March 14, 2003
Mr. Jonathan B. Katz
Re: File No. S7-02-03
Dear Mr. Katz:
We are writing on behalf of AB Svensk Exportkredit AB (Swedish Export Credit Corporation) ("SEK") to comment on the Commission's proposal to adopt new Rule 10A-3, Standards Relating to Listed Company Audit Committees, under the Securities Exchange Act of 1934, as set forth in the Commission's Release Nos. 33-8173/34-47137 and pursuant to Section 301 of the Sarbanes-Oxley Act of 2002 (the "Proposed Rule"). In particular, we wish to address the criteria proposed for the "independence" of audit committee members as it impacts SEK, perhaps uniquely.
We apologize for submitting this letter well after the close of the comment period. SEK has a relatively small staff and it has been difficult for them to address the Proposed Rule more promptly in the midst of the audit season. Nevertheless, we hope this letter will be helpful in considering the special problems presented to foreign private issuers by the Proposed Rule.
SEK is a stock corporation organized under Swedish law with two classes of share capital. The Swedish State, acting through the Ministry of Foreign Affairs, owns all of the Class A Shares, which represent approximately 65% of the share capital and entitle the holder to elect four of the six members of the Board of Directors. The Class B Shares, which represent the balance of the share capital and entitle the holder to elect the other two members of the Board of Directors, are owned by ABB Structured Finance AB, a subsidiary of ABB Ltd. If either shareholder elects to dispose of its shares in SEK the other has a right of first refusal to purchase such shares. SEK has no other authorized or outstanding voting securities. None of the members of the Board of Directors is an officer or employee of SEK or receives any consulting, advisory or other compensatory fee from SEK other than in such person's capacity as a Board member.
From SEK's inception in 1962 until the current shareholding structure became effective in June 2000, the State owned 50% of the share capital and voting rights, with the balance held by Sweden's major commercial banks.
SEK's objective is to engage in financing activities that are directly related to Swedish exports of goods and services or otherwise promote the development of Swedish commerce and industry, especially the export sector, by providing competitive long-term credits. It is regulated as a credit institution by the Swedish Financial Supervisory Authority. SEK conducts the substantial majority of its lending business on commercial market-based terms intended to provide its shareholders with a competitive long-term return on equity. The balance of its lending is at fixed rates that may be lower than prevailing market rates under a state support system designed to comply with the OECD Consensus on Officially-Supported Export Credits. SEK administers the state support system for the State, which pays for this service and takes the risk of annual operating deficits (and the benefit of surpluses) in the system, but leaves the ultimate borrowers' credit risk to SEK.
The State does not guarantee the obligations of SEK, and SEK is a foreign private issuer within the meaning of the Commission's rules under the Securities Act and the Exchange Act. However, SEK's credit ratings from the international rating agencies have historically been equal to or one notch below Sweden's sovereign rating, reflecting SEK's integral role in financing programs important to the State as well as the quality of SEK's assets.
SEK has been subject to the periodic reporting requirements of the Exchange Act for over 20 years. Currently it has two classes of non-voting Preferred Capital Securities listed on the New York Stock Exchange and, accordingly, would be subject to the Proposed Rule. As noted above, there are only two holders of its voting securities.
The Proposed Rule provides that any "director, executive officer, partner, member, principal or designee of an affiliate will be deemed to be an affiliate [of the issuer]" and thus could not meet the independence criteria set forth in the Proposed Rule and the Sarbanes-Oxley Act. Since both shareholders of SEK are likely to be deemed affiliates and the directors they respectively elect are their designees, the Proposed Rule would effectively mandate a one-person audit committee for SEK: one Director elected by the State could serve on the audit committee by virtue of the exemption provided by paragraph (b) (1) (iv) (E) of the Proposed Rule.*
The exemption provided by paragraph (b) (1) (iv) (D) applies well in the case of former state enterprises in which, following privatization, a government has retained a substantial interest but where there is a public float of the voting equity enabling directors to be elected by non-affiliate shareholders. The Swedish government's position as majority shareholder of a company without any public equity float is clearly a different situation. We are not aware of other foreign private issuers with securities listed on a U.S. national securities exchange which are majority owned by a government and none of whose voting securities are publicly held. There may be a few, but certainly not many.
SEK believes that a one-person audit committee is not the optimal means of independent oversight of the auditing process. SEK suggests that the Proposed Rule be modified to provide that a member of the audit committee of a foreign private issuer may be exempt from the requirements of paragraph (b) (1) (ii) (B) of Rule 10A-3 if (1) a foreign government or foreign governmental entity owns voting securities sufficient to elect a majority of the Board of Directors of the foreign private issuer, (2) none of the voting securities of any class of the foreign private issuer are listed on any U.S. or non-U.S. securities exchange or quoted on any U.S. or non-U.S. inter-dealer quotation system and (3) the member is not an executive officer of the foreign private issuer.
SEK believes that the exemption suggested above is an appropriate reflection of the comity historically shown to foreign governments by the Commission and is consistent with the protection of investors. A government that controls a commercial entity is ultimately doing so as custodian for the people of its country and there is an inherent obligation on the government representatives on the Board of Directors to act in the public interest that is different from a corporate shareholder. Without public common equity float, the price level of common stock in the market is missing from the considerations that can influence the actions of management and the Board of Directors. Where the listed securities are senior to the voting securities, managing the business in a manner that maintains strong ratings for the issuer assumes paramount importance for the shareholders. In addition, government ownership typically implies some government oversight of the accounting function, particularly where the issuer is in the financial sector. In the case of SEK, its annual financial statements are audited by an independent accountant representing the Swedish Financial Supervisory Authority, in addition to the independent accountants appointed by the shareholders.
SEK believes the exemption set forth above provides more than reasonable protection for investors. Nevertheless, if the Commission believes SEK's proposal cannot be accepted as consistent with the Sarbanes-Oxley Act, SEK would request that the Proposed Rule be modified as suggested above with the additional requirement that the member not only not be an executive officer of the foreign private issuer but also not be an official or employee of any agency of the government shareholder. This is analogous to the exemption in paragraph (b) (1) (iv) (B) for a member of the audit committee of a listed majority-owned subsidiary that is also a director of its parent company and otherwise meets the independence text except for sitting on both boards of directors. SEK is, in effect, a majority-owned subsidiary of the Swedish State, but because the parent is not in corporate form it does not have directors through which independence for purposes of the subsidiary's audit committee can be established. An exemption for directors of a foreign private issuer majority-owned by a government entity who are not government officials seems a fair reproduction of the exemption provided for a director of a majority-owned subsidiary of a corporate parent.
If the Commission is not inclined to modify the Proposed Rule to provide the exemption set forth above for registrants in SEK's position, we would hope that the Commission, notwithstanding its statement that it does not anticipate granting or permitting self-regulatory organizations to grant individual exemptions under Rule 10A-3, would be receptive to requests by foreign private issuers such as SEK controlled by foreign governments for reasonable exemptions from or interpretations of the audit committee rules.
If you have any questions or need any additional information, please contact the undersigned or Jakob Nordin, Executive Director, Financial Control, at SEK, telephone +46-8-613-8300, Jakob.Nordin@sek.se. Thank you for your considerations.