Computer Sciences Corporation

December 9, 2002

Mr. Jonathan G. Katz, Secretary
U.S. Securities and Exchange Commission
450 Fifth Street N.W.
Washington, D.C. 20549-0609

Re: File No. S7-42-02

FILED ELECTRONICALLY (rule-comments@sec.gov)

Dear Mr. Katz:

Thank you for the opportunity to comment on the Commission's "Proposed Rule: Disclosure in Management's Discussion and Analysis About Off-Balance Sheet Arrangements, Contractual Obligations and Contingent Liabilities and Commitments," Subject File No. S7-42-2 (the "Proposed Rule").

Executive Summary

Overall, we are in agreement with the codification in the Proposed Rule of the guidance issued by the Commission last January in FR-61, "Commission's Statement about Management's Discussion and Analysis of Financial Condition and Results of Operation" regarding summarized tabular disclosure of contractual obligations and contingent liabilities and commitments. However, we have two fundamental areas of disagreement with disclosure requirements under the Proposed Rule concerning "off-balance sheet arrangements:"

• First, we think the scope and definition of "off-balance sheet arrangements" is overly broad, general and ambiguous; the definition included in Item 303(a)(4)(iii) of Regulation S-K under the Proposed Rule does not unambiguously limit the scope of "off-balance sheet arrangements" to off-balance sheet financing and similar arrangements. We also believe the scope of the definition as to the unconsolidated entities subject to disclosure requires further clarification. For example, a literal interpretation of the definition would encompass investments in unconsolidated subsidiaries accounted for under the equity method of accounting. Further, we specifically believe special purpose entities which meet the requirements for classification as a qualifying special purpose entity ("QSPE") should clearly not be subject to these disclosure requirements.

• Second, we think even after limiting "off-balance sheet arrangements" to this narrower definition, essentially off-balance sheet financing and similar arrangements, the disclosure requirements are excessive in two ways: (1) the Commission has proposed a lower threshold for disclosure, requiring disclosure for all situations where the potential obligations, events or contingencies are not "outside of the realm of reasonable possibility", a very broad threshold, and (2) the specific disclosure requirements applicable to each arrangement requiring disclosure are much too expansive and overly prescriptive.

We have provided a summary of our more significant detailed comments, concerns and suggestions in the following paragraphs and have included detailed responses to each "Request for Comment" from the Proposed Rule in the attached Exhibit.

General

We think the Commission's guidance issued in January 2002 (FR-61, "Commission's Statement about Management's Discussion and Analysis of Financial Condition and Results of Operations") provided greater clarity with respect to disclosure requirements regarding contractual obligations, contingent liabilities and commitments, liquidity, capital resources, and off-balance sheet arrangements, as well as several other important areas. Indeed, like many other registrants, CSC expanded disclosures regarding contractual obligations and contingent liabilities and commitments in our most recent annual report on Form 10-K consistent with this guidance. CSC is in agreement with codification of these disclosure requirements (relating to summarized tabular disclosure of contractual obligations and contingent liabilities and commitments) in the Proposed Rule. However, we fundamentally do not agree further disclosure requirements regarding "off-balance sheet arrangements" will resolve recent issues regarding such arrangements.

We understand Congress and the Commission are attempting to address investor concerns arising from recent highly publicized irregularities. However, failure to consolidate special purpose entities (SPE's) in circumstances clearly requiring consolidation, and failure to appropriately disclose obligations and commitments, do not represent deficiencies in existing reporting and disclosure requirements. Rather, these situations represent flagrant departures from long standing requirements under generally accepted accounting principles and SEC reporting requirements. Consequently, further disclosure and reporting requirements will not remedy these situations; only enforcement action by the Commission, where appropriate, will deter these flagrant violations. In fact, the sanctions under the Sarbanes-Oxley Act of 2002 (the "Act") should strengthen compliance and, although adopted only recently, have already resulted in demonstrable increases in reporting and disclosure practices.

Moreover, the financial accounting standard setting bodies have addressed, or are in the process of addressing accounting, reporting and disclosure issues in this area. The Financial Accounting Standards Board (the "FASB") is currently deliberating an Interpretation of Accounting Research Bulletin (ARB) No. 51, "Consolidated Financial Statements" regarding consolidation of SPE's and is expected to issue this in the near future. In addition, in November 2002 the FASB issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others," which provides accounting and disclosure guidance regarding guarantees issued under a variety of contractual arrangements.

While we agree with the importance of transparency and appropriate disclosure of off-balance sheet arrangements, we have serious reservations about the dramatically expanded disclosure requirements under the Proposed Rule. Our concern relates principally to the scope of such arrangements requiring disclosure based on the proposed (1) overly broad definition of "off-balance sheet arrangements," and (2) the dramatically lower disclosure threshold for such arrangements under the Proposed Rule. Furthermore, we think the specific disclosures required under the Proposed Rule for each "off-balance sheet arrangement" are far more extensive than would be necessary for a sufficient understanding of the potential impact of the arrangement on financial condition, changes in financial condition and results of operations. The sheer volume of information as a result of the combination of these requirements will inundate users and result in substantial investor confusion, rather than clarity.

We think the overly broad definition of "off-balance sheet arrangements" (discussed in the following section, "Scope and Definition of Off-Balance Sheet Arrangements") would present formidable challenges for financial institutions and insurance companies, the organizations which generally perform the administrative support for such arrangements. This issue would be further exacerbated by the significantly lower proposed disclosure threshold and the extent of specific disclosures required for each arrangement (discussed in the following two sections "Disclosure Threshold" and "Content for Disclosures for Off-Balance Sheet Arrangements," respectively). Taken together these disclosure parameters would require an enormous record keeping and reporting work effort at a very substantial cost. Ultimately, we do not think that the costs will be commensurate with the benefit of these reporting and disclosure requirements.

Scope and Definition of "Off-Balance Sheet Arrangements"

We think the definition of "off-balance sheet arrangements" included in Item 303(a)(4)(iii) of Regulation S-K under the Proposed Rule is overly broad, general and ambiguous. The proposed definition could be interpreted much more broadly than we believe is intended under the Act. We think this could effectively extend these disclosure requirements to include many other types of contractual arrangements and a variety of unconsolidated entities.

The proposed definition seems substantially broader than disclosure requirements set forth in Section 401 (a) of the Sarbanes-Oxley Act of 2002 (the "Act"). The Act requires registrants disclose all "material off-balance sheet transactions, arrangements, obligations (including contingent obligations), and other relationships of the issuer with unconsolidated entities or other persons, that may have a material current or future effect on financial condition, changes in financial condition, results of operation, liquidity, capital expenditures, capital resources or significant components of revenues and expenses." We think that the intent of the legislation focused on transactions, arrangements and obligations with unconsolidated entities and other equivalent relationships, the most obvious example of which is financing arrangements which incorporate use of special purpose entities (SPE's). In other words, we understand the intent is to address situations where disclosure is mandated in lieu of consolidation of such entities, where consolidation is not required or not permitted under generally accepted accounting principles. We further understand these disclosures are primarily targeted at off-balance sheet financing and similar transactions.

The proposed definition (included in Item 303(a)(4)(iii) of Regulation S-K under the Proposed Rule) seems to broaden the subject of these disclosures to potentially include many other contractual arrangements such as: minimum purchase commitments under supplier contracts, guarantees under customer contracts, guarantees of residual values under operating leases, indemnifications and guarantees under leases and other contracts, etc. We think these situations are already comprehended by financial statement disclosure requirements regarding commitments and contingencies and elsewhere under generally accepted accounting principles and existing SEC disclosure requirements pursuant to Regulations S-X and S-K.

The characterization of "off-balance sheet arrangements" in the background to the Proposed Rule seems to clearly limit "off-balance sheet arrangements" to off-balance sheet financing and similar arrangement (page 6 of the Proposed Rule - "B. Off-balance Sheet Arrangements, 1. Background"):

"Off-balance sheet arrangements often are used to provide financing, liquidity, market or credit risk support or to engage in leasing, hedging or research and development. Some companies use off-balance sheet financing to obtain financing at a lower cost of capital than otherwise would be available to the company....Off-balance sheet arrangements may involve the use of complex structures, including structured finance or special purpose entities to facilitate a company's transfer of, or access to, assets. In many cases, the transferor of assets [retains] some continuing involvement with the transferred assets that may assume different forms, such as financial guarantees, retained interests, keepwell agreements or other contingent arrangements designed to reduce the risk to the special purpose entities or other third parties. The use of off-balance sheet arrangements may play a significant part in the continued availability of liquidity and capital resources for the transferred assets. It may also be a source of risk to a company's future liquidity or results of operations."

While the background to the Proposed Rule seems to suggest the interpretation of "off-balance sheet arrangements" should be limited to off-balance sheet financing and similar arrangements, the definition included in Item 303(a)(4)(iii) of Regulation S-K under the Proposed Rule does not clearly limit the scope of these disclosure requirements to such arrangements. We think it is absolutely critical that the definition included in Item 303(a)(4)(iii) of Regulation S-K pursuant to the Proposed Rule unambiguously limit the scope of "off-balance sheet arrangements" to off-balance sheet financing and similar arrangements.

We also think the definition requires further clarification as to the unconsolidated entities subject to these disclosure requirements. For example, we think these disclosures should not apply to special purpose entities that meet the requirements for classification as a qualifying special purpose entity ("QSPE") set forth in Statement of Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS No. 140"). QSPE' are materially different than other SPE's since, as a result of the character of the underlying assets (which are limited exclusively to "financial instruments") and the overall structure of the QSPE, any exposure is clearly "outside of the realm of reasonable possibility." If, however, as a result of changes in circumstances and events, it appears obligations and contingent liabilities arising from a QSPE could have a material effect on the registrant's financial condition, changes in financial condition, results of operations, capital resources and liquidity or capital expenditures, existing SEC reporting and disclosure requirements under Regulation S-K would require further disclosure under "Management's Discussion and Analysis of Financial Condition and Results of Operation" (the "MD&A").

Similarly, the proposed definition could be interpreted to apply to unconsolidated subsidiaries accounted for under the "equity method of accounting" in accordance with APB Opinion No. 18, "The Equity Method of Accounting for Investments in Common Stock" ("APB No.18"). This method of accounting is applicable where the registrant's investment exceeds 20% but is not more than 50%, and, as a consequence, the financial statements of the investee typically are not consolidated by the registrant. Rather, the registrant recognizes its share of the investee's earnings in its income statement and includes its investment in the investee as a single balance sheet line item. Generally, disclosure requirements regarding investments and transactions with unconsolidated subsidiaries accounted for using the equity method of accounting are set forth in APB No. 18. In addition, Regulation S-X requires further disclosure for such investments and transactions where the registrant's investment exceeds specified significance thresholds. Further, Statement of Financial Accounting Standards No. 57, "Related Party Disclosures" would require disclosure of any material transactions between the registrant and the investee.

Accordingly, we suggest the Commission further clarify the scope and definition of "off-balance sheet arrangements" to clearly limit such increased disclosure requirements to off-balance sheet financing and similar arrangements. This could be accomplished by further qualifying the definition of "off-balance sheet arrangements" included in Item 303 (a)(4)(iii) of Regulation S-K under the Proposed Rule with more descriptive language, such as the language included in the background information to the Proposed Rule cited in the preceding paragraph. Inclusion of specific examples would further assist in better understanding the scope of arrangements subject to the disclosure requirements. Furthermore, the definition also requires further clarification as to the unconsolidated entities subject to these disclosure requirements, including but not limited to the following examples: qualified special purpose entities and unconsolidated subsidiaries accounted for under the equity method of accounting (which should be excluded from the proposed definition).

Disclosure Threshold

We have very serious concerns regarding the disclosure threshold under the Proposed Rule. For a number of reasons, we do not think changing the disclosure threshold from the "reasonably likely" standard, applicable to all other disclosure requirements included in the MD&A, to the proposed threshold of "more likely than remote" will result in more meaningful disclosure.

The proposed "more likely than remote" disclosure threshold for "off-balance sheet arrangements" will inundate investors with unnecessary and extraneous information. Under this disclosure threshold, companies will likely provide expansive disclosures on all "off-balance sheet arrangements," wherever practicable, because determining that an event is "outside of the realm of reasonable possibility" is not a practical standard. In many instances, disclosure may not be practicable because the registrant may not have access to the necessary information to be disclosed. Due to our litigious environment, companies will likely default to disclosing, wherever practicable, all "off-balance sheet arrangements" that could have a material impact including situations where such exposure is actually more than remote. The additional information will negatively impact investors' ability to understand the registrant's current financial performance and to assess and predict future performance, as they must distinguish the significant and meaningful information from that which is extraneous and unimportant.

Additionally, the proposed disclosure standard disproportionately increases the prominence of "off-balance sheet arrangements." By utilizing a different threshold, the Commission underscores the importance of "off-balance sheet arrangements;" however, these arrangements are no more significant than many other areas of disclosure. This may have the unintended consequence of diverting investor's attention from other more significant trends and risks, since essentially any risk, even one which is remote, would be subject to disclosure.

Moreover, we are concerned by the apparent belief that new disclosure thresholds or standards are necessary for reporting potential obligations, events and contingencies. Existing disclosure standards used in the financial reporting framework have evolved over a very long period of time. The financial reporting and disclosure standards for contingencies are set forth in Statement of Financial Accounting Standards No. 5, "Accounting for Contingencies" ("SFAS No. 5"). SFAS No. 5 provides a framework for evaluating contingencies and establishes the standards for reporting and disclosure of these matters in the financial statements. If the proposed disclosure threshold is implemented, there will be multiple standards for disclosure in SEC filings. There will be one for the financial statements, where material contingencies which are reasonably possible are generally disclosed, and yet another lower threshold for "off-balance sheet arrangements," where all matters which are not remote ("outside of the realm of reasonable possibility") require disclosure.

Furthermore, the form and content of the auditors' "letters of audit inquiry" concerning evaluation of a company's litigation, claims and assessments are set forth in the AICPA's Codification of Statements on Auditing Standards (AU) Section 337. Similarly, the American Bar Association (ABA) has established corresponding standards for the legal profession under ABA "Statement of Policy Regarding Lawyers Responses to Auditors' Requests for Information." This policy sets forth matters that must be reported, and the manner in which they are reported, in response to auditors' "letters of audit inquiry" regarding such matters. These standards generally classify contingencies into three strata: probable, reasonably possible and remote. The "letter of audit inquiry" to client counsel is the auditors' primary means of corroborating information furnished by client management concerning litigation, claims and assessments. In the "letter of audit inquiry," the auditor provides client counsel with a description and evaluation of the following matters with respect to which counsel has been engaged by the client: (1) pending or threatened litigation, claims and assessments, and (2) unasserted claims and assessments that management considers to be probable of assertion and that, if asserted, would have at least a "reasonable possibility" of an unfavorable outcome. Further, in the "letter of audit inquiry" the auditor requests client counsel provide: (1) a general description, status and evaluation of the likelihood of an unfavorable outcome with respect to pending or threatened litigation, claims and assessments, (2) counsel's comments in any instances where their views differ from management as to the description and evaluation of unasserted claims and assessments, and (3) confirmation of counsel's responsibility to advise the client of any instances where he has concluded unasserted claims and assessments may require disclosure pursuant to SFAS No. 5. The foregoing audit procedures would not facilitate collection of information necessary to comply with the proposed lower disclosure threshold: disclosure of any matters not clearly "outside of the realm of reasonable possibility." Alignment of the scope of auditing procedures with SEC disclosure requirements is critically important to the effective operation of our reporting and disclosure system.

We suggest disclosure for "off-balance sheet arrangements" be subject to the "reasonably likely" disclosure threshold, the same standard applicable to the remainder of the MD&A. This will present such information in a consistent context and better enable users to understand significant matters affecting the financial condition, changes in financial condition and results of operations of registrants. We also think use of the "reasonably likely" disclosure threshold will facilitate comparability among registrants due to the well-established status of this standard. It also would avoid potential confusion resulting from applying yet another disclosure standard within the MD&A.

Content of Disclosures for "Off-Balance Sheet Arrangements"

As indicated above, we think the proposed disclosures regarding "off-balance sheet arrangements" are much too expansive and overly prescriptive. The required content of the disclosure is exhaustive: nature and purpose; terms and conditions; assets and obligations of the unconsolidated entity; revenues, expenses and cash flows arising from the arrangement; nature and amounts of any interests retained, securities issued or indebtedness incurred by the registrant; and any other registrant obligations or liabilities arising from the arrangements that may become material and the triggering events or circumstances that could cause them to arise. We think this amount of information for each arrangement falling within the definition would almost certainly overwhelm most investors and other users of SEC filings.

A flexible approach would provide a more meaningful picture to investors. For example, rather than disclosing all the detailed terms and conditions, contingencies, and potential triggering events, we suggest disclosures focus on the reasonably likely potential impact on the company's financial condition and business risk. This approach would be more nearly similar to disclosure requirements applicable to the discussion of liquidity and capital resources and would direct the investor's attention to specific exposures and potential impact on the registrant's financial condition, changes in financial condition or results of operations. We think concentrating the investor's attention on the major exposures and risks and reasonably likely potential impact provides more meaningful information than excessive disclosure of details which may obscure the more critical issues.

In addition, we think the overall approach in the Proposed Rule seems contrary to the recent widely shared global belief that financial accounting and reporting should move from a rules-based approach to a principles-based approach. It is also contrary to the Commission's objective of providing clear and concise disclosures readily understandable by the average investor. In fact, in the course of reviewing the Proposed Rule we have conferred with several attorneys and independent public accountants, and, even within this group of professionals, there are significantly divergent interpretations of the disclosures required under the Proposed Rule. The overriding belief is the combination of the overly broad definition of "off-balance sheet arrangements," volume of situations requiring disclosure under the "more likely than remote" disclosure threshold, and the extent of information required to be disclosed for each arrangement would overwhelm even the most sophisticated users, let alone the average investor. Moreover, we think this issue would be made worse by the fact that management would most likely disclose substantially all situations, even the most remote, to avoid exposure to litigation for any failure to disclose situations which later result in unexpected liability.

Safe Harbor Provisions

We agree with the Commission to the extent the Proposed Rule requires disclosure of forward looking information such information should be subject to safe harbor protection. We further think this safe harbor protection should be clearly extended to all forward looking information included in a registrant's MD&A.

Conclusion

In conclusion, we strongly recommend the Commission incorporate changes regarding the definition of "off-balance sheet arrangements," disclosure threshold and extent of information requiring disclosure for such arrangements. We think this will provide investors with material information necessary to a full understanding of a company's financial position, changes in financial position and results of operations and avoid overwhelming them with massive amounts of extraneous information.

Thank you for the opportunity to comment on this most critical proposal and for your consideration of our comments and suggestions.

Sincerely,

Donald G. DeBuck
Vice President and Controller
Computer Sciences Corporation

CC:

Mr. Harvey L. Pitt, Chairman, The Securities and Exchange Commission
Mr. Paul S. Atkins, Commissioner, The Securities and Exchange Commission
Mr. Roel C. Campos, Commissioner, The Securities and Exchange Commission
Ms. Cynthia A. Glassman, Commissioner, The Securities and Exchange Commission
Mr. Harvey J. Goldschmid, Commissioner, The Securities and Exchange Commission

Exhibit 1

Proposed Rule: Disclosure in Management's Discussion and Analysis About Off-Balance Sheet Arrangements, Contractual Obligations and Contingent Liabilities and Commitments, Subject File No. S7-42-02 (the "Proposed Rule")

Request for Comments

II. B. Off-balance Sheet Arrangements

4) Proposed Disclosure about Off-balance Sheet Arrangements

1. Have we appropriately tailored the proposed definition of the term "off-balance sheet arrangement" and the proposed disclosure to filter out disclosure that is unimportant to investors? If not, how should we change the proposed definition or disclosure requirements?

   No, we think the definition of "off-balance sheet arrangements" included in Item 303(a)(4)(iii) of Regulation S-K under the Proposed Rule is overly broad, general and ambiguous. The proposed definition could be interpreted much more broadly than we believe is intended under the Act. We think this could effectively extend these disclosure requirements to include many other types of contractual arrangements and a variety of unconsolidated entities.

   The proposed definition seems substantially broader than disclosure requirements set forth in Section 401 (a) of the Sarbanes-Oxley Act of 2002 (the "Act"). The Act requires registrants disclose all "material off-balance sheet transactions, arrangements, obligations (including contingent obligations), and other relationships of the issuer with unconsolidated entities or other persons, that may have a material current or future effect on financial condition, changes in financial condition, results of operation, liquidity, capital expenditures, capital resources or significant components of revenues and expenses." We think that the intent of the legislation focused on transactions, arrangements and obligations with unconsolidated entities and other equivalent relationships, the most obvious example of which is financing arrangements which incorporate use of special purpose entities (SPE's). In other words, we understand the intent is to address situations where disclosure is mandated in lieu of consolidation of such entities, where consolidation is not required or not permitted under generally accepted accounting principles. We further understand these disclosures are primarily targeted at off-balance sheet financing arrangements and similar arrangements.

   The proposed definition (included in Item 303(a)(4)(iii) of Regulation S-K under the Proposed Rule) seems to broaden the subject of these disclosures to potentially include many other contractual arrangements such as: minimum purchase commitments under supplier contracts, guarantees under customer contracts, guarantees of residual values under operating leases, indemnifications and guarantees under leases and other contracts, etc. We think these situations are already comprehended by financial statement disclosure requirements regarding commitments and contingencies and elsewhere under generally accepted accounting principles and existing SEC disclosure requirements pursuant to Regulations S-X and S-K.

   The characterization of "off-balance sheet arrangements" in the background to the Proposed Rule seems to clearly limit "off-balance sheet arrangements" to off-balance sheet financing and similar arrangements (page 6 of the Proposed Rule - "B. Off-balance Sheet Arrangements, 1. Background"):

   "Off-balance sheet arrangements often are used to provide financing, liquidity, market or credit risk support or to engage in leasing, hedging or research and development. Some companies use off-balance sheet financing to obtain financing at a lower cost of capital than otherwise would be available to the company....Off-balance sheet arrangements may involve the use of complex structures, including structured finance or special purpose entities to facilitate a company's transfer of, or access to, assets. In many cases, the transferor of assets [retains] some continuing involvement with the transferred assets that may assume different forms, such as financial guarantees, retained interests, keepwell agreements or other contingent arrangements designed to reduce the risk to the special purpose entities or other third parties. The use of off-balance sheet arrangements may play a significant part in the continued availability of liquidity and capital resources for the transferred assets. It may also be a source of risk to a company's future liquidity or results of operations."

   While the background to the Proposed Rule seems to suggest the interpretation of "off-balance sheet arrangements" should be limited to off-balance sheet financing and similar arrangements, the definition included in Item 303(a)(4)(iii) of Regulation S-K under the Proposed Rule does not clearly limit the scope of these disclosure requirements to such arrangements. We think it is absolutely critical that the definition included in Item 303(a)(4)(iii) of Regulation S-K pursuant to the Proposed Rule unambiguously limit the scope of "off-balance sheet arrangements" to off-balance sheet financing and similar arrangements.

   We also think the definition requires further clarification as to the unconsolidated entities subject to these disclosure requirements. For example, we think these disclosures should not apply to special purpose entities that meet the requirements for classification as a qualifying special purpose entity ("QSPE") set forth in Statement of Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS No. 140"). If, however, as a result of changes in circumstances and events, it appears obligations and contingent liabilities arising from a QSPE could have a material effect on the registrant's financial condition, changes in financial condition, results of operations, capital resources and liquidity or capital expenditures, existing SEC reporting and disclosure requirements under Regulation S-K would require further disclosure under "Management's Discussion and Analysis of Financial Condition and Results of Operation" (the "MD&A").

   Similarly, the proposed definition could be interpreted to apply to unconsolidated subsidiaries accounted for under the "equity method of accounting" in accordance with APB Opinion No. 18, "The Equity Method of Accounting for Investments in Common Stock" ("APB No.18"). This method of accounting is applicable where the registrant's investment exceeds 20% but is not more than 50%, and, as a consequence, the financial statements of the investee typically are not consolidated by the registrant. Rather, the registrant recognizes its share of the investee's earnings in its income statement and includes its investment in the investee as a single balance sheet line item. Generally, disclosure requirements regarding investments and transactions with unconsolidated subsidiaries accounted for using the equity method of accounting are set forth in APB No. 18. In addition, Regulation S-X requires further disclosure for such investments and transactions where the registrant's investment exceeds specified significance thresholds. Further, Statement of Financial Accounting Standards No. 57, "Related Party Disclosures" would require disclosure of any material transactions between the registrant and the investee.

   Accordingly, we suggest the Commission further clarify the scope and definition of "off-balance sheet arrangements" to clearly limit such increased disclosure requirements to off-balance sheet financing and similar arrangements. This could be accomplished by further qualifying the definition of "off-balance sheet arrangements" included in Item 303 (a)(4)(iii) of Regulation S-K under the Proposed Rule with more descriptive language, such as the language included in the background information to the Proposed Rule cited in the preceding paragraph. Inclusion of specific examples would further assist in better understanding the scope of arrangements subject to the disclosure requirements. Furthermore, the definition also requires further clarification as to the unconsolidated entities subject to these disclosure requirements, including but not limited to the following examples: qualified special purpose entities and unconsolidated subsidiaries accounted for under the equity method of accounting (which should be excluded from the proposed definition).

2. Is the proposed definition too narrow? If so, how should we change it to include other off-balance sheet arrangements that are significant to investors?

   No, as indicated in our response to question 1 above we strongly recommend the definition more explicitly focus on off-balance sheet financing and similar arrangements.

3. Is the proposed definition of an "off-balance sheet arrangement" sufficiently clear to enable registrants to determine which derivative instruments are included in the proposed disclosure requirements and which are not?

   No, as indicated in our response to question 1 above we do not believe the definition is sufficiently clear. Further, in view of the existing reporting and disclosure requirements regarding derivative instruments under Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Investing Activities" we do not feel that further disclosure is necessary.

4. Is it appropriate to apply our existing policy of excluding preliminary negotiations from MD&A disclosure to off-balance sheet arrangements?

   Yes, we think preliminary negotiations are not sufficiently definite nor definitive; the final arrangement may be significantly different than arrangements proposed during negotiations.

5. Is the proposed "remote" disclosure threshold appropriate and consistent with the language in Section 401(a) of the Sarbanes-Oxley Act? If not, how should we change it?

   No, we have very serious concerns regarding the disclosure threshold under the Proposed Rule. For a number of reasons, we do not think changing the disclosure threshold from the "reasonably likely" standard, applicable to all other disclosure requirements included in the MD&A, to the proposed threshold of "more likely than remote" will result in more meaningful disclosure.

   The proposed "more likely than remote" disclosure threshold for "off-balance sheet arrangements" will inundate investors with unnecessary and extraneous information. Under this disclosure threshold, companies will likely provide expansive disclosures on all "off-balance sheet arrangements", wherever practicable, because determining that an event is "outside of the realm of reasonable possibility" is not a practical standard. In many instances, disclosure may not be practicable because the registrant may not have access to the necessary information to be disclosed. Due to our litigious environment, companies will likely default to disclosing, wherever practical, all "off-balance arrangements" that could have a material impact including situations where such exposure is actually more than remote. The additional information will negatively impact investors' ability to understand the registrant's current financial performance and to assess and predict future performance, as they must distinguish the significant and meaningful information from that which is extraneous and unimportant.

   Moreover, we are concerned by the apparent belief that new disclosure thresholds or standards are necessary for reporting potential obligations, events and contingencies. Existing disclosure standards used in the financial reporting framework have evolved over a very long period of time. The financial reporting and disclosure standards for contingencies are set forth in Statement of Financial Accounting Standards No. 5, "Accounting for Contingencies" ("SFAS No. 5"). SFAS No. 5 provides a framework for evaluating contingencies and establishes the standards for reporting and disclosure of these matters in the financial statements. If the proposed disclosure threshold is implemented, there will be multiple standards for disclosure in SEC filings. There will be one for the financial statements, where material contingencies which are reasonably possible are generally disclosed, and yet another lower threshold for "off-balance sheet arrangements," where all matters which are not remote ("outside of the realm of reasonable possibility") require disclosure.

   Furthermore, the form and content of the auditors' "letters of audit inquiry" concerning evaluation of a company's litigation, claims and assessments are set forth in the AICPA's Codification of Statements on Auditing Standards (AU) Section 337. Similarly, the American Bar Association (ABA) has established corresponding standards for the legal profession under ABA "Statement of Policy Regarding Lawyers Responses to Auditors' Requests for Information." This policy sets forth matters that must be reported, and the manner in which they are reported, in response to auditors' "letters of audit inquiry" regarding such matters. These standards generally classify contingencies into three strata: probable, reasonably possible and remote. The "letter of audit inquiry" to client counsel is the auditors' primary means of corroborating information furnished by client management concerning litigation, claims and assessments. In the "letter of audit inquiry," the auditor provides client counsel with a description and evaluation of the following matters with respect to which counsel has been engaged by the client: (1) pending or threatened litigation, claims and assessments, and (2) unasserted claims and assessments that management considers to be probable of assertion and that, if asserted, would have at least a "reasonable possibility" of an unfavorable outcome. Further, in the "letter of audit inquiry" the auditor requests client counsel provide: (1) a general description, status and evaluation of the likelihood of an unfavorable outcome with respect to pending or threatened litigation, claims and assessments, (2) counsel's comments in any instances where their views differ from management as to the description and evaluation of unasserted claims and assessments, and (3) confirmation of counsel's responsibility to advise the client of any instances where he has concluded unasserted claims and assessments may require disclosure pursuant to SFAS No. 5. The foregoing audit procedures would not facilitate collection of information necessary to comply with the proposed lower disclosure threshold: disclosure of any matters not clearly "outside of the realm of reasonable possibility." Alignment of the scope of auditing procedures with SEC disclosure requirements is critically important to the effective operation of our reporting and disclosure system.

   We suggest disclosure for "off-balance sheet arrangements" be subject to the "reasonably likely" disclosure threshold, the same standard applicable to the remainder of the MD&A. This will present such information in a consistent context and better enable users to understand significant matters affecting the financial condition, changes in financial condition and results of operations of registrants. We also think use of the "reasonably likely" disclosure threshold will facilitate comparability among registrants due to the well-established status of this standard. It also would avoid potential confusion resulting from applying yet another disclosure standard within the MD&A.

6. Would it be appropriate under the language in Section 401(a) of the Sarbanes-Oxley Act to apply the "reasonably likely" disclosure threshold applicable elsewhere in MD&A to disclosure about off-balance sheet arrangements? If so, should we adopt the "reasonably likely" standard for disclosure of off-balance sheet arrangements?

   Yes, as indicated in our response to question 5 we think it would be appropriate to apply the "reasonably likely" standard to disclosure about "off-balance sheet arrangements." We do not think the intent of the Act is to change the disclosure threshold otherwise applicable throughout the remainder of the MD&A.

7. Would the application of the disparate disclosure threshold proposed to apply to disclosure of off-balance arrangements, in comparison to the "reasonably likely" standard used elsewhere in MD&A, attribute undue prominence to information about off-balance sheet arrangements in relation to other significant information?

   Yes, we believe the proposed disclosure standard disproportionately increases the prominence of "off-balance sheet arrangements." By utilizing a different threshold, the Commission underscores the importance of "off-balance sheet arrangements;" however, these arrangements are no more significant than many other areas of disclosure. This may have the unintended consequence of diverting investors' attention from other more significant trends and risks, since essentially any risk, even one which is remote, would be subject to disclosure.

8. Should we consider amending current MD&A rules to lower the existing "reasonably likely" disclosure threshold to be consistent with the threshold in the proposals?

   No, such a disclosure threshold would, without question, result in an overwhelming volume of unnecessary and extraneous information. This would almost certainly inundate most users and would result in greater investor confusion, rather than clarity.

9. Would the proposed disclosure threshold for prospectively material information related to off-balance sheet arrangements yield comparable disclosures among registrants?

   No, we think the proposed disclosure threshold is significantly more ambiguous than the existing "reasonably likely" threshold and, as a consequence, would result in reduced comparability across the registrant community.

10. Is there any basic information not required by the proposals that would be necessary to understand a registrant's off-balance sheet arrangements? If so, what additional disclosure should be required?

    No, quite to the contrary, we think the proposed disclosures regarding "off-balance sheet arrangements" are much too expansive and overly prescriptive. The required content of the disclosure is exhaustive: nature and purpose; terms and conditions; assets and obligations of the unconsolidated entity; revenues, expenses and cash flows arising from the arrangement; nature and amounts of any interests retained, securities issued or indebtedness incurred by the registrant; and any other registrant obligations or liabilities arising from the arrangements that may become material and the triggering events or circumstances that could cause them to arise. We think this amount of information for each arrangement that falls within the definition would almost certainly overwhelm most investors and other users of SEC filings.

11. Do the proposals provide enough flexibility to companies to fully and clearly describe their off-balance sheet arrangements? Would a more flexible approach, such as the current MD&A requirements for liquidity and capital resources, result in better disclosure?

    We found the off-balance sheet disclosures all-inclusive and overly prescriptive. In our experience, overly prescriptive guidance results in a checklist approach to disclosure. A flexible approach would provide a more meaningful picture to investors. For example, rather than disclosing all the detailed terms and conditions, contingencies, and potential triggering events, we suggest disclosures focus on the reasonably likely potential impact on the company's financial condition and business risk. This approach would be more nearly similar to disclosure requirements applicable to the discussion of liquidity and capital resources and would direct the investor's attention to specific exposures and potential impact on the registrant's financial condition, changes in financial condition or results of operations. We think concentrating the investor's attention on the major exposures and risks and reasonably likely potential impact provides more meaningful information than excessive disclosure of details which may obscure the more critical issues.

12. Would a registrant be able to monitor and provide disclosure about arrangements to which it is not a party, yet that may create direct or contingent liabilities or obligations for the registrant?

    There may be many circumstances where registrants' may have difficulty monitoring the activities of "off-balance sheet arrangements".

13. Is there any management analysis not required by the proposals that would be necessary for an investor to gain an understanding of the magnitude and proximity of risk exposures and financial impact of a registrant's off-balance sheet arrangements? If so, what additional disclosure should be required?

    No.

II. C. Contractual Obligations and Contingent Liabilities and Commitments

2) Proposed Disclosure of Contingent Liabilities or Commitments

14. Should we require the proposed table to be accompanied by additional narrative disclosure regarding liquidity and capital resources above and beyond that which already exists in MD&A?

    No. The current MD&A rules adequately address disclosure requirements regarding liquidity and capital resources.

15. Should we adopt definitions of "contractual obligations" and "contingent liabilities or commitments"? If so, what should they be?

    No.

16. To avoid potential abuses and to promote comparable disclosure among companies, should we include an instruction to the table that would limit the extent to which a registrant may adapt the table to its particular circumstances? If so, what limits should we impose?

    No, we think some flexibility is necessary to tailor these disclosures to the particular circumstances of the registrant

17. Should the proposed rules state that no disclosure is required with respect to the issuance of notes, drafts, acceptances, bills of exchange or other commercial instruments with a maturity of one year or less issued in the ordinary course of the registrant's business?

    Yes, additional clarification would facilitate improved disclosures.

II. D. Presentation of Proposed Disclosure

2) Language and Format

18. Should we require the proposed disclosure to be presented in a separate MD&A section or should it be integrated into other closely related MD&A discussions of financial condition, changes in financial condition, results of operations and liquidity and capital resources?

    We suggest the Commission allow registrants the flexibility to either integrate these disclosures or present them in a separate section. This will allow registrants to tailor their discussion to their particular facts and circumstances consistent with the relative significance of these matters to their business.

19. To facilitate the layering of MD&A, should we amend the MD&A rules to require separate captions for the required discussions of results of operations, liquidity and capital resources?

    No, this requirement seems overly prescriptive. As indicated in our response to question 18, we suggest the Commission retain the current flexibility in the disclosure requirements.

II. E. Other MD&A Disclosure

20. Should we further amend the MD&A rules to require more specific disclosure about liquidity and capital resources? If so, what specific disclosure items should we include? Already Sufficient

    No. The current MD&A rules are sufficient.

21. Should we further amend the MD&A rules to require more specific disclosure about relationships and transactions with persons or entities that derive benefits from their non-independent relationships with the registrant or the registrant's related parties? If so, what specific disclosure items should we include?

    No. The current MD&A rules are sufficient.

22. Should we codify the factors that we identified in our January 2002 Commission statement for management's consideration in identifying the trends, demands, commitments, events and uncertainties that require disclosure with respect to liquidity and capital resources? Are there other factors that should be included in such a codification?

    No, we do not think codification of these factors is necessary.

II. F. Application of the Proposals to Foreign Private Issuers

23. Should we apply the proposed rules to foreign private issuers' annual reports on Form 20-F or 40-F, as proposed? Or should we exempt these foreign private issuer annual reports from the scope of the proposed rules? If so, why?

    No comment.

24. Should we exempt Form 40-F, the MJDS annual report filed by qualified Canadian issuers, from the scope of the proposed rules? If so, why?

    No comment.

25. If we should require foreign private issuers to provide some expanded disclosure regarding off-balance sheet transactions and other similar items in their annual reports, should we adopt rules that apply different standards for foreign private issuers compared to the standards adopted for domestic issuers but that would be consistent with the Sarbanes-Oxley Act? If so, what standards would you substitute for the proposed rules?

    No comment.

26. Should we exempt Form 6-K reports from the scope of the proposed rules, as proposed? Or should we apply the proposed rules to Form 6-K reports that include quarterly financial statements?

    No comment.

II. G. Proposed Safe Harbor for Forward-Looking Information

27. Should the proposed safe harbor be expanded to apply to all forward-looking information in MD&A, regardless of whether the information relates to off-balance sheet arrangements?

    Yes, the proposed safe harbor should be expanded to apply to all forward-looking information in the MD&A. We believe that the proposed safe harbor protection is essential to encouraging registrants to provide more meaningful forward-looking information.

28. Is there any need for the proposed safe harbor, or would the statutory safe harbors afford sufficient protection to encourage the type of information and analysis necessary for investors to understand the impact of off-balance sheet arrangements?

    Yes, we think the specific safe harbor proposal is necessary and will promote quality disclosures.

III. General Request for Comment

29. Is the additional information elicited by the proposals useful to investors, other users of company disclosure and readers of a company's financial statements? If not, how can it be improved to achieve that goal?

    Yes, to an extent, please refer to our response to question 1.

30. In addition to the requirements we propose, are there particular aspects of off-balance sheet arrangements, contractual obligations and contingent liabilities and commitments that the proposals should specifically require companies to address? If so, what are they?

    No. The requirements are sufficiently comprehensive.

31. If the proposed disclosure would involve competitive or other sensitive information, are there any mechanisms that would ensure full and accurate disclosure while reducing a company's risk of competitive harm?

    No comment.

32. Are there aspects of the proposed disclosure that should be retained while other parts of the proposed disclosure are eliminated? We solicit comment on the desirability of adopting some sections of the proposed rules, but not all sections.

    Refer to our responses to questions 1-3, 5, 7-11

V. D. Potential Benefits of the Proposed Rules

33. We solicit quantitative data to assist our assessment of the benefits of identifying off-balance sheet arrangements and analyzing their effects on the financial statements and preparing a table of contractual obligations and contingent liabilities.

    No comment.

V. E. Potential Costs of the Proposed Rules

34. What types of expenses would companies incur in order to comply with the proposed disclosure requirements?

    We believe that the additional preparation time incurred in order to comply with the proposed disclosure requirement will be significant, particularly if the scope and definition, disclosure threshold and required disclosures are not curtailed as we have recommended in our responses to questions 1-3, 5, and 7-11. We also believe any benefits, beyond those achieved by complying with existing rules, to be minimal, while the costs of compliance will be material.

35. What would the average printing and dissemination costs be for each firm?

    No comment.

36. We solicit quantitative data to assist our assessment of the compliance costs of identifying off-balance sheet arrangements and the table of contractual obligations and contingent liabilities and commitments in the manner proposed.

    No comment.