Internal Market
Director General

                      Brussels, 18.2.2003 0916
                      Internal Market DG/GL D(2003) 64

                      Jonathan G. Katz
                      U.S. Securities and Exchange Commission
                      450 Fifth Street NW
                      Washington DC 20549-0609
                      United States of America

Dear Mr. Katz,

Subject : File No. S7-02-03
Proposed rule: Standards relating to listed company audit committees

We thank you for the opportunity to comment on the proposed rule on standards relating to listed company audit committees under Section 301 of the Sarbanes-Oxley Act (SOA). We make the following comments as part of a constructive regulatory dialogue between the United States and the European Union because the Act has also important effects on US-listed EU companies and EU auditors.

The adoption of the Sarbanes-Oxley Act is a US reaction to US financial reporting scandals. The Act aims at restoring investors' confidence in US capital markets. The European Commission and our 15 Member States share these concerns and could in principle support the objectives and many measures of the Act.

Equivalence of EU corporate governance systems

On 23 January, the SEC finished a major round of rulemaking implementing the Sarbanes-Oxley Act. Although we still have to analyse the final rules, which have not yet been completely published, the SEC has given foreign companies and auditors relief to accommodate legal conflicts with foreign jurisdictions. Moreover, foreign lawyers seem to have been fully exempted from a SEC rule on section 307 SOA.

However, the European Commission and our 15 Member States consider this only to be a first step in the right direction. We request full recognition of equivalence of EU corporate governance systems. This also includes the regulation and public oversight on statutory auditors. In general, the SEC should be aware that EU companies and auditors are already subject to longstanding, well developed Member State corporate governance requirements. These are tailored to their specific legal environments and are in their different ways as effective and efficient at providing investor protection as U.S. rules. Additional requirements of the SOA applied to EU companies and auditors would place on them an unnecessary additional layer of requirements - taken from a completely different (US) corporate governance environment. We fail to see why EU companies and auditors should be overburdened with such duplicative requirements compared to their US counterparts. Further improvements envisaged in our forthcoming political communications on corporate governance and statutory audit only underline the viability of the European corporate governance environment. Bearing this in mind, the SEC should recognise equivalence of EU corporate governance systems and thus fully exempt not only EU lawyers but also EU companies and auditors from the SOA, also with regard to audit committee requirements.

Audit committees as a key area of EU concern

Audit committee issues have already been addressed at an early stage in our dialogue with the SEC on the Sarbanes-Oxley Act. They formed one of seven key areas of EU concern which were brought to the SEC's attention prior to the meeting of SEC Chairman Pitt with European Commissioner Bolkestein on 9 October 2002 in Brussels. They comprised the appointment of auditors by shareholder assemblies, the representation of non-management employees on audit committees and uncertainties how the audit committees requirement works in corporate governance systems different from the one-tier board system. We have positively noted that you have specifically addressed these issues in your proposed rule with limited exemptions or clarifications in order to accommodate possible legal conflicts.

These flexibilities are necessary for the following reasons:

  • Section 301 SOA requires the audit committee to appoint the auditor. Member States underlined that in their company laws the shareholders (general assembly) have the ultimate responsibility for appointing the auditor, not the audit committee.

  • Some Member States, European industry and Trade Unions have expressed concerns that they cannot meet the requirement of independent audit committee members (section 301 SOA) because employees, who are paid by the company, would be excluded from audit committees.

  • Section 301 SOA envisages that every registrant should have an audit committee but does not make audit committees directly mandatory for registrants. If the registrant does not have an audit committee, the independence requirements have to be fulfilled by all board members (section 2(3)B). It left open whether and how this would work in dual board and single board systems of Member States of the European Union.

Nevertheless, a general exemption of EU issuers is preferable because it would remove any uncertainty about whether Member States' corporate governance systems are fully exempted from SOA requirements.

* * *

We trust that our comments will help the definition of further SEC rules to be in the best interest of US and also EU companies and auditors with transatlantic business links.

Finally, we like to point out that there is still a number of pressing issues that need to be resolved. This specifically includes direct US access to audit working papers and registration of EU audit firms with the new US oversight board PCAOB. The theoretical registration requirement for EU audit firms will already come into effect in October 2003. The leaves little time for us to intensify our regulatory dialogue and to resolve these issue in a satisfactory manner - for both sides. Commissioner Bolkestein hopes that this initiative will show significant progress when he visits Washington later this month.

Yours sincerely,


Alexander SCHAUB