February 14, 2003
Via E-mail - firstname.lastname@example.org
Attention: Jonathan G. Katz, Secretary
Re: File No. S7-02-03
Ladies and Gentlemen:
Edison International appreciates the opportunity to comment on the Commission's release entitled Standards Relating To Listed Company Audit Committees, Release Nos. 33-8173; 34-47137; IC-25885 (the "Release"). This letter addresses one proposal in the Release: proposed Rule 10A-3(c)(1), which would exempt the listings of securities of consolidated, majority-owned subsidiaries from the proposed audit committee requirements, provided the parent entity is subject to the audit committee requirements as a result of the listing of a class of its equity securities. We support the adoption of this proposed exemption. Imposing audit committee requirements on these subsidiaries would create heavy burdens on their parent companies to create and maintain independent audit committees for these subsidiaries, while providing no benefit to investor protection or corporate governance because the parent companies are subject to the requirements. In our view, avoiding such burdens where there is no benefit to investors is consistent with the Commission's cost-benefit analysis in the Release as well as the spirit of the Sarbanes-Oxley Act of 2002 (the "S-Ox Act"). This comment letter first describes Edison International's situation before addressing proposed Rule 10A-3(c)(1).
Edison International is an "issuer" as defined in Section 2(a)(7) of the S-Ox Act, and its common stock is listed on the New York Stock Exchange. Its principal subsidiaries are Southern California Edison, which is an electric utility, Edison Mission Energy ("Edison Mission"), which is an independent power producer, and Edison Capital, which provides financing for infrastructure and energy projects. Edison International, directly or indirectly, owns all of the outstanding common stock of these subsidiaries.
As an independent power producer, Edison Mission is an operating company. Edison Mission is also an "issuer" as defined in the S-Ox Act because Mission Capital, L.P., a limited partnership in which Edison Mission is the sole general partner, is the issuer of 9 7/8% Cumulative Monthly Income Preferred Securities, Series A and 8½% Cumulative Monthly Income Preferred Securities, Series B ("MIPS"). Both series of MIPS are listed on the New York Stock Exchange and registered pursuant to Section 12(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The payments of distributions on these series of MIPS and payments on liquidation or redemption are guaranteed by Edison Mission.
As the parent of Edison Mission, Edison International includes Edison Mission in its financial statements on a consolidated basis. Edison International has long had an audit committee composed entirely of independent directors. Hence, even though Edison Mission is an "issuer" under the S-Ox Act, we believe that it should be exempt from the audit committee requirements because it is subject to the oversight of Edison International's audit committee. Accordingly, we strongly endorse proposed Rule 10A-3(c)(1) under the Exchange Act, which exempts the listing of non-equity securities by a direct or indirect consolidated majority-owned subsidiary of a parent company from the proposed audit committee requirements if the parent company is subject to the requirements as a result of the listing of a class of its equity securities. We believe that this proposed exemption, which would apply to operating companies, like Edison Mission, as well as finance subsidiaries, is appropriate, both in concept and scope, and is consistent with the S-Ox Act.
Without the exemption, requiring Edison Mission to comply with the proposed audit committee requirements would be onerous and burdensome. Like many subsidiary registrants' boards, Edison Mission's board is comprised predominantly of its parent's officers. Creating an independent audit committee would significantly change this structure. Moreover, we believe that recruiting qualified directors for audit committees of subsidiaries such as Edison Mission would be difficult and expensive.
In contrast to the burdens, imposing such requirements would add no benefit or investor protection to Edison Mission's security holders since Edison International is subject to the Commission's rules implementing Section 301 and to the audit committee requirements of the New York Stock Exchange. Edison International's audit committee oversees the financial reporting processes and internal controls of all of the consolidated subsidiaries, including Edison Mission.
Because of our cost-benefit analysis, we believe that the exemption from such requirements is reasonable and sound.1 We also believe that the exemption will not adversely affect the oversight by Edison International's audit committee of the financial reporting processes and internal controls of Edison Mission and is therefore consistent with the goals of Section 301 of the S-Ox Act to promote good corporate governance.
Finally, we have a minor drafting suggestion. We believe that subsidiary registrants that are exempt from the proposed audit committee requirements pursuant to proposed Rule 10A-3(c)(1) should also be exempt from the disclosure requirement in proposed Item 401(h)(1) of Regulation S-K, which would require these subsidiaries to disclose whether or not they have separate audit committees in accordance with Section 3(a)(58) of the Exchange Act. Since proposed Rule 10A-3(d) provides that these subsidiaries need not disclose that they are availing themselves of the exemption from the audit committee requirements, it would be anomalous to require these same subsidiaries to disclose whether or not they have audit committees. Moreover, public companies typically are not required to disclose that they qualify for an exemption from a disclosure or listing requirement.
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We appreciate the opportunity to comment. Should the Commission or its Staff have any questions concerning the comments in this letter, please do not hesitate to contact me at (626) 302-1130.
cc: Hon. Harvey L. Pitt
Hon. Harvey Goldschmid
Hon. Paul Atkins
Jeffrey J. Minton