Computer Sciences CorporationFebruary 18, 2003 Jonathan G. Katz, Secretary
Re: File No. S7-02-03
Dear Mr. Katz: Computer Sciences Corporation ("CSC") respectfully submits the following comments regarding the Securities and Exchange Commission's ("the Commission") "Proposed Rule: Standards Relating to Listed Company Audit Committees," Subject File No. S7-02-03 (the "Proposed Rule"). We believe a high-quality financial reporting system is critical to effective operation of our capital markets and efficient functioning of the economy. We agree accurate and reliable financial information is fundamental to investor confidence. The events of the past year, particularly some of the more egregious abuses, have resulted in significant changes in financial reporting and disclosure requirements and corporate governance. We think no system can totally eliminate non-compliant and misleading reporting of companies led by unethical and irresponsible executives. However, effective corporate governance through active oversight by, and involvement of, a registrant's board of directors and audit committee can reduce the likelihood of such incidents, accelerate detection and better protect the interests of the company's stockholders. Responsible executive leadership, effective independent audits and active oversight of the financial reporting process by the board of directors and the audit committee are all essential to preserving the integrity of our financial reporting process. We support the efforts of the President, Congress and the Commission to strengthen overall corporate governance. We believe incorporation of the audit committee requirements into the listing standards of the national securities exchanges and associations will further raise the visibility of these initiatives and enhance investor confidence in the integrity of our financial reporting system and our capital markets. We have provided below a summary of our more significant comments and suggestions. Additionally, we have included responses to each "Request for Comment" within the Proposed Rule in the attached Exhibit. Role of Management and the Audit Committee Our most significant concern is the Proposed Rule instructs the audit committee to be directly and intimately involved in the day-to-day coordination of the independent auditor's examination. This level of involvement threatens to compromise the audit committee's objectivity, overextend its members and discourage audit committee service. We also are concerned such a broadly defined audit committee role overshadows management's primary responsibility for the fair presentation of the registrant's financial statements, adequacy of disclosure and compliance with applicable SEC reporting and disclosure requirements. The proposal could result in the audit committee indirectly "managing" day-to-day financial affairs of the registrant. This issue is further exacerbated by similar requirements under other recently issued regulations. We strongly recommend the Proposed Rule clearly delineate management's responsibility for financial reporting practices, policies and procedures and coordinating the day-to-day work of the independent auditor from the audit committee's oversight responsibility. We discuss this concern and our recommendation more fully in the section below entitled "Responsibilities Relating to Registered Public Accounting Firms." Audit Committee Independence We agree with the two basic criteria for determining independence under the Proposed Rule. However, we recommend the Proposed Rule include the following clarifications:
We support the proposed definition of an affiliate or affiliated person by reference to the existing definition under the securities laws, such as Rule 12b-2 of the Securities and Exchange Act of 1934 and Rule 144 under the Securities Act of 1933, subject to a facts and circumstances determination and a safe harbor rule, providing that persons holding stock interests of less than 10% would not be considered affiliated persons. Responsibilities Relating to Registered Public Accounting Firms Generally, except as indicated elsewhere herein, we agree with the scope and definition of the role and responsibilities of the audit committee relating to oversight of the company's independent auditor. While we agree the audit committee should be responsible for the appointment, compensation and retention of the registrant's independent auditor and outside advisors, we think the full board, given its overall responsibility for the affairs of the registrant, should ratify the decisions of the audit committee. This ratification provides a needed check and balance, since the full board of directors bears the oversight responsibility for the company's compliance with disclosure and other reporting requirements. Finally and perhaps most importantly, the Proposed Rule instructs the audit committee to be directly and intimately involved in the day-to-day coordination of the independent auditor's examination. The Proposed Rule states "the audit committee would have to be directly responsible for the appointment, compensation, retention and oversight of the work of the independent auditor...and the independent auditor would have to report directly to the audit committee (emphasis added)." This level of involvement compromises the audit committee's objectivity, overextends its members and discourages audit committee service. As a consequence, these issues could reduce the pool of qualified and willing candidates. We also are concerned such a broadly defined audit committee role overshadows management's primary responsibility for the fair presentation of the registrant's financial statements, adequacy of disclosure and compliance with applicable SEC reporting and disclosure requirements. This issue is further exacerbated by similar requirements under other recently issued regulations. Because filings with the Commission are importantly and fundamentally the representations of management, it is vitally important these regulatory initiatives not dilute management's sense of responsibility and accountability for these matters. Furthermore, the involvement of the audit committee must not be so invasive as to diminish the ability or willingness of the company's executives to execute signed representations required under the Commission's recently issued certification rules. Procedures for Handling Complaints CSC, like many registrants, has long-standing policies for handling a broad spectrum of ethical issues, including questions, potential issues and complaints concerning accounting and auditing matters. The process has been structured to handle these matters on a confidential basis. Additional mandated detailed rules or procedures are not necessary to accomplish these objectives. Furthermore, we do not think there is any need for detailed prescriptive rules concerning related record retention or delegation by the audit committee. We suggest registrants be permitted to adopt policies and procedures pertinent to their business, operations, practices and organization. Authority to Engage Advisors and Funding As indicated above, we think the board of directors should ratify the proposed compensation of auditors and outside advisors. While the audit committee provides informed guidance on financial reporting and auditing matters, the full board of directors bears the oversight responsibility for the company's compliance with SEC and other disclosure requirements. We also would like to suggest changes to certain language in the interpretive guidance regarding the role of outside advisors. The Proposed Rule suggests the registrant "may need the authority to engage its own advisors, including experts in particular areas of accounting" regarding "conflicts of interest" and to "assess the company's disclosure and other compliance obligations with an independent and critical eye." This characterization of the role of outside advisors seems to duplicate the role of the registrant's independent auditor. The registrant's independent auditor should have the requisite "experience and knowledge to identify best practices of other companies that might be appropriate for the issuer." The independent auditor is as well suited, and likely best informed and able, to "independently investigate questions that may arise regarding financial reporting and compliance with the securities laws." We are very troubled by the pejorative tone which seems to suggest the independent auditor may not be sufficiently objective or independent, or may not have the requisite experience and knowledge of "best practice" financial reporting and disclosure practices. We suggest the text of the final rule be modified to remove pejorative language which could further weaken, rather than improve, investor confidence in the integrity and effectiveness of independent audits. Application and Implementation of the Proposed Standard Generally, we are in agreement with the proposed implementation provisions including the effective date and process for review and approval of self-regulatory organizations' (SRO's) rules necessary to satisfy the requirements of the Proposed Rule. We also agree with the scope of applicability of the Proposed Rule with respect to SRO's and securities. However, with respect to the applicability to issuers, we think the Proposed Rule should be modified to provide greater flexibility for NASDAQ registrants given that, in many cases, NASDAQ companies are less mature, less sophisticated and may require a longer transition period. We also think companies which have just completed their initial public offering should be afforded broader exemption and transition than specified in the Proposed Rule. Finally, we agree registrants should be afforded an opportunity to cure any defects arising from failure to meet audit committee standards before imposition of a prohibition. We suggest the Commission require the SRO's to establish specific procedures for curing defects with respect to listing requirements within specific timeframes. Disclosure Changes Regarding Audit Committees We think that existing disclosure in the proxy material is sufficient and that disclosure in the annual report would be redundant. Cost Estimates and Cost Benefit Analysis The estimated cost of implementing the Proposed Rule of $99,000 is unrealistic and, we think, significantly understated. The actual work requirements will be much greater, particularly for multinational companies. The time spent by our internal staff and external advisors, including our auditor's consultation, has already exceeded the estimated work effort for the average registrant in evaluating, and responding to, the Proposed Rule. We agree the annual cost associated with disclosure requirements likely would be fairly nominal. However, the registrant could incur significant recurring costs for expanded audit committee agendas and activities, additional processes and procedures for handling complaints, and ongoing retention of advisors, as and where necessary. This would be particularly true if registrants feel compelled to retain outside advisors based on what some might interpret as an endorsement of their use in the Proposed Rule. Compounding potential concerns of audit committees, a mounting volume of literature is being distributed by consultants and attorneys using a tone designed to induce them to purchase unnecessary services. These resulting costs of course would be more significant for smaller businesses that have yet to develop the processes and procedures required under the Proposed Rule. Thank you for the opportunity to comment on this important proposal. We appreciate your consideration of our comments and suggestions.
cc: The Honorable William H. Donaldson, Chairman, Securities and Exchange Commission
Proposed Rule: Standards Relating To Listed Company Audit Committees, Subject File No. S7-02-03Request for Comments II. A. Audit Committee Member Independence 1. Is additional clarification necessary regarding the consulting, advisory or other compensatory fee prohibition? For example, should we clarify whether "compensatory fees" would include compensation under a retirement or similar plan in which a former officer or employee of the issuer participates? Should there be an exception for a de minimis amount of payments? If so, what amount would be appropriate? How would such an exception be consistent with the purposes of the prohibition? Yes, we think additional clarification would be helpful. The Proposed Rule should explicitly state reimbursement of reasonable and necessary director expenses does not impair their independence and, as a result, is permitted. Furthermore, due to the expanding role of directors particularly audit committee members, such reimbursement is absolutely essential (i.e. training regarding SEC regulatory developments, new financial reporting standards, effective systems of internal accounting controls, ethics, etc.). 2. Is the proposed extension of the compensatory prohibition to spouses, minor children or stepchildren or children or stepchildren sharing a home with the member appropriate? Should it be expanded or narrowed? For example, should there be an exception for non-executive family members employed by the issuer? Is the extension to payments accepted by an entity in which an audit committee member is a partner, member or principal or occupies a similar position and which provides accounting, consulting, legal, investment banking, financial or other advisory services or any similar services to the issuer appropriate? Should we extend the prohibition further, such as to ordinary course business relationships? Yes, we think the compensatory prohibition should apply to all immediate family members and does not need to be expanded or narrowed. We would support an exception for non-employer family members employed by the issuer. We agree with the prohibition against payments to an entity in which an audit committee member is a partner, member or principal or occupies a similar position which provides accounting, consulting, legal, investment, banking, financial or other advisory services but do not believe the prohibition should be extended to ordinary course business relationships. 3. Is the proposed definition of "affiliated person" for non-investment companies appropriate? Is the proposed safe harbor from the definition of affiliated person appropriate? Should it include fewer or more persons? In responding to these questions, please keep in mind that, by its very nature, it would be difficult to create a safe harbor covering all individuals who are non-affiliates without inadvertently covering affiliates as well. The safe harbor would not create a presumption that those outside the safe harbor are affiliates. Rather, the safe harbor is designed to cover only those individuals whom we reasonably believe would not be affiliates. Is this assumption accurate? Can we reliably assume that people who own less than 10% of a company and are not officers or directors are not in control of the company? Should this threshold be higher (e.g., 20%) or lower (e.g., 5%)? Should the exclusion from the definition of affiliate include an express presumption that those persons not so excluded are affiliates, unless rebutted by a majority of independent directors? We support the proposed definition of an affiliate or affiliated person by reference to the existing definition under the securities laws, such as Rule 12b-2 of the Securities and Exchange Act of 1934 and Rule 144 under the Securities Act of 1933, subject to a facts and circumstances determination and a safe harbor rule, providing that persons holding stock interests of less than 10% would not be considered affiliated persons. 4. Should we rely exclusively on retaining a subjective test for determining affiliate status, given the varied contractual arrangements with a control feature entered into by issuers, particularly smaller companies? A person might employ specified thresholds to conceal a control relationship. Should a facts and circumstances test be retained in order to reflect the different ways a control relationship can be established with an issuer? No, we think a "facts and circumstances" determination is always appropriate. 5. Should the board of directors be required to determine whether an audit committee member is independent? Should the board be required to disclose this determination? If so, when? If the board should not make the determination, who should? Yes, in view of the full board of directors' responsibility for governance of the registrant, the board of directors should bear the responsibility of determining the independence of audit committee members. 6. The proposed independence requirements relate to current relationships with the audit committee member and related persons. Should the prohibition also extend to a "look back" period before the appointment of the member to the audit committee? If so, what period (e.g., three years or five years) would be appropriate? Should there be different look-back periods for different relationships or different parties? If so, which ones? No, we do not think a "look back" provision is meaningful in assessing the independence of audit committee members. For example, assume a potential audit committee member held a 15% ownership interest in a company but had divested his stock holding. There would no longer seem to be any conflict since he no longer had any financial interest at risk. 7. Should there be additional criteria for independence apart from the two proposed criteria? For example, in addition to the proposed prohibitions, should there be a prohibition on any transactions or relationships with the audit committee member or an affiliate of the audit committee member apart from the committee member's capacity as a member of the board and any board committee? No, we think the specified criteria are adequate. 8. Should additional relationships be exempted from the independence requirements at this time? If so, which relationships should be exempted, why should they be exempted, and how would such an exemption be consistent with maintaining the independence of the audit committee? We are not aware of any other relationships which would warrant exemption. 9. Is the proposed exemption for new public companies appropriate? Should more than one audit committee member be exempted from the requirements? Should a specific percentage of audit committee members be exempted? Should the exemption be conditioned on there being at least a majority of independent directors on the audit committee? Should the exemption period be longer (e.g., 1 year) or shorter (e.g., 30 days)? We are not proposing to apply this exemption to investment companies. Should this exemption apply to investment companies? Yes, we agree companies which have just completed their initial public offering should be afforded an exemption but suggest an exemption period of one year, rather then 90 days. This would permit election of the new director in conjunction with the company's annual election of directors. Finally, we agree registrants should be afforded an opportunity to cure any defects arising from failure to meet audit committee standards before imposition of a prohibition. We suggest the Commission require the self-regulatory organizations (SRO's) to establish specific procedures for curing such defects within specific timeframes. 10. Is the proposed exemption for independent board members that sit on both a parent's and consolidated majority-owned subsidiary's board of directors appropriate? Is the requirement that the board member also is otherwise independent of the subsidiary necessary? Should the exemption be limited only to wholly owned subsidiaries or other specified level of ownership? Should the exemption be denied if the subsidiary maintains a listing for its own securities? Is there any need for a similar exemption from the "interested person" test for investment companies? Yes, the exemption seems appropriate for directors sitting on the board of both the parent and it's consolidated subsidiary since these responsibilities do not create any substantive conflict. We agree that the director must be otherwise independent to qualify for this exemption. The exemption should be allowed provided the parent holds a majority interest in the subsidiary. This would likely preclude any situations which could result in a meaningful conflict since any benefit or detriment to the subsidiary would, at a minimum, impact the parent to the full extent of it's majority interest. 11. Should there be an exception to the independence requirements based upon exceptional and limited circumstances, if the board determines that membership on the committee by the individual is required by the best interests of the corporation and its shareholders? If so, should the board be required to disclose the nature of the relationship and the reasons for that determination? Should there be a time limit for these appointments? No. 12. Should companies be allowed to request exemptive relief on a case-by-case basis? If so, what procedures should be used for submitting and evaluating applications for exemptive relief? What factors should the Commission consider in considering such requests? How would such a case-by-case process be consistent with the policy and purposes of Section 10A(m)? How would such a process be coordinated between the Commission and the SROs? Should companies be required to disclose publicly any exemption they receive? Should SROs be permitted to grant exemptions within defined parameters? What should those parameters be? No. 13. Are any modifications required to the consulting, advisory or other compensatory fee prohibition for investment companies? Is it appropriate to use the definition of "interested person" as set forth in Section 2(a)(19) of the Investment Company Act to test the independence of members of investment company audit committees, as proposed? If not, should the rule apply the affiliation test, which we propose to apply to operating companies, or a different test? No comment. II. B. Responsibilities Relating to Registered Public Accounting Firms 14. We request comment on implementation of this proposed requirement. Is additional specificity needed? Generally, we agree with the scope and definition of the role and responsibilities of the audit committee relating to oversight of the company's independent auditor. While we agree the audit committee should be responsible for the appointment, compensation and retention of the registrant's independent auditor and outside advisors, we think the full board, given its overall responsibility for the affairs of the registrant, should ratify the decisions of the audit committee. This ratification provides a needed check and balance, since the full board of directors bears the oversight responsibility for the company's compliance with disclosure and other reporting requirements. Finally and perhaps most importantly, the Proposed Rule instructs the audit committee to be directly and intimately involved in the day-to-day coordination of the independent auditor's examination. The Proposed Rule states "the audit committee would have to be directly responsible for the appointment, compensation, retention and oversight of the work of the independent auditor...and the independent auditor would have to report directly to the audit committee (emphasis added)." This level of involvement compromises the audit committee's objectivity, overextends its members and discourages audit committee service. As a consequence, these issues could reduce the pool of qualified and willing candidates. We also are concerned such a broadly defined audit committee role overshadows management's primary responsibility for the fair presentation of the registrant's financial statements, adequacy of disclosure and compliance with applicable SEC reporting and disclosure requirements. This issue is further exacerbated by similar requirements under other recently issued regulations. Because filings with the Commission are importantly and fundamentally the representations of management, it is vitally important these regulatory initiatives not dilute management's sense of responsibility and accountability for these matters. Furthermore, the involvement of the audit committee must not be so invasive as to diminish the ability or willingness of the company's executives to execute signed representations required under the Commission's recently issued certification rules. We strongly recommend the Proposed Rule clearly delineate management's responsibility for financial reporting practices, policies and procedures and coordinating the day-to-day work of the independent auditor from the audit committee's oversight responsibility. 15. Should the audit committee also be directly responsible for the appointment, compensation, retention and oversight of an issuer's internal auditor? Should other responsibilities be under the supervision of the audit committee? No, the charter of the internal audit function may encompass many operational activities and projects, in addition to audits of the company's financial results and system of internal accounting controls. For example, our internal audit function performs a variety of operational and business support functions including: acquisition due diligence, financial modeling and acquisition transition planning; operations audits; due diligence for outsourcing contracts; and project support to the business units. We are not aware of any other functional activities which should be under the supervision of the audit committee. 16. Does the proposed instruction that the requirement does not conflict with, and is not affected by, any requirement that requires shareholders to ultimately elect, approve or ratify the selection of the issuer's auditor adequately address the concerns of issuers whose governing law or documents requires shareholder selection of the auditor? Are additional accommodations necessary? Please explain how any accommodation would be consistent with the Sarbanes-Oxley Act. No further accommodations seem necessary. 17. Should the requirements relating to independent auditor selection of Section 32(a) of the Investment Company Act be retained with respect to registered investment companies falling within the scope of the proposed rule? If so, why? Should the Commission instead exempt registered investment companies from the requirements relating to independent auditor selection in Section 32(a) of the Investment Company Act, when such investment companies fall within the scope of the proposed rule, and require that their independent auditors be selected by the audit committee? If so, why? No comment. 18. Should the Commission require registered investment companies to comply with the requirements of both Section 32(a) of the Investment Company Act and the proposed rule with respect to the selection of independent auditors? If so, should we interpret these provisions to require that the audit committee nominate the independent auditor and the majority of disinterested directors approve the independent auditor? No comment. 19. We note that our recent release regarding auditor independence proposes that the audit committee of a registered investment company separately approve the independent auditor. How should the Commission reconcile proposed Rule 10A-3, the auditor independence proposal, and Section 32(a) of the Investment Company Act? No comment. II. C. Procedures for Handling Complaints 20. Do most listed issuers have procedures for the receipt, retention and treatment of complaints or for the confidential, anonymous submission by employees of concerns regarding questionable accounting or auditing matters? If so, how do these procedures work? Are they effective in their purpose? CSC, like many registrants, has long-standing policies for handling a broad spectrum of ethical issues, including questions, potential issues and complaints concerning accounting and auditing matters. The process has been structured to handle these matters on a confidential basis. 21. Should the proposed rule require a company to disclose the procedures that have been established or any changes to those procedures? If so, where and how often should the disclosure appear and what should it look like? No, we do not think there would be any benefit to such disclosures. 22. Should specified procedures be prescribed or encouraged? For example, should we specify how long complaints must be retained? Should we specify who could or could not be designated by the audit committee for the receipt and treatment of complaints? Additional mandated detailed rules or procedures are not necessary to accomplish these objectives. Furthermore, we do not think there is any need for detailed prescriptive rules concerning related record retention or delegation by the audit committee. We suggest registrants be permitted to adopt policies and procedures pertinent to their business, operations, practices and organization. II. D. Authority to Engage Advisors 23. Is any additional specificity needed for this requirement? For example, should we define what constitutes an "independent advisor?" We do not think further specificity would be necessary or useful. II. E. Funding 24. Is any additional specificity needed for this requirement? For example, should a specific agreement or arrangement be required to provide for the appropriate funding? No. 25. Should there be any limit on the amount of compensation that could be requested by the audit committee? If so, who should set these limits (e.g., the full board)? Should the audit committee's request be limited to "reasonable" compensation? Who would determine what is "reasonable?" How would such limits be consistent with the policy and purposes of the Sarbanes-Oxley Act? Is the fact that the audit committee members ultimately are elected by, and answerable to, shareholders sufficient to address any concern over compensation limits? No, we do not think a limit would be appropriate or helpful, however, we recommend that the board of directors ratify the proposed compensation of auditors and outside advisors. The full board of directors bears the oversight responsibility for the company's compliance with SEC and other disclosure requirements. II. F. Application and Implementation of the Proposed Standards 1. SROs Affected 26. Do the proposed implementation dates provide sufficient time for SROs to propose and obtain Commission approval for new or amended rules to meet the requirements of the proposals? Is the date by when the standards would need to be operative appropriate? If not, what other dates would be appropriate? What factors should the Commission consider in determining these dates? Generally, we are in agreement with the proposed implementation provisions including the effective date and process for review and approval of self-regulatory organizations' (SROs') rules necessary to satisfy the requirements of the Proposed Rule. 2. Securities Affected b. Security Futures Products and Standardized Options 27. Is the proposed exemption for the listings of other classes of securities of an issuer appropriate? Would the benefit of having multiple SROs monitoring compliance outweigh the potential duplicative and administrative burdens that would be imposed on issuers and SROs if there was not such an exemption? Should the exemption be conditioned on having a class of common equity or similar securities listed, or should any class of securities be sufficient? We think the exemption is appropriate and agree the cost of multiple SRO's monitoring the same issuer would greatly exceed any possible benefit. We do not think the exemption should be conditioned on having a class of common equity listed since the listing requirements would be consistent. 28. Similarly, is the proposed exemption of listings of non-equity securities by consolidated majority-owned subsidiaries appropriate? Instead, should all issuers of securities be required to maintain an audit committee meeting the proposed standards? What would be the burden on companies from mandating such a requirement? Should the exemption be limited to wholly owned subsidiaries or some other specified level of ownership? Is limiting the exemption to non-equity securities (other than non-convertible, non-participating preferred securities) of the subsidiary appropriate? Yes, we agree exemption is appropriate for non-equity securities of majority owned subsidiaries and agree this exemption should not be extended to equity securities. 29. Is the exclusion for securities futures products and standardized options appropriate? If not, how should these securities be handled? No comment. 30. Although we do not propose to exempt other types of securities from coverage of the proposed rule, we request comment on the propriety of either a complete or partial exemption from the requirements for other types of securities? For example, should the rule apply only to classes of voting common equity of an issuer? What would be the basis for such an exclusion, and how would it be consistent with the purposes of the Sarbanes-Oxley Act? In responding to this request, commenters should specifically address how such an exemption would be consistent with investor protection. We do not think other types of securities should be exempt. 3. Issuers Affected d. Investment Companies 31. Although we do not propose a complete exemption for foreign issuers from coverage of the proposed rule, and question whether such an exemption would be consistent with the policies underlying the Sarbanes-Oxley Act, we solicit comment on the propriety of either a complete or broader exemption from the requirements for foreign issuers. Given the exemptions that are proposed, would the proposals conflict with local law or local stock exchange requirements? If so, how? Are the problems that the proposals are intended to address dealt with in alternative ways in other jurisdictions? Would any foreign issuers not consider a listing solely because of these requirements? Would any foreign issuers that currently maintain a U.S. listing seek to delist their securities because of these requirements? No comment. 32. Is the proposed special accommodation to the independence requirements adequate for issuers in countries with a dual board structure where employee representatives sit on the supervisory board or are required to be on the audit committee? If not, how should we accommodate these issuers, if at all? No comment. 33. Are the proposed special accommodations for foreign issuers with controlling shareholder or shareholder groups or foreign government representation appropriate? Do the proposed exemptions provide appropriate accommodations for foreign private issuer practices, consistent with the purposes of Section 10A(m) of the Exchange Act and the protection of investors? Are there alternative approaches that would be preferable to address the issue? Should any of the conditions of the proposed exemption be changed? For example, for controlling shareholders, should the level of shareholder ownership proposed be higher (e.g., 80%) or lower (e.g., 10%)? Is the limitation for controlling shareholders to observer status and not being a voting member or chair of the audit committee appropriate? No comment. 34. Is the proposed special accommodation for issuers from jurisdictions that operate with boards of auditors or similar bodies appropriate? Does the proposed exemption provide appropriate accommodation for these issuers, consistent with the purposes of Section 10A(m) of the Exchange Act and the protection of investors? Are there alternative approaches that would be preferable to address the issue? Should we provide a "sunset" date for this provision to allow the Commission to reconsider its effectiveness and to reexamine the trend towards audit committees in other jurisdictions? If so, what date should we use (e.g., December 31, 2005)? Yes, we believe special accommodation is appropriate and agree with the proposed exemption. 35. Is the compliance burden for companies under a certain size disproportionate to the benefits to be obtained from the proposed requirements? Would any smaller issuers not consider a listing solely because of these requirements? Would any smaller issuers that currently maintain a listing seek to delist their securities because of these requirements? How can we minimize the burden consistent with the purposes of the Sarbanes-Oxley Act? We think the requirements should be consistent regardless of company size. Financial reporting anomalies have arisen in small companies, as well as large. 36. Should the scope of one or more of the proposed requirements be narrowed to exclude or apply differently to companies under a certain size? If so, which requirements should be changed? How would such accommodations be consistent with the purposes of Section 10A(m) and the protection of investors? Should there be special accommodations for companies considered under our rules to be "small business issuers" (companies that have revenues and public float of less than $25 million)? Should there be a higher cutoff, such as $100 million or $200 million public float and/or revenues? If there should be a different standard for determining the level of issuer affected, should it be based on additional or alternative criteria, such as total assets, shareholder equity or reporting history? What alternate means exist that would provide the same protections to shareholders? No, refer to our response to question 35. 37. Is the exclusion of asset-backed issuers appropriate? If not, how should these issuers be handled? Are there other types of issuers that should be handled differently? Yes. 38. Is the exclusion for ETFs that are structured as unit investment trusts appropriate? If not, how should these ETF UITs be handled? Exchange-traded UITs typically provide audited financial information in shareholder reports although these reports are not required by Commission rules. How should this affect whether exchange-traded UITs are covered by the proposed requirements? Should the sponsor, depositor, or trustee of the UIT be required to comply with the proposed rule? Are there other types of investment companies that should be excluded from the proposed rule? If so, why? No comment. 39. We propose to make the general exemptions of Exchange Act Rule 10A-3(c) available for use by investment companies. Would investment companies ever fall within any of these exemptions? Should some exemptions be available to investment companies and others unavailable? If so, which ones should be available and why? No comment. 4. Determining Compliance with Proposed Standards 40. Should a listed issuer be required to notify the SRO if it has failed to comply with our proposed requirements? Is it sufficient for the notification to be made "promptly?" Should the direction to the SROs on this point be more specific (e.g., notification must occur no later than two business days after an executive officer of the issuer becomes aware of any material noncompliance)? Yes, the issuer should notify the SRO promptly in the event of non-compliance. 41. Is the proposed triggering event for notification (i.e., that an executive officer of the issuer has become aware of any material noncompliance) appropriate? For example, should the standard also include any audit committee member becoming aware of any material noncompliance? Yes. 42. In addition to, or in lieu of, notification in the event of noncompliance, should a listed issuer be required to disclose periodically to the SROs whether they have been in compliance with the standards? If so, how often? No, this reporting procedure would be unnecessary since the issuer would be required to notify the SRO upon breach of the listing requirements. 43. Should a listed issuer be required to notify the SRO if it has failed to comply with listing standards apart from our proposed requirements for audit committees? Should this requirement apply only to particular listing standards? Yes, the issuer should notify the SRO in the event of non-compliance with any listing standards, provided such non-compliance was material. 5. Opportunity to Cure Defects 44. Should the SROs be required to establish specific procedures for curing defects apart from those proposed? If so, what would these procedures look like? Should there be a specific course for redress other than the delisting process? Yes, we agree with the provision under the Proposed Rule requiring the SRO to provide definite procedures and time periods for compliance with proposed requirements. 45. Should our final rule include specific provisions that set maximum time limits for an opportunity to cure defects? If so, what time limits would be appropriate? Yes, we think an appropriate time limit will depend upon the nature of the non-compliance but generally should not exceed 90 days. 46. Beyond the limited exemption we propose for the independence requirements, should companies that have just completed their initial public offering be given additional time to comply with the requirements? Yes, we think the exemption period should be one year. 47. Is the proposed date for when the SROs rules must be operative appropriate for companies that must comply with the new standards? If not, what date would be appropriate and what factors should we consider in setting any such date? Would a period beyond the proposed date be necessary or appropriate for compliance by smaller companies? Are there special considerations that we should take into account for foreign private issuers? Yes, the proposed effective date for SRO rules is appropriate. II. G. Disclosure Changes Regarding Audit Committees 3. Updates to Existing Audit Committee Disclosure 48. Should companies be required to disclose publicly if they are taking advantage of an exemption to the proposed SRO requirements? If so, are the proposed locations of this disclosure appropriate? Should we permit incorporation by reference into the company's annual report? Should the disclosure be required as an exhibit to the company's filing? Is the disclosure of the company's assessment of whether and if so, how, such reliance would materially adversely affect the ability of the audit committee to act independently and to satisfy the other proposed requirements appropriate? Yes, companies should be required to disclose exemption to the proposed SRO requirements but we recommend disclosure in the proxy information which can be incorporated by reference in the annual report. We further agree with the requirement that the company disclose whether this would materially adversely affect the ability of the audit committee to act independently and fulfill its charter. 49. Should foreign private issuers that avail themselves of the exemption for boards of auditors or similar structures be required to file an exhibit to their annual reports stating that they are doing so? No comment. 50. Should a UIT be required to disclose that it is availing itself of the exemption from the audit committee requirements? If so, where should such disclosure be made? Exchange-traded UITs typically provide audited financial information in shareholder reports although these reports are not required by Commission rules.115 Should disclosure of the exemption from audit committee requirements be required in these reports? No comment. 51. Should an issuer relying on the multiple listing exemption be required to disclose that it is availing itself of that exemption? Should the disclosure only be required for subsidiaries relying on the exemption for their own listed securities? No comment. 52. Should we require disclosure of basic information about an issuer's audit committee in its annual report, or is the current location of this disclosure for issuers subject to the proxy rules sufficient? Would disclosure of whether the entire board is acting as the audit committee be helpful? We believe disclosure in the proxy information is sufficient and think disclosure is appropriate where the entire board is acting as the audit committee. 53. Given the new definition of audit committee in the Exchange Act, is it appropriate to clarify in the current disclosure requirements for audit committees that if the issuer does not have a separately designated audit committee, or committee performing similar functions, the issuer must provide the disclosure with respect to all members of its board of directors? How many issuers will this change affect? Yes. We are not aware of the extent of issuers that would be impacted by this requirement. 54. Are our proposed changes to the disclosure requirements regarding the independence of audit committee members appropriate? Is there a reason to continue to require non-listed issuers to choose from one of the NYSE's, AMEX's or Nasdaq's definitions for audit committee members? Yes, we think the proposed changes to the disclosure requirements are appropriate and agree it is no longer necessary to require designation of the applicable definition applied by the issuer. 55. Listed issuers that are foreign private issuers are generally not subject to the proxy rules. Should we require disclosure regarding the independence of audit committee members for these issuers? If so, where should this disclosure appear? No comment. 56. Is there any additional disclosure concerning audit committees that would be beneficial to investors? With the new requirements we propose for audit committees, is any existing disclosure we require regarding audit committees no longer needed? No additional disclosures seem necessary and we are not aware of any existing disclosures which would no longer be necessary. |