February 18, 2003
Mr. Jonathan G. Katz
File No. S7-02-03
Dear Mr. Katz:
This letter relates to the proposed adoption by the Securities and Exchange Commission ("Commission") of rules under Section 301 of the Sarbanes-Oxley Act of 2002. AXA, like many other French companies listed in the United States, is a member of the Association Française des Entreprises Privées - Association des Grandes Entreprises Françaises ("AFEP-AGREF") which has submitted a comment letter to the Commission, dated February 10, 2003 on behalf of its members concerning the Commissions proposed rules under Section 301. AXA supports the positions expressed in AFEP-AGREF's comment letter.
In addition to the comments in that letter, AXA would like to comment on two aspects of the Commission's definition of "independence" under of the proposed rules that we believe should be modified. We fully understand and appreciate the necessity for an independent audit committee and the critical role of the audit committee in the corporate governance process; however, we believe that certain aspects of the Commission's proposed rules are too restrictive and may ultimately have the effect of disqualifying from audit committee service a number of highly qualified individuals who have no real conflicts of interest and whose service and experience would otherwise inure to the benefit of all shareholders.
Receipt of Indirect Compensation
Under the Commission's proposed rules, a director would not qualify as "independent" if he is a "partner, member, principal or occupies a similar position" in an entity which accepts payments from the issuer for providing "accounting, consulting, legal, investment banking, financial or other advisory services or any similar services" to the issuer. We believe that the absence of any materiality threshold in this proposed standard is not appropriate and may well result in otherwise qualified directors being automatically disqualified from audit committee service in cases where they have no real conflict-of-interest. This is particularly the case where the transactions in question occur in the ordinary course of business and on an arms-length basis. For example, while the precise scope of the proposed rule is somewhat ambiguous, the rule could be construed to disqualify from audit committee service a director who happens to be a partner or an executive officer of bank in the event that the bank receives any fees, regardless of the amount, in connection with (i) its participation in a syndicate of banks which provides the issuer or its affiliates with a revolving credit facility (even if the bank is not the arranger of the facility but merely a participant in the syndicate); (ii) its participation in a syndicate that underwrites securities of the issuer or its affiliates (even if the bank is not the lead underwriter but merely a member of the underwriting syndicate) and/or (iii) its origination of a loan to the issuer or its affiliates on arms-length basis in the ordinary course of business. In each of these cases, provided that the aggregate amount of fees received by the bank are not material and the transactions in question are on an arms-length basis, we do not believe that the director should be disqualified from audit committee service. In addition, we believe that particularly for global organizations, such as AXA which operates in more than 50 countries, the absence of any materiality threshold in the proposed rule would impose very substantial verification and compliance burdens when making independence determinations since the payment of even one Euro in indirect compensation by a downstream affiliate could potentially jeopardize a director's independence for audit committee purposes.
Affiliated Person Prohibition
The proposed rules would also disqualify from audit committee service a director who is an "affiliated person" of the issuer. The rule uses a broad definition of "affiliate" derived from other contexts, such as Rule 144 and Section 16, and provides an exemption for a director, otherwise independent, who also sits on the board of a "consolidated majority-owned" subsidiary of the issuer. We believe that the proposed "consolidated majority-owned" exception should be enlarged to cover directors, otherwise independent, who may also sit on boards of entities in which the issuer may hold less than a majority interest. For example, there does not appear to be a clear basis for making a distinction between a director sitting on the board of a 51% owned joint venture (which would be covered by the proposed exemption) and one sitting on the board of a 50% owned joint venture (which would not be covered by the proposed exemption). In the context of assessing a director's independence for audit committee service, it is not entirely clear to us why a director, otherwise independent, should be disqualified from audit committee service if that director also sits the board of entity in which the issuer holds a substantial interest but less than a majority. In this respect, we believe that the Commission should consider broadening this exception so that it would also cover these cases.
In addition to the points noted above, we would like to emphasize again our support for the points set out in the comment letter of AFEP-AGREF, dated February 10, 2003, on these proposed Section 301 rules. We would be appreciative if the Commission would seriously consider AFEP-AGREF's various recommendations and, in particular, its recommendation that the proposed effective date of the new rules be modified to provide that companies listed in the U.S. must be in compliance with the new rules no later than their first annual shareholders meeting following the adoption of the final rules by the U.S. national securities exchanges. AXA, like many French companies, typically holds it annual shareholders meetings in May and the rules, as currently proposed, may require us to call special shareholders meeting for the purpose of changing the composition of our Supervisory Board. We believe that AFEP-AGREF's recommendation would ensure timely compliance with the new rules while avoiding any need to call a special shareholders meeting for that purpose.
We appreciate the opportunity to comment on the Commission's proposed rules under Section 301. Please feel free to contact me (at 331 4075 5638) or my colleague George Stansfield (331 4075 7275) should you have any questions regarding these comments.