Schedule B issuers. As drafted, the Proposed Rule might be interpreted to apply to foreign governments and other Schedule B issuers with listed debt securities, because it would apply to any "issuer" with securities listed on a national securities exchange or in an automated inter-dealer quotation system of a national securities association.5 Issuer is defined in Section 10A(f) of the Exchange Act as "an issuer (as defined in Section 3), the securities of which are registered under Section 12, or that is required to file reports pursuant to Section 15(d), or that files or has filed a registration statement that has not yet become effective under the Securities Act of 1933, and that it has not withdrawn." A foreign government or instrumentality of a foreign government (such as the treasury) or other Schedule B issuer that lists its debt securities on a U.S. exchange might arguably be covered by this definition since its securities are "registered under Section 12" of the Exchange Act. We assume that the application of the Proposed Rule to Schedule B issuers is unintentional and suggest that an explicit exemption for such entities be added to paragraph (c)(5). B. The exemption for boards of auditors or statutory auditors should accommodate a greater variety of arrangements. Paragraph (c)(2) of the Proposed Rule would permit a foreign private issuer with an alternative mechanism for overseeing the independent auditor, such as a board of auditors, statutory auditors or similar body, to be exempt from the independence requirements and the responsibilities relating to independent auditors, subject to certain conditions. We commend the Commission for accommodating these alternative mechanisms, but believe that the detailed provisions of the exemption are too restrictive to accommodate the mechanisms used in many countries. Based on a limited survey of jurisdictions with a board of auditors or statutory auditors mechanism, we have identified several conflicts with specific provisions and suggest accommodating revisions to paragraph (c)(2). We first suggest that two of the detailed conditions be eliminated. The requirement in paragraph (c)(2)(i)(A) that the board of auditors exemption be subject to the condition that the securities of the foreign private issuer be listed or quoted on a securities exchange or inter-dealer quotation system located outside the United States would effectively render the exemption unavailable to certain Italian and other companies that are listed only in the United States, but are subject to a board of auditors or statutory auditors (collegio sindacale in the case of Italian companies) requirement pursuant to local law. In addition, the requirement in paragraph (c)(2)(i)(F) that the board of auditors or statutory auditors be responsible, to the extent permitted by law, for the appointment and retention of the issuer's independent auditor might render the exemption unavailable to many foreign private issuers, such as those in Brazil, where the board of auditors (conselho fiscal) has only an advisory role. This limited role, as well as common practice in Brazil, would make it very difficult for the board of directors and board of auditors to share decision-making authority regarding the retention of the independent auditor, as subparagraph (F) would require. As discussed in Part V.A below, the Commission's Instruction to this subparagraph concerning conflicts with local law does not fully address the concern. Second, we propose that subparagraph (E) of the Proposed Rule be revised. Subparagraph (E) would require that the board of auditors or statutory auditors be directly responsible, in accordance with standards prescribed by home country legal or listing provisions, for the oversight of the work of the independent auditor. This provision would conflict with the functioning of the board of auditors in a number of countries. In Italy, for example, the board of auditors is arguably not responsible for the oversight of the independent auditors or the resolution of disagreements with management; however, neither management nor the executive officers of the issuer are responsible for such oversight. To accommodate such corporate governance arrangements, we suggest that subparagraph (E) be revised as follows: Such board or body, or statutory auditors, or the issuer's shareholders, board of directors or other independent body not including management or any executive officer of the issuer, is directly responsible for the oversight of the work of any registered public accounting firm engaged (including resolution of disagreements between management and the auditor regarding financial reporting) for the purpose of preparing or issuing an audit report or related work or performing other audit, review or attest services for the issuer.6 Finally, paragraph (c)(2)(ii) of the Proposed Rule should be amended. Paragraph (c)(2)(ii) would apply the requirements of paragraphs (b)(3), (b)(4) and (b)(5) of the Proposed Rule to the issuer's board of auditors or statutory auditors. In Brazil, however, the board of auditors does not have the authority to establish procedures to handle complaints (as paragraph (b)(3) would require), but only to investigate fraud and recommend preventive measures. The requirements in paragraphs (b)(4) and (b)(5), while perhaps critical in the context of a committee of the board of directors of the issuer, have less significance for an independent board that does not rely on the issuer for the scope of its authority or its funding. We suggest that paragraphs (b)(3), (b)(4) and (b)(5) should apply to an issuer's board of auditors or statutory auditors, separate audit committee or entire board of directors (as appropriate for the particular issuer), rather than specifically to the issuer's board of auditors or statutory auditors. In the adopting release for the disclosure requirements of Sections 406 and 407 of the Sarbanes-Oxley Act, the Commission requested comment as to whether and how the disclosure requirements relating to audit committee financial experts should apply to an issuer that relies on the exemption provided by paragraph (c)(2) of the Proposed Rule.7 We suggest that such an issuer be exempt from new Item 16A of Form 20-F (pertaining to audit committee financial expert disclosure) but required to disclose in proposed Item 15(f) of Form 20-F (where reliance on exemptions from the listing standards is disclosed) whether any member of the alternate body meets the definition of audit committee financial expert and whether any person who does so is independent as defined by the local law standards referred to in paragraph (c)(2)(i)(D).8 C. The exemption from the independence requirements for a non-management employee director should not be limited to legal or listing requirements. Paragraph (b)(1)(iv)(C) of the Proposed Rule would permit non-management employees to sit on the audit committee of a foreign private issuer if the employee is elected or named to the board of directors or audit committee of the foreign private issuer pursuant to home country legal or listing requirements. We commend the Commission for providing this exemption to accommodate the practices of many non-U.S. jurisdictions. However, we propose that this exemption not be limited to non-management employee directors elected or appointed pursuant to legal or listing requirements. In some countries, such a director is not required by any legal or listing requirement but rather has evolved to be a common practice and may be required by an issuer's bylaws or contractual arrangements. For example, collective bargaining agreements negotiated with labor unions may require the appointment of a non-management employee to the board of directors, the audit committee or board of auditors. These arrangements should also be entitled to the exemption from the independence requirements in the Proposed Rule. As the Commission states in the Proposing Release, having non-management employees "serve on the board or audit committee can provide an independent check on management, which itself is one of the purposes of the independence requirements under the Sarbanes-Oxley Act."9 Such non-management employee directors would serve this function regardless of whether their presence is mandated by law, contract or common practice in the jurisdiction. IV. Suggested modifications to the independence requirements. A. The prohibition on indirect payments should be clarified, particularly as to the meaning of "ordinary-course commercial business relationships." The Proposed Rule would prohibit consulting, advisory or other compensatory payments made directly or indirectly to an audit committee member. Indirect payments would include payments to an entity in which the audit committee member is a partner, member or principal and which provides accounting, consulting, legal, investment banking, financial or other advisory or any similar services.10 We believe several elements of this prohibition require further clarification to provide guidance to the SROs in formulating new rules or rule amendments and to listed issuers in establishing audit committees that comply with the independence requirements. In the Proposing Release, the Commission indicates that the prohibition would not extend to ordinary-course commercial business relationships between an issuer and an entity with which an audit committee member has a relationship. It is unclear, however, how to distinguish between prohibited relationships, in which "accounting, consulting, legal, investment banking, financial or other advisory or any similar services" are provided, and "ordinary-course commercial business relationships." In France, for example, it is common for a representative of a commercial bank to sit on an issuer's audit committee. The provision of most services by a commercial bank should be considered an ordinary-course commercial business relationship that does not preclude independence. Commercial banking services, however, arguably also would be "financial services" prohibited under the Proposed Rule. It is therefore unclear whether a commercial bank representative would be independent under the Proposed Rule. The Commission should clarify that ordinary commercial banking services, such as making loans, maintaining customer accounts, providing letters of credit, clearing checks and similar services, so long as they are provided on terms available to the general public, will not result in a prohibited relationship. We also believe it would be appropriate to exclude from proscribed indirect payments those that would have so little economic effect on an audit committee member that it would not be reasonable to conclude they would be prejudicial. We suggest that any payment to an entity in which an audit committee member is a partner, member or principal constituting less than 1% of the revenue of that entity during the 12-month period in which it is received should not be treated as a disqualifying payment. B. Any prohibition on retirement or pension compensation should be left to the discretion of the SROs. The Commission has requested comment as to the inclusion of retirement or pension plan payments within the prohibited category of "compensatory fees." We do not believe that these payments should necessarily preclude independence under the Proposed Rule. Recognizing that the Proposed Rule sets out only minimum standards with regard to audit committee member independence, we suggest that the consideration of a prohibition on payments under retirement or pension plans should be left to the SROs. The SROs also could then consider appropriate de minimis levels, or exceptions, for example, for non-contingent deferred compensation payments.11 Accordingly, we recommend that the Commission clarify that retirement or pension plan payments are not included within "compensatory fees" for purposes of the Proposed Rule. C. The exemption for non-executive shareholder representatives should be broadened to include less-than-50% shareholders and should apply to U.S. issuers as well as foreign private issuers. Paragraph (b)(1)(iv)(D) of the Proposed Rule would permit one representative of a controlling shareholder to sit on the audit committee as a non-voting observer if such representative is not an executive officer of the issuer and does not receive any compensation prohibited by the independence requirements. As drafted, this exemption from the independence requirements would be available only for the representative of a greater-than-50% shareholder (or a group of owners that collectively are the beneficial owner of more than 50% of the voting common equity) of a foreign private issuer. We believe that the exemption should also be available to shareholders that own less than 50% of an issuer's voting shares. Under the Proposed Rule, a shareholder that owns more than 10% but less than 50% of the voting shares of a foreign private issuer would be unable to benefit from either the affiliate safe harbor or the exemption permitting an observer shareholder representative on the audit committee. As the Commission implicitly acknowledged in proposing the 10% threshold for the safe harbor, a shareholder holding less than 50% of the voting shares of an issuer may have control if there are no other large shareholders (if, for example, the remaining voting shares are widely held), while a shareholder may not be the sole controlling party even at a 50% level if there are other large shareholders. Indeed, it is not unusual for a large shareholder below the 50% level to negotiate board representation, including audit committee membership. We do not see any reason to distinguish between these shareholder representatives and the representatives of greater-than-50% shareholders based solely on the amount of the shareholder's voting interest. As the Commission notes, the limitation in the exemption to non-voting observer status should be sufficient to preserve the fundamental purpose of the Proposed Rule as originally set forth in Section 301; indeed, the presence of such representatives may further the interests of investors by including a strong shareholder presence in observer status on the audit committee. Accordingly, we recommend that the percentage ownership level in paragraph (1) of the exemption be reduced to 10% from 50%. We also propose that the exemption be available to both U.S. and non-U.S. issuers. Although, as the Commission notes in the Proposing Release, controlling shareholders or shareholder groups with a role in corporate governance are more prevalent outside the United States, many U.S. issuers also have similar arrangements.12 The rationale for permitting non-U.S. issuers to include shareholder representatives as non-voting observers on their audit committees applies equally to U.S. issuers. D. The exemption for issuers following an initial listing or initial public offering should be extended beyond 90 days. Paragraph (b)(1)(iv)(A) of the Proposed Rule would exempt one member of a new issuer's audit committee from the independence requirements for 90 days from the effective date of the issuer's initial registration statement under Section 12 of the Exchange Act or a registration statement under the Securities Act of 1933 covering an initial public offering. In the Proposing Release, the Commission states that it is proposing this exemption in recognition of (i) the difficulty new public companies may have in recruiting independent members in advance of an initial public offering and (ii) the effectiveness of having a member with historical knowledge and experience of the company on the audit committee of a new public company. We agree with the Commission's rationale for this exemption but believe that it should apply for a longer period. While it may be difficult for an issuer to recruit a sufficient number of independent board members in advance of its initial listing or initial public offering, many newly public issuers also may be reluctant to make significant changes to their board of directors shortly following an IPO. Many issuers prefer to defer significant board changes until their regular annual general meeting, rather than call a special shareholders' meeting. In addition, the benefit of an experienced audit committee member with historical knowledge of a new public company would continue to be significant beyond one fiscal quarter. Accordingly, we propose that the Commission extend this exemption to a one-year period that also includes one full annual meeting cycle. E. The Proposed Rule's safe harbor for affiliate status should not be revised to create a presumption of "affiliate" status. Paragraph (e)(1)(i) of the Proposed Rule would establish a safe harbor for audit committee members who are not executive officers, directors or greater-than-10% shareholders of the issuer. The safe harbor would not create a presumption that those outside the safe harbor are affiliates; a facts-and-circumstances analysis would still need to be undertaken in such cases. In the Proposing Release, the Commission requests comment whether failure to meet the safe harbor should result in a presumption of affiliation. We commend the Commission for proposing a safe harbor that is familiar to issuers because of its similarity to the test used for determining insider status under Section 16 of the Exchange Act. We believe that the safe harbor is appropriate as written and should not be revised to create any presumption of affiliation. Under the Proposed Rule, some issuers already may be reluctant to include any person on the audit committee who does not fall within the safe harbor. Creating a negative presumption of affiliation might turn the safe harbor into a bright-line rule. The safe harbor, however, should be revised. The introductory sentence to the independence requirements states that an audit committee member must meet the independence criteria, "other than in his or her capacity as a member of the audit committee, the board of directors, or any other board committee."13 The safe harbor, which appears in the definitions section of the Proposed Rule, contradicts the introductory sentence in that it would be available only to a person who is not "the beneficial owner, directly or indirectly, of more than 10% of any class of equity of securities of the issuer; is not an executive officer of the issuer; and is not a director of the issuer." The last provision (Proposed Rule 10A-3(e)(1)(i)(C) "is not a director of the issuer") is confusing and superfluous given the fact that all audit committee members will also be directors of the issuer. To eliminate confusion, this provision should be deleted from the safe harbor. V. Comments relating to the other audit committee requirements. A. The Proposed Rule should explicitly address selection of the company's auditors by the shareholders or the entire board of directors, rather than through an instruction. The Proposed Rule would include an instruction indicating that the requirement that the audit committee be directly responsible for the appointment of the independent auditor does not conflict with (i) any requirement under a company's governing law or documents (or, for a foreign private issuer, home country requirements) that shareholders elect, approve or ratify the selection of the issuer's auditor or (ii) any requirement in an issuer's home jurisdiction that prohibits the full board of directors from delegating the responsibility to select the company's auditor.14 We suggest that the Proposed Rule include an explicit exemption for the situations covered by the proposed Instruction. The Proposed Rule, in requiring that the audit committee be directly responsible for the appointment and retention of the independent auditor, would, in fact, conflict with legal requirements in a number of jurisdictions, such as Brazil, France and Italy.15 The apparent intent of the Commission is to clarify that certain practices involving shareholder or board of director selection of the issuer's independent auditor do not conflict with the purposes of the Proposed Rule. We suggest that this intent would be better served by an explicit exemption. We also suggest that the explicit exemption include voluntary selection of auditors by the shareholders. In the Proposing Release, the Commission indicates that the responsibility requirements relate to the assignment of responsibility between the audit committee and management. Like mandatory shareholder selection, voluntary shareholder selection of the independent auditor vests the power of selection away from management and in the shareholders, affording the very protections Section 301 is designed to ensure. The Instruction would only address the selection of the independent auditor by the shareholders. Non-U.S. laws may also mandate that the compensation and dismissal of the auditors be decided by the issuer's shareholders. Accordingly, we suggest that the explicit exemption also address these areas. Therefore, we propose that the following text be added as paragraph (b)(2)(iii): The listing of securities of an issuer will not be subject to the requirements of paragraph (b)(2)(i) if The language of paragraph (b)(2)(i) would need to be revised to read: "Except as provided in paragraph (b)(2)(ii) and (b)(2)(iii) of this section,...." B. The Proposed Rule's provisions relating to procedures for handling complaints should not be changed. In the Proposing Release, the Commission requests comment as to whether companies should be required to disclose their procedures for handling complaints or any changes to those procedures. Disclosure about procedures and changes to those procedures may have an unintended chilling effect. If an issuer is forced to disclose its procedures, the audit committee may be less innovative and less willing to try different approaches to the difficult question of how, as the Proposing Release states, "to cultivate open and effective channels of communication." Therefore, we suggest that no such disclosure be required. The Commission also requests comment on the necessity of specifying procedures for the handling of complaints. We believe it would be best to leave the specific procedures to the audit committee, which will be able to take into account the individual circumstances of an issuer. VI. The date for required compliance by currently listed companies should be extended due to the timing of annual meetings. The Proposed Rule would require that the final rules of the SROs be operative by the first anniversary of the Commission's final rules (i.e., by April 2004).17 Under the Proposed Rule, the SROs must propose rules in compliance with the final rule no later than 60 days after publication of the Commission's final rule (i.e., June 2003), and the Commission would approve the SROs' rules or rule amendments no later than 270 days after such publication (i.e., January 2004). The Commission has requested comment as to whether the proposed implementation schedule is appropriate. Under the Proposed Rule, some issuers, particularly those with annual shareholders' meetings in May or June, would be required to hold special meetings to comply with the new requirements. To avoid such special meetings, we recommend that the final rule provide that listed companies must be in compliance with the audit committee requirements no later than the date following their first annual shareholders' meeting after the adoption of the final rules by the SROs (i.e., during the 2004 proxy season), rather than by one specific date. As discussed in Part II.C, we also suggest that the application of the final rule to foreign private issuers be delayed. * * * * * We thank you for the opportunity to comment on the Proposed Rule. We would be happy to discuss with you our comments or any other matters you feel would be helpful in your review of the proposals. Please do not hesitate to contact Leslie N. Silverman and David I. Gottlieb in New York (212-225-2000) or Edward F. Greene in London (44-20-7614-2200) if you would like to discuss these matters further.
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