Comments of National Association of Real Estate Investment Trusts on S7-40-02

National Association of Real Estate Investment Trusts
1875 I Street NW, Suite 600
Washington, DC 20006

November 26, 2002

VIA E-MAIL

Mr. Jonathan G. Katz
Secretary
U.S. Securities and Exchange Commission
Mail Stop 6-9
450 Fifth Street, NW
Washington, DC 20549-6009

Re: Disclosure Required by Sections 404, 406 and 407 of the Sarbanes-Oxley Act of 2002 (File No. S7-40-02)

Dear Mr. Katz:

The National Association of Real Estate Investment Trusts® (“NAREIT®”) welcomes this opportunity to respond to the request for comments from the Securities and Exchange Commission (“Commission”) on various proposals contained in Release Nos. 33-8138, 34-46701, and IC-25775 (“Release”). NAREIT is the national trade association for real estate investment trusts (“REITs”) and other publicly traded real estate companies. Members include REITs and other businesses that own, operate, and finance income-producing real estate, as well as those firms and individuals who advise, study and service those businesses.

Executive Summary

NAREIT supports the Commission’s efforts to promulgate rules that would implement the requirements of the Sarbanes-Oxley Act of 2002 (“Act”). At the same time, following are comments regarding certain specific conclusions reflected in the proposed rules:

The proposed definition of “financial expert” should be consistent with the NYSE requirement so that a company could satisfy both requirements with one person.
We believe that the definition of “financial expert” should not incorporate an independence requirement but that disclosures should distinguish those “financial experts” who are independent.
We believe that codes of ethics should apply to all executive officers as well as senior financial officers.
We generally agree with the staff’s proposal that annual management reports on internal controls and amended certifications should not be required until attestation standards, developed by the Public Company Accounting Oversight Board (PCAOB), are effective.

Definition of “Financial Expert”

While we generally agree with the definition of “financial expert” in the proposed rule, NAREIT is concerned that this definition may conflict with the characterization of audit committee members used in the revised New York Stock Exchange corporate governance listing requirements. It would be helpful in implementing both the proposed SEC and NYSE rules if the proposed definitions were consistent. This would allow a company to satisfy both requirements with the same person or persons. Furthermore, the implementation timing of the rules should be consistent and allow for an orderly transition.

Independence of Financial Expert

The Release requests comments as to whether the definition of “financial expert” should incorporate an independence requirement or whether the final rule should require the disclosure as to whether the financial experts are independent. It seems important that users of the financial statements understand if both independent and non-independent financial experts have participated in audit committee processes. While independent financial experts should be distinguished in disclosures, non-independent financial experts also can contribute to the effectiveness of audit committee oversight. Therefore, we agree with the proposal that the definition of “financial expert” should not incorporate an independence requirement but that disclosures should distinguish those “financial experts” who are independent.

Executives Covered by Code of Ethics

The Release requests comments as to whether the rules should require that codes of ethics cover executive officers beyond senior financial officers. NAREIT believes that applying codes of ethics to all executive officers strengthens the implementation of the Act and is in the public interest. Additionally, the revised New York Stock Exchange corporate governance listing requirements call for codes of ethics covering a broad range of corporate officers. Therefore, we agree with the Release in applying codes of ethics to a registrant’s principle executive officer and recommend that these codes be applied to all senior executive officers.

Transition Period for Reports on Internal Controls and Procedures for Financial Reporting

We agree with the staff’s proposal that annual management reports on internal controls and amended certifications should not be required until attestation standards, developed by the Public Company Accounting Oversight Board (PCAOB), are effective. The release proposes that the new requirements would first apply to companies whose fiscal years end on or after September 15, 2003. Due to the current circumstances surrounding the PCAOB, we would request that the Commission reconsider this specific effective date.

NAREIT thanks the Commission for this opportunity to comment on the Release. Please contact me or Robert Cohen, NAREIT’s National Policy Counsel, at (202) 739-9400 if you would like to discuss our comments in more detail.

Respectfully submitted,