February 17, 2003

Re: Proposed Rule: Standards relating to Listed Company Audit Committees
[Release Nos. 33-8173; 34-47137; IC-25885; File No. S7-02-03]

Dear Mr. Katz:

I am the General Counsel of Plains All American Pipeline, L.P., a master limited partnership ("PAALP"). The common units (limited partner interests) of PAALP are traded on the New York Stock Exchange. I am writing in response to the Commission's invitation to comment on the proposed rules regarding Listed Company Audit Committees.

MLP Structure

As with most master limited partnerships ("MLPs"), PAALP does not directly have officers, directors or employees; rather, the general partner manages all operations and activities.¹ PAALP's unitholders (limited partners) do not directly or indirectly participate in the management or operation of the partnership. The rights of our unitholders are defined in PAALP's partnership agreement. Although the unitholders have voting rights under certain limited circumstances, including removal of the general partner, they do not elect a Board of Directors.²The Board of Directors of the general partner serves as the Board of Directors of the partnership. As a result, the locus of control and governance is not actually at the issuer MLP, but at the entity that manages the MLP.

Interpretive Concerns

The distinctive character of our governance structure creates some interpretive concerns under the proposed rules implementing Section 301 of the Sarbanes-Oxley Act ("SOA"). Maintaining the integrity of the Audit Committee function is obviously of primary importance, and the following observations are offered in the hope of addressing these interpretive concerns without compromising the objectives of the proposed rules. As a threshold matter, Section 205 of SOA defines the audit committee as "[a] committee (or equivalent body) established by and amongst the board of directors of an issuer..." The proposed rules state "[e]ach member of the audit committee must be a member of the board of directors of the listed issuer..." As mentioned above, PAALP does not (and, I believe, most MLPs do not) have a board of directors per se, but "borrows" the board from the general partner to perform that function. Section 205, by including the parenthetical ("or equivalent body") after "committee" clearly emphasizes function rather than formality. The functional objective of the rule requires selection of the audit committee from the group that exercises ultimate oversight over management. Indeed, the Commission in its Release No. 33-8183 (Final Rule: Strengthening the Commission's Requirements Regarding Auditor Independence) acknowledges the need to do so.³ The rules as proposed under Section 301, however, fail to address the circumstance where the directors (and audit committee) of a general partner serve the equivalent function for an issuer limited partnership.

The measures of independence: absence of compensation and affiliation

The audit committee functions to oversee the accounting and financial reporting processes of an issuer as well as the audits of the financial statements of the issuer. As noted in the Release of the proposed rules, the oversight function requires objective assessment of the quality of financial disclosure and adequacy of controls. This objectivity can be compromised if a member of the committee is subjected to influences that could interfere with the exercise of independent judgment. Thus the prerequisite of "independence" applies to each member of the committee. Independence is defined under SOA and the proposed rules in the negative: a member of the audit committee must not (i) receive compensation other than for board or committee service nor (ii) be an "affiliated person" of the issuer.

SOA does not define "affiliated person," so it is left to the implementing rules to establish the reach of the phrase. The proposed rules define the terms "affiliate" and "affiliated person," consistently with the usage in other areas of securities law, by reference to "control," which is also defined consistently with existing usage. The proposed rules go further, however, to identify certain circumstances in which a person is deemed to be an affiliate. The application of these presumptions of affiliation to MLPs generally and to PAALP specifically produces unwarranted and, I believe, unintended results.

Application of proposed rules to partnership/general partner relationship results in universal disqualification

The proposed rules define "affiliated person" to include an affiliate of an affiliate. Applying control concepts to partnership law, a general partner is clearly an affiliate of the partnership. Under the proposed rules, a director of an affiliate also is deemed to be an affiliate. Under this analysis, any director of the general partner is an affiliate of the partnership and fails the independence test without regard to whether the director is truly independent. The proposed rules also state that any partner or member of an affiliate is deemed to be an affiliate. In the case of PAALP, this means that each partner of its general partner, Plains AAP, L.P., is an affiliate of PAALP. This would include PAA LLC as the general partner of Plains AAP, L.P.⁴In turn, each member of PAA LLC would be an affiliate of an affiliate. There is no person or entity left with the ability either to serve on the audit committee or to elect someone to serve on the audit committee. The proposed rules assume that the first order of "control" is at the issuer level when, in fact, for MLPs the first level of true "control" resides somewhere upstream of the issuer. I believe the rules operate more appropriately if the assumption is corrected.

A designee of an affiliate should be disqualified only if other factors exist

Similarly, because the proposed rules deem any "designee" of an affiliate to be an affiliate, any director elected or appointed by the owners of the general partner could be disqualified, even if by every other measure he or she would be considered independent. This is unnecessarily broad. A designee should be disqualified only if such designee has a relationship with the affiliate that warrants disqualification. In other words, if the designee would qualify as a member of the audit committee of the affiliate, he or she should not, merely because of the designation, be disqualified from serving on the audit committee of the issuer. The Commission employs this logic in the context of the exemption contained in proposed rule 10A-3(b)(1)(iv)(B).⁵ I believe the same logic applies with even more force in the context of designees.

The proposed rules deem any owner of an affiliate to be an affiliate

The breadth of proposed rule 10A-3(e)(1)(ii) creates concerns not only for MLPs, but for other business forms as well. The words "partner," "member" and "principal" would include any partner (including a limited partner) in a partnership, any member of a limited liability company, and any principal in an unincorporated association. This approach would equate any ownership with control. In the corporate analogy, any stockholder of a corporation, regardless of the amount of stock held, would be an affiliate of the corporation. Clearly, the latter is not the Commission's view. Rather, the focus is on the concept of control, as addressed in proposed rule 10A-3(e)(1)(i).⁶Analysis based on control concepts should likewise dictate whether a "partner," "member" or "principal" is an affiliate, and the inclusion of these terms in subsection (e)(1)(ii) is unnecessary.⁷

Suggested changes

There may be multiple ways to address the concerns expressed above. I offer the following suggested changes as one approach.⁸

1. Amend proposed rule 10A-3(b)(1)(i) to state:

Each member of the audit committee must be a member of the board of directors (or equivalent body) of the listed issuer, and must otherwise be independent.

Comment: The parenthetical clarifies that the committee members should be selected from whatever body functions in the role traditionally served by the board of directors.

2. Amend proposed rule 10A-3(b)(1)(iv)(B) to state:

An audit committee member of an issuer who is also (1) a director of an affiliate or (2) a designee of an affiliate to the board of directors of the issuer, is exempt from the requirements of paragraph (b)(1)(ii)(B) of this section if the member, but for the member's service as a director or designee of such affiliate, otherwise meets the independence requirements of paragraph (b)(1)(ii) of this section for both the issuer and the affiliate, including the receipt of only ordinary-course compensation for serving as a member of the board of directors (or committee thereof) of the issuer or the affiliate.

Comment: The suggested changes would exempt from the affiliation disqualification any individual that otherwise meets all requirements of independence, but for serving as a director or designee of an affiliate.

3. Amend proposed rule 10A-3(e)(1)(i) to state:

(1)(i) The term affiliate of, or a person affiliated with, a specified person, means a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such specified person. A person will be deemed not to be in control of the issuer for purposes of this section if the person:

(A) Is not the beneficial owner, directly or indirectly, of more than 10% of any class of equity securities of the issuer that has voting rights in the election of the board of directors;

(B) Is not an executive officer of the issuer; and

(C) Is not an affiliate of a director of the issuer.

Comment: The first sentence of this section is changed to clarify the reference to a "specified person." Clause (A) is changed to focus on equity ownership with voting rights. In the context of most MLPs, the analysis would be at the general partner level. Clause (C) is changed to reflect what I believe to be the intent of the provision.

4. Amend proposed rule 10A-3(e)(1)(ii) by deleting from it the words "partner, member, principal."

Comment: As discussed above, these words imply that any owner is disqualified. The change would have no effect in the case of a partner, member or principal that actually has a control relationship with a person.

5. Add a new clause (iii) to proposed rule 10A-3(e)(1) to state:

(iii) For purposes of subclauses (A), (B) and (C) of clause (i) of this section, the term "issuer" shall mean, in the case of a partnership, the issuer or the managing general partner (or entity directly or indirectly serving the equivalent function) of the issuer. For purposes of clause (ii) of this section, a director or designee of the managing general partner (or entity serving the equivalent function) of an issuer that is a partnership will not be deemed to be an affiliate of the issuer.

Comment: The first sentence of the suggested change makes clear that the safe harbor is available in the context of an MLP only if the requirements are met at both the limited partnership and general partner levels. The second sentence resolves the concern that, because a general partner is an affiliate of a limited partnership, any director of the general partner would be disqualified.

6. Add a new definition to proposed rule 10A-3(e) that states:

The term board of directors (unless otherwise defined in this rule) means the body serving as the functional equivalent of the board of directors of a corporation and, in the case of a limited partnership without a board of directors, the board of directors of the managing general partner (or equivalent).

Comment: This suggestion directly introduces the reality of partnership governance into the rules.

These suggestions are respectfully submitted in the hope that the Commission will take them into account in drafting the final rules. I believe they do no more than address legitimate concerns and do not impinge upon the effectiveness of the rules in ensuring the objectivity and independence of the members of the audit committee. I would be happy to provide further information or clarification, or to meet with members of the staff, if it would assist the Commission in its consideration of the above matters.

Very truly yours,

Plains All American Pipeline, L.P.

Tim Moore
Vice President and General Counsel

Annex A

Organizational chart [Not included with submission]

Annex B

Blackline of Suggested Changes

§ 240.10A-3 Listing standards relating to audit committees.

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(b) Required standards.

(1) Independence.

(i) Each member of the audit committee must be a member of the board of directors [(or equivalent body) ]of the listed issuer, and must otherwise be independent.

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(iv) Exemptions from the independence requirements.

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(B) An audit committee member that sits on [of an issuer who is also (1) a director of an affiliate or (2) a designee of an affiliate to]the board of directors of both a listed [the] issuer, and its direct or indirect consolidated majority-owned subsidiary (or that sits on the board of both a listed issuer and its parent, if the listed issuer is a direct or indirect consolidated majority-owned subsidiary of the parent) is exempt from the requirements of paragraph (b)(1)(ii)(B) of this section if the member, except [but for] sitting on both boards, [the member's service as a director or designee of such affiliate,] otherwise meets the independence requirements of paragraph (b)(1)(ii) of this section for both the parent [issuer] and the subsidiary [affiliate], including the receipt of only ordinary-course compensation for serving as a member of the board of directors audit [(or] committee [thereof) of the issuer] or any other board committee of the parent or subsidiary [the affiliate].

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(e) Definitions. Unless the context otherwise requires, all terms used in this section have the same meaning as in the Act. In addition, unless the context otherwise requires, the following definitions apply:

(1)(i) The term affiliate of, or a person affiliated with, a specified person, means a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such issuer[specified person]. A person will be deemed not to be in control of the issuer for purposes of this section if the person:

(A) Is not the beneficial owner, directly or indirectly, of more than 10% of any class of equity securities of the issuer [that has voting rights in the election of the board of directors];

(B) Is not an executive officer of the issuer; and

(C) Is not [an affiliate of] a director of the issuer.

(ii) A director, executive officer, partner, member, principal or designee of an affiliate will be deemed to be an affiliate.

[(iii) For purposes of subclauses (A), (B) and (C) of clause (i) of this section, the term "issuer" shall mean, in the case of a partnership, the issuer or the managing general partner (or entity directly or indirectly serving the equivalent function) of the issuer. For purposes of clause (ii) of this section, a director or designee of the managing general partner (or entity serving the equivalent function) of an issuer that is a partnership will not be deemed to be an affiliate of the issuer.]

[(2) The term board of directors (unless otherwise defined in this rule) means the body serving as the functional equivalent of the board of directors of a corporation and, in the case of a limited partnership without a board of directors, the board of directors of the managing general partner (or equivalent).]

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1	In our case, we actually have a two-tiered general partner structure. See the organizational chart attached to this letter. All of our personnel are employed by Plains All American GP LLC ("PAA GP LLC"), the general partner of our general partner.
2	PAALP's partnership agreement defines "Board of Directors" to mean the board of directors of PAA LLC. The members of PAA LLC elect its Board in accordance with the terms of its LLC agreement.
3	In a different context, the Commission has recognized the practical aspects of the relationship between a limited partnership and its general partner. Rule 16a-1(f), in defining the word "officer," states that "when an issuer is a limited partnership, officers or employees of the general partner(s) who perform policy-making functions for the limited partnership are deemed officers of the limited partnership." The Commission tacitly acknowledged this position, and extended it to directors as well as officers of the general partner, in two No-Action Letters. See Transco Energy Company (publicly available August 5, 1985) and PCTC, Incorporated (publicly available June 8, 1990).
4	See attached organizational chart.
5	Although the exemption as proposed would apply only to the parent/subsidiary relationship when the parent owns a consolidated majority interest in the subsidiary, this limitation on the exemption relates neither to control nor compensation. Characterizing a relationship based on percentage of ownership may create a distinction without meaning, in the absence of other factors. For purposes of assessing the independence of an individual designated to the board by an equity owner, there is no inherent reason why a 40% owner should be treated differently than a 60% owner. The real concern should be whether an affiliate has a relationship with the individual (such as employment or compensation that could be threatened) that creates an extraneous influence on the objectivity of the individual. The rules should exempt any director or designee of an affiliate unless one of these control relationships exists.
6	This provision requires some clarification. It defines an affiliate of "a specified person" as one who is in a control relationship with "such issuer." Either "issuer" should be substituted for "specified person" or vice versa.
7	This also obviates the exemptive effect of another portion of the proposed rules. Although under proposed rule 10A-3(e)(1)(i)(A), (B) and (C) a person might be deemed not to be in "control" of the issuer, that person could nonetheless be deemed an affiliate.
8	For ease of reference, I have attached an annex with the suggested changes "blacklined" against the proposed rules.