California Public Employees' Retirement System (CalPERS)

Investment Office
P.O. Box 2749
Sacramento, CA 95812-2749
Telecommunications Device for the Deaf - (916) 326-3240
(916) 326-3400; FAX (916) 326-3330

February 18, 2003

Jonathan G. Katz
Secretary
U.S. Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549-0609

Re: File No. S7-02-03

Dear Mr. Katz,

I am writing to you on behalf of the California Public Employees' Retirement System (CalPERS). CalPERS is the largest public pension system in the U.S., with approximately $135 billion in assets. We manage the retirement benefits and health insurance on behalf of nearly 1.3 million members.

CalPERS is pleased to provide comment on the Commission's proposed rules regarding "Standards Relating to Listed Company Audit Committees." CalPERS has long advocated for greater independence of public companies' boards and audit committees, and has been a strong supporter of the reform measures in the Sarbanes-Oxley Act. Accordingly, we are generally very supportive of the Commission's proposed rules regarding independence of the Audit Committee and its members. We feel strongly that the SEC should strive to ensure that independent Audit Committees play a strong role in improving corporate governance.

To provide specific comment, I have attached a matrix which presents our position on selected topics contained within the proposal. It is our position that Audit Committees should be completely independent. This is of paramount importance to investors who depend upon companies having a strong system of internal controls and reliable financial reporting. We rely heavily on the independence of the audit committee and its members in evaluating the investments we make.

In March 2002, the CalPERS Board adopted a Financial Market Reform program that contains the System's position on numerous issues related to the financial market crisis. Several of the central issues contained in the Board's reform program relate to the role of

the independent auditor and the role of the Audit Committee. Therefore, I am also enclosing a copy of CalPERS' Financial Market Reform Matrix for your reference. If you have any questions regarding our comments on the proposed rules, or on the Reform Matrix, please contact Ted White, Director of Corporate Governance at (916) 341-2731, or Larry Jensen, Chief Audit Executive, at (916) 231-7807.

Sincerely,

Mark Anson
Chief Investment Officer

Attachments

Number	SEC Question/Request	CalPERS Response
	Section II. Proposed Changes
	A. Audit Committee Member Independence
1	Q1. Is additional clarification necessary regarding the consulting, advisory or other compensatory fee prohibition? Q2. 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? Q3. Should there be an exception for a de minimis amount of payments? Q4. If so, what amount would be appropriate? Q5. How would such an exception be consistent with the purposes of the prohibition?	A1. No comment. A2. No comment A3. There should not be an exception for a de minimis amount of payments because prohibition of conflicts of interest should be subject to a "bright-line test." A4. No comment. A5. No comment.
2	Q1.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? Q2. Should it be expanded or narrowed? Q3. For example, should there be an exception for non-executive family members employed by the issuer? Q4. 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? Q5. Should we extend the prohibition further, such as to ordinary course business relationships?	A1. Yes. A2. It should be expanded to include all children step-children, brothers, sisters, parents, and parents-in-law. The restriction of "sharing a home" in the proposal should be deleted. A3. If there is an exception, it should be for persons who are rank-and-file, and therefore are both non-executive and non-managerial employees. A4. Yes. A5. Not at this time.
3	Q1. Is the proposed definition of "affiliated person" for non-investment companies appropriate? Q2. Is the proposed safe harbor from the definition of affiliated person appropriate? Q3. 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. Q4. Is this assumption accurate? Q5. 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? Q6. 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?	A1. No comment. A1. No comment. A1. No comment. A1. No comment. A5. No. A6. The threshold should be lower, perhaps 5% or less than 5%.
4	Q1. 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. Q2. Should a facts and circumstances test be retained in order to reflect the different ways a control relationship can be established with an issuer?	A1. We do not believe that we should rely exclusively on subjective tests, but that some objective tests should be formulated. Therefore, first, the objective of the tests for determining affiliate status should be stated. Second, there should be a direction that the purpose of the tests is to be an aid in determining affiliate status, that the tests should be conducted in that spirit and not for the purpose of seeking technicalities to circumvent the tests. Third, we believe that the tests should first include a set of objective criteria, and these should be followed by subjective criteria designed to prevent circumvention of the objective criteria through technicalities. A2. Yes.
5	Q1. Should the board of directors be required to determine whether an audit committee member is independent? Q2. Should the board be required to disclose this determination? Q3. If so, when? Q4. If the board should not make the determination, who should?	A1. No. There should be bright-line tests of independence based upon strict definitions that are determined by the SEC. A2. N/A, see A1, above. However, the board of directors should disclose to the shareholders how the board has followed the strict definitions and bright-line tests determined by the SEC. A3. N/A. A4. N/A.
6	The proposed independence requirements relate to current relationships with the audit committee member and related persons. Q1. Should the prohibition also extend to a "look back" period before the appointment of the member to the audit committee? Q2. If so, what period (e.g., three years or five years) would be appropriate? Q3. Should there be different look-back periods for different relationships or different parties? Q4. If so, which ones?	A1. Yes, but it may be appropriate to include a grandfather clause. A2. At least three years. A3. No comment. A4. N/A
7	Q1. Should there be additional criteria for independence apart from the two proposed criteria? Q2. 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?	A1. Yes. But, there should be a cooling-off period when former audit committee members should maintain the standards of independence after leaving the audit committee. A2. We support 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.
8	Q1. Should additional relationships be exempted from the independence requirements at this time? Q2. 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?	A1. No. A2. N/A
9	Q1. Is the proposed exemption for new public companies appropriate? Q2. Should more than one audit committee member be exempted from the requirements? Q3. Should a specific percentage of audit committee members be exempted? Q4. Should the exemption be conditioned on there being at least a majority of independent directors on the audit committee? Q5. 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. Q6. Should this exemption apply to investment companies?	A1. It appears to be reasonable at this time. A2. No. A3. No. A4. Yes. A5. The exemption period should be no longer than 180 days. A6. No.
10	Q1. 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? Q2. Is the requirement that the board member also is otherwise independent of the subsidiary necessary? Q3. Should the exemption be limited only to wholly owned subsidiaries or other specified level of ownership? Q4. Should the exemption be denied if the subsidiary maintains a listing for its own securities? Q5. Is there any need for a similar exemption from the "interested person" test for investment companies?	A1. It appears to be reasonable at this time. A2. Yes. A3. The exemption should apply to any entity controlled and consolidated by the parent company. A4. No comment. A5. No comment.
11	Q1. 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? Q2. If so, should the board be required to disclose the nature of the relationship and the reasons for that determination? Q3. Should there be a time limit for these appointments?	A1. No. A2. If this is done, then yes. A3. If they are done, then no more than a one-year term.
12	Q1. Should companies be allowed to request exemptive relief on a case-by-case basis? Q2. If so, what procedures should be used for submitting and evaluating applications for exemptive relief? Q3. What factors should the Commission consider in considering such requests? Q4. How would such a case-by-case process be consistent with the policy and purposes of Section 10A(m)? Q5. How would such a process be coordinated between the Commission and the SROs? Q6. Should companies be required to disclose publicly any exemption they receive? Q7. Should SROs be permitted to grant exemptions within defined parameters? What should those parameters be?	A1. No. A2. N/A A3. N/A A4. N/A A5. N/A A6. If this is done, then yes. A7. N/A.
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?	Not at this time.
	B. Responsibilities Relating to Registered Public Accounting Firms
14	We request comment on implementation of this proposed requirement. Is additional specificity needed?	We generally support the SEC proposal. However, we believe that the Internal Audit unit should manage the contract of the external auditor for the Audit Committee under the Standards for the Professional Practice of Internal Auditing (SPPIA) Section 2050, and SPIAA Practice Advisories 2050-1 and 2050-2.
15	Q1. Should the audit committee also be directly responsible for the appointment, compensation, retention and oversight of an issuer's internal auditor? Q2. Should other responsibilities be under the supervision of the audit committee?	A1. CalPERS believes that the Chief Audit Executive should report to a level within the organization that allows the internal audit activity to fulfill its responsibilities per the Standards for the Professional Practice of Internal Auditing (SPPIA) Standard No. 1110. CalPERS also believes that the Chief Audit Executive ideally should report functionally to the Audit Committee and administratively to the Chief Executive Officer. We also note that in some companies that the Chief Audit Executive reports to an operations or financial executive, impairing independence. For example, at WorldCom, the Chief Audit Executive reported to the Chief Financial Officer. Therefore, we believe that the Audit Committee should determine the position that the Chief Audit Executive reports to administratively. A2. No additional responsibilities should be mandated.
16	Q1. 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? Q2. Are additional accommodations necessary? Please explain how any accommodation would be consistent with the Sarbanes-Oxley Act.	A1. Yes. A2. Not at this time.
17	Q1. 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? Q2. If so, why? Q3. 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?	A1. No comment. A2. No comment. A3. No comment.
18	Q1. 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? Q2. 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?	A1. No comment. A2. 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.
	C. Procedures for Handling Complaints
20	Q1. 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? Q2. If so, how do these procedures work? Q3. Are they effective in their purpose?	A1. No comment. A2. No comment. A3. Given the number of major accounting/auditing frauds that have occurred, we believe the SEC should require and compile data from companies concerning the effectiveness of these procedures. The required information should include the number of events, the allegations made for each event, and the resolution of each issue. This process would provide investors with some confidence as to whether or not these procedures are working. We also would consider public disclosure of the information sometime in the future. We also note that the procedures should have safeguards against reprisals or retribution against whistleblowers by the Board, Board members, management, and/or other employees.
21	Q1. Should the proposed rule require a company to disclose the procedures that have been established or any changes to those procedures? Q2. If so, where and how often should the disclosure appear and what should it look like?	A1. Yes. A2. The complaint procedure(s) should be disclosed to new employees during orientation, posted on the company website, and there should be reminders posted quarterly (coinciding with the quarterly/annual financial statements).
22	Q1. Should specified procedures be prescribed or encouraged? Q2. For example, should we specify how long complaints must be retained? Q3. Should we specify who could or could not be designated by the audit committee for the receipt and treatment of complaints?	A1. Prescribed, at least the general guidelines. A2. Yes, for a minimum of seven (7) years. A3. Yes. The person receiving the information should be one of the independent directors.
	D. Authority to Engage Advisors
23	Is any additional specificity needed for this requirement? For example, should we define what constitutes an "independent advisor?"	Yes, there should be definition of what an independent advisor is. In addition, there should be guidelines as to what types of activities constitute conflicts of interest. These prohibited activities might include that they cannot be doing work for management of the same company, its subsidiaries and affiliates, and for any of the company managers. The guidelines might include a section that the independent advisor may not profit by selling the company additional implementation services based upon the advice given, and that the staff of the advisory company may not personally profit from the advice given.
	E. Funding
24	Q1. Is any additional specificity needed for this requirement? Q1. For example, should a specific agreement or arrangement be required to provide for the appropriate funding?	A1. Not at this time. However, we believe that the SEC should re-examine this issue in about three years. A2. N/A
25	Q1. Should there be any limit on the amount of compensation that could be requested by the audit committee? Q2. If so, who should set these limits (e.g., the full board)? Q3. Should the audit committee's request be limited to "reasonable" compensation? Q4. Who would determine what is "reasonable?" Q5. How would such limits be consistent with the policy and purposes of the Sarbanes-Oxley Act? Q6. Is the fact that the audit committee members ultimately are elected by, and answerable to, shareholders sufficient to address any concern over compensation limits?	A1. Not in the regulations. A2. The Board should govern the limits, if used. A3. Yes. A4. The Board. A5. No comment. A6. Yes, provided that the shareholders are provided full disclosure related to this information.
	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?	No comment.
	2. Securities Affected
27	Q1. Is the proposed exemption for the listings of other classes of securities of an issuer appropriate? Q2. 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? Q3. Should the exemption be conditioned on having a class of common equity or similar securities listed, or should any class of securities be sufficient?	A1. No. A2. It is not clear that this is necessary at this time. A3. N/A.
28	Q1. Similarly, is the proposed exemption of listings of non-equity securities by consolidated majority-owned subsidiaries appropriate? Q2. Instead, should all issuers of securities be required to maintain an audit committee meeting the proposed standards? Q3. What would be the burden on companies from mandating such a requirement? Q4. Should the exemption be limited to wholly owned subsidiaries or some other specified level of ownership? Q5. Is limiting the exemption to non-equity securities (other than non-convertible, non-participating preferred securities) of the subsidiary appropriate?	A1. Yes. A2. Yes. A3. No comment. A4. N/A A5. N/A
29	Q1. Is the exclusion for securities futures products and standardized options appropriate? Q2. If not, how should these securities be handled?	A1. No comment. A2. Like any other publicly-traded security.
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.	General comment. We believe that exemptions can be inconsistent with investor protection. Therefore, we prefer to keep exemptions to an absolute minimum.
	3. Issuers Affected
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?	General comment. The question relates to the uniformity of the rules that issuers must follow in order to raise capital in the United States markets. These rules should be the same for all issuers, domestic and foreign. The granting of exceptions to foreign issuers is counter-productive to the goal of protecting investors and leveling the playing field for all issuers in the capital markets of the United States. Also, granting of exceptions to foreign companies may encourage United States firms to move offshore. Therefore, we would support reasonable transition periods and only minor exceptions for foreign issuers where absolutely necessary.
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?	General comment. We recognize that the SEC must accommodate numerous practices with foreign practices and law. We believe that exceptions for foreign firms should be kept to an absolute minimum. We believe that these accommodations will achieve your desired result; however, we have reservations over whether this is consistent with purpose of the Sarbanes-Oxley Act.
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)?	General comment. We recognize that the SEC must accommodate numerous practices with foreign practices and law. We believe that exceptions for foreign firms should be kept to an absolute minimum. We believe that these accommodations will achieve your desired result; however, we have reservations over whether this is consistent with purpose of the Sarbanes-Oxley Act. Yes, this is necessary to promote governance improvements in countries and companies that wish to access the United States capital markets.
35	Q1. Is the compliance burden for companies under a certain size disproportionate to the benefits to be obtained from the proposed requirements? Q2. Would any smaller issuers not consider a listing solely because of these requirements? Q3. Would any smaller issuers that currently maintain a listing seek to delist their securities because of these requirements? Q4. How can we minimize the burden consistent with the purposes of the Sarbanes-Oxley Act?	A1. No. The need for safeguards is independent of a company's size. A2. No comment. A3. No comment. A4. No comment.
36	Q1. Should the scope of one or more of the proposed requirements be narrowed to exclude or apply differently to companies under a certain size? Q2. If so, which requirements should be changed? Q3. How would such accommodations be consistent with the purposes of Section 10A(m) and the protection of investors? Q4. 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)?96 Q5. Should there be a higher cutoff, such as $100 million or $200 million public float and/or revenues? Q6. 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? Q7. What alternate means exist that would provide the same protections to shareholders?	A1. No. A2. N/A A3. N/A A4. No. A5. N/A. A6. There should not be such a standard. A7. If there were alternate means, then they would likely apply to all sizes of companies.
37	Q1. Is the exclusion of asset-backed issuers appropriate? Q2. If not, how should these issuers be handled? Q3. Are there other types of issuers that should be handled differently?	A1. No comment. A2. N/A. A3. N/A.
38	Q1. Is the exclusion for ETFs that are structured as unit investment trusts appropriate? Q2. 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. Q3. How should this affect whether exchange-traded UITs are covered by the proposed requirements? Q4. Should the sponsor, depositor, or trustee of the UIT be required to comply with the proposed rule? Q5. Are there other types of investment companies that should be excluded from the proposed rule? If so, why?	A1. No comment. A2. N/A. A3. N/A. A4. N/A. A5. None that we know of.
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	Q1. Should a listed issuer be required to notify the SRO if it has failed to comply with our proposed requirements? Q2. 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)?	A1. Yes, and the SEC should also be notified. A2. Yes, and the limit should be two business days.
41	Q1. Is the proposed triggering event for notification (i.e., that an executive officer of the issuer has become aware of any material noncompliance) appropriate? Q2. For example, should the standard also include any audit committee member becoming aware of any material noncompliance?	A1. It should also include board members. A2. Yes, not only any audit committee member, but also any board member.
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?	In addition to notifying the SEC, the issuer should send a certification to both the SEC and the SRO annually as to whether or not they are in compliance the standards.
43	Q1. 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? Q2. Should this requirement apply only to particular listing standards?	A1. Yes. A2. It should apply to all standards.
	5. Opportunity to Cure Defects
44	Q1. Should the SROs be required to establish specific procedures for curing defects apart from those proposed? Q2. If so, what would these procedures look like? Q3. Should there be a specific course for redress other than the delisting process?	A1. Yes. A2. The procedures should specify notification periods and maximum periods to redress defects. A3. Yes, but delisting should remain an option.
45	Q1. Should our final rule include specific provisions that set maximum time limits for an opportunity to cure defects? Q2. If so, what time limits would be appropriate?	A1. Yes. A2. The time limits may be specific to different defects. It seems appropriate that the maximum periods should not exceed one quarter.
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?	No.
47	Q1. Is the proposed date for when the SROs rules must be operative appropriate for companies that must comply with the new standards? Q2. If not, what date would be appropriate and what factors should we consider in setting any such date? Q3. Would a period beyond the proposed date be necessary or appropriate for compliance by smaller companies? Q4. Are there special considerations that we should take into account for foreign private issuers?	A1. Yes A2. N/A A3. No. A4. No.
	G. Disclosure Changes Regarding Audit Committee
48	Q1. Should companies be required to disclose publicly if they are taking advantage of an exemption to the proposed SRO requirements? Q2. If so, are the proposed locations of this disclosure appropriate? Q3. Should we permit incorporation by reference into the company's annual report? Q4. Should the disclosure be required as an exhibit to the company's filing? Q5. 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?	A1. Yes, in the event that such exceptions exist. We generally discourage making exceptions. A2. Yes, but the disclosure should also be posted on the company's website. A3. Yes, if such exemptions exist. A4. Yes. A5. Yes.
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?	If this circumstance occurs, yes.
50	Q1. Should a UIT be required to disclose that it is availing itself of the exemption from the audit committee requirements? Q2. 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. Q3. Should disclosure of the exemption from audit committee requirements be required in these reports?	A1. Yes, in the circumstances that exceptions are made, then these exemptions should be disclosed. A2. N/A A3. N/A.
51	Q1. Should an issuer relying on the multiple listing exemption be required to disclose that it is availing itself of that exemption? Q2. Should the disclosure only be required for subsidiaries relying on the exemption for their own listed securities?	A1. Yes, in the case that such exemptions exist, then yes. A2. Yes, at this time.
52	Q1. 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? Q2. Would disclosure of whether the entire board is acting as the audit committee be helpful?	A1. This information should also be in the annual report and should be on the website. A2. Yes.
53	Q1. 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? Q2. How many issuers will this change affect?	A1. Yes. A2. No comment.
54	Q1. Are our proposed changes to the disclosure requirements regarding the independence of audit committee members appropriate? Q2. 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?	A1. They seem to be appropriate at this time. A2. We believe that it would be much better to have uniform standards.
55	Q1. 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? Q2. If so, where should this disclosure appear?	A1. Yes. A2. In the annual report and on the company's website.
56	Q1. Is there any additional disclosure concerning audit committees that would be beneficial to investors? Q2. With the new requirements we propose for audit committees, is any existing disclosure we require regarding audit committees no longer needed?	A1. The audit committee charter and actions should be available on the company's website. A2. None that we know of.
	H. General Request for Comment
57	We request and encourage any interested person to submit comments on the proposals, on any additional or different changes, and on any other matters that might have an impact on the proposals. We request comment from the point of view of national securities exchanges and national securities associations that would be required to comply with the proposals. We also request comment from the point of view of companies that would be subject to the listing requirements that would result from the proposals. We also request comment from the point of view of investors in the securities of these companies on their views of the proposals and any possible changes to the proposals. With regard to any comments, we note that such comments are of greatest assistance to our rulemaking initiative if accompanied by supporting data and analysis of the issues addressed in those comments.	CalPERS appreciates the opportunity to work with the SEC in formulating independence standards for the audit committees of publicly traded companies. CalPERS believes that the SEC performs a critical role in setting standards for corporate governance, and CalPERS encourages the SEC to continue setting the highest possible standards for independence of audit committees. Therefore, CalPERS generally supports the proposals made by the SEC, and this support is evident in our responses. CalPERS also questions some of the proposed exceptions because exceptions often tend to grow in scope and size until the original rule becomes ineffective. CalPERS believes generally that all companies, large and small, foreign and domestic should be subject to the same minimum rules in the capital markets of the United States. We also believe that the SEC may have more stringent rules for mid-cap and large-cap companies as appropriate. We believe that the SEC should encourage the exchanges to promote higher standards.

CalPERS' Financial Market Reform: 3/02

Issue1	Board Approval?		Staff Recommendation/ Timing	External Commentary2
	Yes	Not Yet
Audit Committees3
1. Increase the number of members required to be "financially literate" (at least two, or a majority).	X		2/02, 3/02: Recommended and approved.	No known disagreement; question is how many? Likely to be among topics considered by exchanges' tasks forces.4
2. Provide guidelines on what "financial literacy" means.	X		2/02: Recommended and approved.	General agreement, though whether "financial literacy" equates to "audit expertise" is a matter of debate. Should audit comm. members be experts, or simply have the skills to competently question the experts? Need market guidance (perhaps from NACD?) on the types of questions/ scope of inquiry that an audit committee should undertake. May be among the topics considered by exchanges' task forces.
3. Impose minimum training requirements on Audit Committee members.	X		2/02: Recommended and approved.	Likely to be among topics considered by exchanges' tasks forces.
4. Require Audit Committee approval of any non-audit services by the auditor, and disclosure of the reasons in the proxy. (This applies only to the extent non-audit services are permitted, which is CalPERS' preferred approach; see Auditor Independence #1, below.)	X		2/02: Recommended and approved.	Audit industry and corporate officials prefer this approach to CalPERS' preferred "bright line" ban on non-audit services (see Auditor Independence #1, below). May be a component of federal legislation, and likely to be among topics considered by exchanges' tasks forces.
5. Provide that Audit Committees have the power to hire and fire the auditor.	X		2/02: Recommended and approved.	General agreement (subject to the state law requirement that shareholders approve retention of the auditor). Likely to be among topics considered by exchanges' tasks forces.
6. Require that Audit Committees meet at least once per quarter, review the company's internal audit functions at least annually, and have at least one meeting per year with the external auditor and without any company employees present.	X		3/02: Recommended and approved.	Consistent with exchange listing standards and NACD guidelines. May be clarified as outgrowth of exchanges task forces.
7. Require that Audit Committees have access to their own resources (e.g., dedicated staff).	X		3/02: Recommended and approved.5	None known.
8. Require that Audit Committees have full access to company books and records.	X		3/02: Recommended and approved.	None known.
Auditor Independence6
1. Prohibit audit firms from providing non-audit services, with the exception preparation of tax forms and registration statements.	X		2/02, 3/02: Recommended and approved.	Part of LaFalce & Oxley bills, but with different definitions of "non-audit": LaFalce: adopts the original Levitt 2000 proposal (most expansive). Oxley: follows industry voluntary practice (where "non-audit" is narrowly defined). Likely to be addressed by other federal legislation as well. Likely to be among SEC proposals, and to be considered by the exchanges' task forces.
2. Require a mandatory rotation (5 to 7 years) of external auditor.	X		2/02: Recommended and approved.	LaFalce bill: 4 years. Likely to be part of other federal legislation proposed by Democrats. Strongly opposed by members of the corporate community. May be considered by SEC roundtable, and/or by the exchanges' task forces.
3. Prohibit audit firms from providing internal and external audit services for the same client.	X		2/02: Recommended and approved.	Likely to be considered as part of SEC roundtables, and/or by the exchanges' task forces. In 2000 (in response to former SEC chairman Levitt's proposals), strongly opposed by small and mid-size companies (particularly those trading on NASDAQ).
4. Establish a "cap" ($ or %) for non-audit services (if bright line test not adopted)		X	3/02: The data necessary to determine the appropriate "cap" is not currently available in the market. Under the approved Reform Package Action Plan, staff will collect this data over the 2002 proxy season and hopes to have a better understanding of the facts by the end of the season (i.e., June).	Preferred by corporate community (leaving to each company the discretion to establish the appropriate "cap"). Consistent with some company's informal policies.7
5. Require a cooling off period (of at least one year) before a company can hire any employees from their auditor that worked on their audit.	X		2/02, 3/02: Recommended and approved.	LaFalce bill: 2 years. Likely to be considered as part of SEC roundtables, and/or by the exchanges' task forces.
6. Require mandatory liability insurance by all auditors.		X	3/02: Staff continuing to research.	Details to follow.
7. Require companies to use two auditors, to double-check each other's work.		X	3/02: Deferred consideration until after the issues described in #1-5, above, are resolved.	Recommended by the Greenlining Institute.
8. Support Congressional efforts to amend the Private Securities Litigation Reform Act of 1995 (PSLRA) to restore joint and several liability for auditors, but only for auditors who fail the "independence" bright line test or who fail to comply with the financial fraud reporting provisions within existing securities laws. Consider other amendments that may be necessary to increase auditor accountability.	X		3/02: Recommended and approved. Additional issues to be brought to the Board as they arise.	LaFalce bill: would restore J&S liability for auditors who fail the independence standard (consistent with CalPERS' "bright line" test), or who knowingly commit a violation of the securities laws, or who fail to comply with financial fraud reporting laws, or where the company audited has become insolvent.
Accounting Standards
1. Join forces with other significant users of financial statement to provide concrete and responsible proposals for accounting standards reform, including: Review the role of accounting standards in the financial markets, and their ability to keep pace with the complexity of the market.	X		2/02: Recommended and approved. 3/02: The Board President will designate one or more Board member(s) to lead staff in this endeavor. Staff is compiling names of potential participants. Target date for coordinating first meeting is April.	Agreement that accounting standards have not kept up with the complexities of the market, and that (minimally) standards need to be revised/added under a more streamlined process than is currently the case. General agreement that financial statements should move toward a "plain English" approach, with end users' needs being paramount. Part of SEC proposals. General debate centers around whether the US should move more toward a "principles-based" model, or remain with what is described as a "rules-based" approach.
2. Coordinate efforts with the California State Board of Accountancy, with regard to state-level regulation of the accounting industry.	X		3/02: Recommended and approved.	Note: CalPERS staff testified on 2/27/02 at a CSBA hearing; staff has also met members of the CSBA's legislative oversight committee.
3. Specifically promote the adoption of more rigorous accounting standards for the consolidation of Special Purpose Entities (SPEs), such as proposed by the IASB.	X		2/02: Recommended and approved. Will also be discussed as part of the Accounting Standards task force.	General agreement, although tied to overarching question of whether the existing standards model should be reformed.
4. Demand broader public exposure (with an annual separate mailing to shareowners) of a company's entrance into forward equity contracts.		X	3/02: This issue will be raised with the Accounting Standards group to be formed (see #1, above).	None known.
5. Consider possible criminal sanctions that will help assure fair, accurate and complete financial reporting.		X	3/02: Staff continuing to research.	Details to follow.
6. Urge FASB to require that stock options used to attract, retain or compensate employees should be reported as expense in income statements.		X	3/02: Deferred consideration pending additional staff analysis.	Consistent with views of many other institutional investors (particularly those with global portfolios), including TIAA-CREF. Consistent with the expected approach from the IASB. Expect the CII to consider this same recommendation at March Spring Conference. S 1940, the "Ending the Double Standard for Stock Options Act" (Levin [D-MI] and McCain [R-AZ]), would disallow tax benefits for stock option compensation unless disclosed in corporate financial statements.
Accounting Industry Oversight
1. Provide for more effective and independent oversight of the auditing industry. Any oversight entity should have an independent funding source and be comprised of a majority of investors.	X		2/02: Recommended and approved.	General agreement that a new body needs to be established, under the oversight of the SEC (as is FASB), and that funding needs to be provided through the private sector but be independent of the accounting industry. Addressed in SEC proposals, and Oxley and LaFalce bills. Expect additional legislation to be proposed as well. Issues include: Whether the members are dominated by "public members," investors, or people with "audit expertise." Whether the oversight body is created through legislation or regulation. Whether the legislation that creates the body provides detail guidance to the SEC (LaFalce approach), or leaves the SEC with greater discretion (Oxley approach).
2. Provide that the oversight entity would have subpoena and disciplinary power.	X		2/02: Recommended and approved.	General agreement.
3. Impose criminal sanctions for those who lie to an auditor.	X		2/02: Recommended and approved.	General agreement. Contained in Oxley & LaFalce bills.
Director Independence8
1. Provide for additional disclosure of each director's financial ties to the board and the company, including personal, family, business, political and philanthropic connections.	X		2/02, 3/02: Recommended and approved.	Consistent with petition for rulemaking submitted to the SEC by the AFL-CIO.
2. Require tougher minimum standards for independence (consistent with CalPERS' standard of independence).9	X		2/02: Recommended and approved.	Generally consistent with the definitions adopted by other institutional investors. Current exchange listing standards articulate similar issues, but defer to boards to evaluate the criteria to determine whether directors are "independent" or not. Likely to be considered as part of SEC roundtables, and/or by the exchanges' task forces.
Governance Model
1. Form a commission made up of regulators, legislative representatives, and investors to examine the diverse components of the governance system (including ways in which conflicts of interest may influence corporate decision making), considering the role of investment banks, equity analysts, rating agencies, lending institutions, outside attorneys and other consultants.	X		2/02: Recommended and approved. 3/02: Board President to designate one or more Board member(s) to lead staff in this endeavor.	Oxley & LaFalce bills both call for the SEC to study the role of rating agencies and "equity research analysts." Generally accepted that various conflicts of interests by third parties advising corporations are common yet not disclosed to the markets.
Other Governance Issues
1. Executive Compensation Disclosure: Improve readability Include all sources and forms of compensation (including all perquisites) Require current disclosure of stock option exercises by executives Require compensation of top executives to be compared to the company's philanthropic expenditures	X		3/02: Recommend and approved.	First three bullets generally supported by other investors, and likely to be part of SEC roundtables. All four bullets recommended by the Greenlining Institute.
2. Invite CalSTRS to participate on both of CalPERS' task forces (i.e., regarding accounting standards and the governance model).	X		3/02: Recommend and approved.	None known. Many public hearings are being held throughout the country, including legislative and CSBA hearings in California.
3. Investigate potential amendments to the PSLRA and related laws to strengthen shareowner rights.		X	3/02: Staff continuing to research.	The LaFalce bill (as well as potentially other federal bills) address components of the PSLRA. LaFalce's bill would restore (under certain circumstances) joint & several liability for auditors (see Auditor Independence # 6); restore aiding and abetting liability to those outside the corporation; and restore the right of plaintiffs to seek discovery before a motion to dismiss.
4. Establish minimum corporate governance standards for investing (e.g., for active managers, private equity transactions).		X	3/02: Staff continuing to research.	Staff continuing to research.
5. Create a "report card for corporate governance" that is easily understood by the marketplace.		X	3/02: Staff continuing to research.	Staff research includes the corporate governance rating services already available in the market.
6. Elevate CalPERS' presence and profile in the financial press.		X	3/02: Staff continuing to research.	Staff continuing to research.
401(k) Reform
1. Support Congressional efforts to provide greater retirement security to 401(k) plan participants.	X		2/02: Recommended and approved.	Various bills (including Boxer/Corzine) have been introduced. General debate seems centered around two issues. First, whether "caps" on the amount of company stock that may be held in an employee's 401(k) plan is contrary to the wishes of most plan participants. Second, whether restrictions on employer matches in the form of company stock will discourage these matches. President Bush's proposal would require that company executives have the same restrictions on their personal stock sales as are imposed on 401(k) plan participants.

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1	Issues in bold are those that have, as of the date of this matrix, part of CalPERS' Financial Markets Reform Package.
2	The information contained in this column is derived from a variety of sources, including published proposals by (and conversations with members of) the Securities and Exchange Commission (in separate meetings as well as through participation in the SEC's first roundtable of these issues); meetings with Congressional staff and staff of the California State Accountancy Board; public positions by other institutional investors; and discussions with representatives from the National Association of Corporate Directors, Financial Accounting Standards Board, Government Accounting Office, American Institute of Certified Public Accountants, past officials of the SEC and Department of Labor, NYSE and NACD Regulation, National Association of State Auditors, Comptrollers and Treasurers, miscellaneous corporate officials, and retired executives from the Public Oversight Board and Deloitte & Touche.
3	Note that CalPERS' U.S. Corporate Governance Core Principles and Guidelines ("Core Principles") call for this committee to be comprised entirely of independent directors. (Core Principles, A.4.)
4	Note that the sanction for noncompliance with a listing standard is de-listing, which is rarely in the best interests of shareowners.
5	This is comparable to CalPERS' existing Core Principle with respect to Compensation Committees. (See Core Principle B.3.)
6	In 2000, CalPERS supported (in writing and testimony) then-chairman Arthur Levitt's proposals to strengthen auditor independence by prohibiting non-audit (as well as internal auditor) services by the company's external auditor. The audit industry, as well as many members of the corporate community widely and strongly opposed this proposal.
7	For example, Intel requires that any non-audit services above $25,000 (excluding financial information system design, which its external auditor may not perform) be subject to a special approval process, culminating in approval by the Chair of the Audit Committee.
8	CalPERS' Core Principles call for the board to be comprised of a substantial majority (defined in practice to be 75%) of independent directors, and that all committees charged with certain key functions (i.e., audit, director nomination, board evaluation and governance, CEO evaluation and management compensation, and compliance and ethics) be comprised wholly of independent directors. (Core Principles A.1 and A.4.)
9	CalPERS' definition (consistent with those adopted by other institutional investors and TIAA-CREF) of an independent director is one who: (a) has not been employed by the company in an executive capacity within the last five years; (b) is not, and is not affiliated with a firm that is, an advisor or consultant to the company or a member of the company's senior management; (c) is not affiliated with a significant customer or supplier of the company; (d) has no personal services contract(s) with the company, or a member of the company's senior management; (e) is not affiliated with a not-for-profit entity that receives significant contributions from the company; (f) within the last 5 years, has not had any business relationship with the company (other than service as a director) for which the company has been required to make disclosure under Regulation S-K; (g) is not employed by a public company at which an executive officer of the company services as a director; (h) has not had any of the relationships described above with an affiliate of the company; and (i) is not a member of the immediate family of any person described above.