Transamerica Finance CorporationJonathan G. Katz, Secretary Re: File No. S7-02-03 Re: Proposed Rules Relating to Audit Committee Independence Dear Mr. Katz: We are submitting this letter on behalf of Transamerica Finance Corporation ("TFC") in response to the Releases detailed above (the "Releases") in which the Securities and Exchange Commission (the "Commission") solicited comments on its proposed rule regarding implementation of Section 301 of the Sarbanes-Oxley Act of 2002 (the "Act"). Our comments generally pertain to proposed §240.10A-3 ("Rule 10A-3") and more specifically to the "multiple listing" exemption in subsection (c)(1) to Rule 10A-3 to be afforded to listed issuers of non-equity securities that are direct or indirect consolidated majority-owned subsidiaries of an issuer of common equity securities. We wish to express our view that the Commission should incorporate the so-called "multiple listing" exemption, for the benefit of non-equity issuing subsidiaries, into those of its various proposed and final rules implementing the Act which relate to the responsibilities and duties of audit committees. Debt-Issuing Subsidiary of a Listed Equity-Issuing Parent TFC is a wholly-owned indirect subsidiary of AEGON N.V. ("AEGON") and has a class of debt securities registered under Section 12(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). AEGON is a foreign private issuer with common equity securities listed on, among other exchanges, the New York Stock Exchange ("NYSE"). TFC does not have any equity securities listed on a national securities exchange; TFC would be subject to the Commission's Rule 10A-3 under Section 301 of the Act by virtue of the listing of certain of its debt securities on the NYSE. The "Multiple Listing" Exemption in Subsection (c)(1) to Rule 10A-3 We write to express our general support of Rule 10A-3 and subsection (c)(1) thereof and suggest that the Commission consider some minor corrective modifications to subsection (c)(1) of proposed Rule 10A-3. We feel strongly that the exemption in subsection (c)(1) to Rule 10A-3 is appropriate in concept and intended scope (subject to our suggested minor drafting revisions). As is the case with TFC, the boards of directors of most debt-issuing subsidiary registrants include one or more representatives of the parent company. By virtue of TFC's status as a non-equity listed issuer on the NYSE, TFC has not been required by existing SRO rules to create an audit committee (NYSE Rule 303). As noted by the Commission in the Releases, to be subject to the proposed audit committee requirements would add little additional benefit if the subsidiary, as in the case of TFC, is controlled by a parent issuer that is subject to the proposed requirements. We also believe that it would be particularly difficult and costly for an entity such as TFC to identify and attract qualified independent directors. Because the Commission does not intend to entertain no-action requests or grant transaction-specific exemptions relating to Rule 10A-3, as stated in footnote 59 to the proposing release, it is important that there be sufficient flexibility in the construction of what does not constitute "equity securities" within the subsection (c)(1) exemption. We believe that the scope of the (c)(1) exemption is not over broad. The Commission has rightfully concluded that so long as a subsidiary is consolidated and has not separately listed common equity or similar securities, investor protection is not compromised by excluding the subsidiary from compliance with proposed Rule 10A-3. We believe, moreover, that investor protection also would be served if the (c)(1) exemption were to extend to an unconsolidated subsidiary or joint venture with only listed debt in the event that at least one of its parents was subject to any of the provisions of Rule 10A-3, even if the subject parent was not the majority owner of the subsidiary. At a minimum, we urge the Commission to modify the (c)(1) exemption so that it extends to consolidated subsidiaries even if their consolidating parent is not a majority owner. The classic fact pattern for this scenario would be a typical joint venture structure with 50-50 ownership by two parent entities. Therefore, we suggest that consideration be given to expanding the exemption to apply regardless of whether a subsidiary is majority-owned or is consolidated or unconsolidated, so long as one or more of its parent entities is subject to any of the provisions of Rule 10A-3. Suggested Revisions to Rule 10A-3(c)(1) We suggest that the exemption in subsection (c)(1) be reworded, as indicated below, in order to clarify what we believe to be the intent of the Commission, as expressed in the commentary accompanying Rule 10A-3, and to be consistent with the general purposes of both the Act and Rule 10A-3. (c) General exemptions. (1) At any time when an issuer has a class of common equity securities (or similar securities) that is listed on a national securities exchange or national securities association subject to [any of] the requirements of this section, listing of other classes of securities of the issuer, [or] The first suggested revision would make clear that an otherwise qualifying subsidiary will not lose the benefit of the (c)(1) exemption if its equity issuing parent is a foreign private issuer not subject to subsections (b)(1) and (b)(2) of Rule 10A-3 by virtue of the exclusion afforded under Rule 10A-3 (c)(2)(i). Usage of the phrase "any of" would take into account that a foreign private issuer will be subject to subsections (b)(3), (b)(4) and (b)(5) of Rule 10A-3 despite the application of subsection (c)(2)(i). We understand that the Commission intends for the (c)(1) exemption to apply to an otherwise qualifying subsidiary even if its parent is not subject to subsections (b)(1) and (b)(2) of Rule 10A-3 as a result of subsection (c)(2)(i). We, therefore, recommend the adoption of this clarifying revision to maintain a logical consistency in the application of the exemption.. The second suggested revision would clarify that the word "and", as used in the subsection (c)(1), is intended by the Commission to mean "and/or". This technical correction would make clear that in order for a subsidiary to qualify for the (c)(1) exemption, its parent would not have to also list "other classes of securities." The third suggested revision, discussed above, relates to our view that, at a minimum, the Commission should consider extending the (c)(1) exemption to subsidiaries even if the consolidating parent is not a majority owner. We leave it to the Commission to determine whether the parent which is subject to this section of the Act must also consolidate the subsidiary or if compliance by only an unconsolidated parent would suffice. Therefore, we have not provided suggested language to address the latter scenario. Rule 10A-3(d) and Section (h)(1) to Item 401 of Regulation S-K The exclusion of subsidiary registrants from the requirement to disclose that they are relying upon the multiple listing exemption pursuant to Rule 10A-3 is also appropriate. The Commission correctly noted in Proposed Rule 10A-3(d) that disclosure of this information by subsidiary registrants would not provide useful information to potential investors. In keeping with the reasoning supporting Proposed Rule 10A-3(d), we believe that subsidiary registrants should also be exempted from the disclosure requirements proposed in new Section (h)(1) to be added to Item 401 of Regulation S-K. This new requirement would in effect require subsidiary registrants to disclose that they do not have an audit committee. This would appear to largely overlap the disclosure of reliance upon the multiple listing exemption, from which subsidiary registrants are proposed to be exempted, as noted above. We believe that disclosure of the exemption should be handled on the same basis as the exemption from disclosing reliance upon the multiple listing exemption. Additional Suggested Revisions to Rule 10A-3(c)(1) in respect of Sections 202, 204, 302, 307 and 407 of the Act The Commission adopted final rules on January 28, 2003 to implement Section 202 of the Sarbanes-Oxley Act, which has been enacted as Section 10A(i) of the Exchange Act ("Release 33-8183"). Release 33-8183 requires that the audit committee of any issuer must pre-approve all auditing services and all permitted non-audit services to be provided to the issuer, subject to a de minimus exception. These rules permit pre-approval by the audit committee or by one or more audit committee members who are also independent board members, but do not appear to permit delegation of this authority outside of the issuer's audit committee. In light of Section 202 of the Act and the definition of "audit committee" under Section 205 of the Act, absent further action by the Commission, subsidiary registrants, like TFC, lacking a separate audit committee pursuant to the exemption from the requirements of Section 301 of the Act under Rule 10A-3, will be required under Release 33-8183 to have their full boards of directors perform the required pre-approval functions. We believe that a subsidiary exempt from compliance with Section 301 of the Act under subsection (c)(1) of Rule 10A-3 should also be exempt in some manner from Release 33-8183. The same rationale supporting the subsection (c)(1) exemption supports a similar exemption from Release 33-8183. At a minimum, a subsidiary exempt under subsection (c)(1) of Rule 10A-3 should be entitled to rely upon the audit committee of its parent or an affiliated company to perform the pre-approval function. Additionally, the parent or affiliated company audit committee should be permitted, for example, to pre-approve retentions that are above or below a specified dollar threshold or involve a pre-determined scope of service. This situation could be remedied for subsidiary registrants relying on the multiple listing exemption under Section 301 by permitting them to satisfy the pre-approval requirements of Section 202 through utilization of the audit committee of one or more of the subsidiary, its parent registrant, or an affiliate. In the latter case, authority for an affiliate's audit committee could be preconditioned upon delegation of authority for pre-approval by the parent's audit committee. Another approach available to the Commission to accomplish the same goal would be to define "audit committee" for any subsidiary exempt under subsection (c)(1) of Rule 10A-3, for purposes of the Commission's rules promulgated under the Act, to include either the audit committee of a parent registrant or, in the event of any delegation of authority by the parent's audit committee, the audit committee of any affiliate company. Release 33-8183 does not permit any reasonable alternatives for debt-issuing subsidiary registrants to comply with Section 202 of the Act. Should this failure, which we believe constituted an unintended oversight, not be remedied, it will be burdensome and inefficient for subsidiary registrants, like TFC, to handle all retentions through their full boards of directors. This also would subvert the intended function of the audit committee of our affiliate company with which we currently interact. We, therefore, strongly urge the Commission to make a conforming amendment to Section 10A(i) of the Exchange Act through these Releases in order to correct the incongruent result that otherwise would follow if Sections 202 and 301 of the Act are not structured in a parallel fashion for the benefit of subsidiaries relying upon the Rule 10A-3 exemption under subsection (c)(1). As a general comment, we also recommend that the Commission consider taking into account the subsection (c)(1) exemption under Rule 10A-3 with respect to all rules involving the utilization or responsibilities of an audit committee, including proposed or final rules required by Sections 202, 204, 302, 307 and 407 of the Act. Unless parallel exemptions are created, subsidiary registrants, like TFC, that are able to utilize the "multiple listing" exemption to avoid creating an audit committee under Section 301, will, nevertheless, be forced to refer numerous matters to the full boards of directors in order for the subsidiary registrant to comply with the various provisions of the Act which presuppose the existence of an audit committee. Such an outcome would be inefficient and unnecessary to achieve the goals of such provisions and the intent of the Act. We would appreciate the opportunity to further address this matter with members of the Commission staff ("Staff") at the convenience of the Staff.
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