Financial Security Assurance Holdings Ltd.February 14, 2003 Via E-mail: rule-comments@sec.gov Securities and Exchange Commission
Re: File No. S7-02-03
Ladies and Gentlemen: I write on behalf of Financial Security Assurance Holdings Ltd., a New York corporation ("FSA") with debt securities listed on the New York Stock Exchange (the "NYSE") and registered under Section 12 of the Securities Exchange Act of 1934 (the "Exchange Act"). This letter sets forth comments on the proposed rules (the "Proposed Rules") under Section 301 of the Sarbanes-Oxley Act entitled "Standards Relating to Listed Company Audit Committees". Specifically, FSA proposes that the Proposed Rules be modified so that the audit committee member independence requirements do not apply to registrants like FSA that do not have any common equity or similar securities listed on a national securities exchange or association. We respectfully submit that the benefits sought by the proposed rules outweigh the burdens in such cases, and believe that holders of fixed income securities could be adequately protected through disclosure regarding the independence of audit committee members in lieu of legal requirements for audit committee membership. FSA. FSA, through its wholly owned subsidiary, Financial Security Assurance Inc., is primarily engaged in the business of providing financial guaranty insurance on asset-backed and municipal obligations. When FSA commenced operations in 1985, it was owned by a number of large insurance companies and other institutional investors. In 1994, FSA completed an initial public offering of common shares, which were listed on the NYSE. In July 2000, FSA completed a merger in which it became a direct subsidiary of Dexia Holdings, Inc., which is an indirect, wholly owned subsidiary of Dexia S.A. Dexia S.A. is a Belgian corporation whose shares are traded in the Euronext Brussels and Euronext Paris markets as well as on the Luxembourg stock exchange. Dexia is primarily engaged in the business of public finance, banking and investment management in France, Belgium, Luxembourg and other European countries. As a result of the merger, FSA ceased to have publicly held common equity securities. Dexia indirectly owns approximately 99% of the common stock of FSA, with the remainder being held by directors and White Mountains Insurance Group, Ltd. ("White Mountains"). White Mountains was the beneficial owner of approximately 25% of the equity of FSA at the time of the merger. FSA has no outstanding preferred stock. From 1997 through 2002, FSA issued several series of AA/Aa-rated debt securities with original maturities of 100 years, each of which is listed on the NYSE. Three issues, aggregating $430 million principal amount, are currently outstanding. Consequently, FSA continues to comply with all applicable filing and other requirements of the Exchange Act, even though it no longer has any outstanding publicly held or listed equity securities. FSA has sought to follow good corporate governance practices. FSA's merger agreement with Dexia contemplated a 12 person board, comprised of five representatives of Dexia, three members of FSA management and four outside directors. The Proposed Rules. The rules proposed in Release Nos. 33-8173 et al apply to "any listed security, regardless of its type, including debt securities, derivative securities and other types of listed securities" because "investors in all securities of an issuer, whether common equity or fixed income, would benefit from the increased financial oversight of an issuer that would result from a strong and effective audit committee" (pages 16 and 17). We respectfully submit that the Sarbanes-Oxley Act of 2002 was adopted in response to abuses by company insiders aimed at fraudulently and artificially inflating the value of equity securities so as to benefit the value of management equity holdings and options. These abuses, which have shaken investor confidence, do not involve attempts by insiders to manipulate debt prices through fraudulent accounting schemes or inferior accounting controls. Indeed, the motivations present for insiders to manipulate stock prices are not applicable to debt securities. A distinction between the potential for abuse between equity and debt securities is evident in the regulatory scheme of the Exchange Act, which limits Section 16 reporting requirements and liability for short-swing profits to equity securities. The concern for share price manipulation and the integrity of the equity markets is further highlighted by the following statements contained in the Release (emphasis added):
In fact, these statements are consistent with well-established principles that directors are fiduciaries of shareholders but not necessarily creditors of a corporation. We do not disagree that a strong and effective audit committee would benefit all investors. However, we believe that the compliance burden for companies without listed equity securities would outweigh the benefits to be obtained from the proposed requirements. In the case of FSA, at least two of its independent directors might be "disqualified" from audit committee service due (i) in the case of one director, to his position as a senior director of an investment bank with which FSA does business in the ordinary course and (ii) in the case of another director, to his part-time employment with a mortgage servicing company in which FSA holds a minority interest and does business in the ordinary course. The Commission has recognized the burdens of compliance with the Proposed Rules for audit committee member independence by considering the extent to which they should apply to small businesses and companies that have recently completed an initial public offering. We hope that the Commission will likewise consider changes to the Proposed Rules as they apply to privately held companies with public debt. To date, the NYSE has shared our view. FSA has sought guidance and obtained a determination from the NYSE that companies that have only bonds listed on the NYSE are generally not bound by the NYSE corporate governance requirements. Suggested Revision to the Proposed Rules. Accordingly, FSA respectfully proposes that the Proposed Rules be modified to exempt companies without listed equity securities from the audit committee member independence requirements. In lieu of such requirements, such exempted companies could be treated similarly to other exempted companies by requiring that they include or incorporate by reference in their annual reports disclosure of their reliance on the exemption and an assessment of whether, and if so, how, such reliance would materially adversely affect the ability of their audit committee to act independently. Investors would be able to take that information into consideration in making investment decisions regarding debt securities. We believe that this proposal would adequately address the interests of holders of debt securities and the integrity of the markets, without placing an undue burden on this group of issuers. Thank you for your consideration of our comments. If you have any questions or require any further information in respect of these comments, please feel free to contact me at 212-339-3482 or bstern@fsa.com.
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