The Australian Treasury
14 February, 2003
Mr Jonathan G. Katz
Dear Mr Katz
THE SARBANES-OXLEY ACT
I refer to the Securities and Exchange Commission's (SEC) proposed rule on standards relating to listed company audit committees which was released on 8 January 2003 and called for comment by 18 February 2003. This submission provides some comment on those rules but also takes the opportunity to raise concerns regarding the insider lending restrictions in section 402 of the Sarbanes-Oxley Act.
The Australian Treasury has been following closely corporate governance developments in the United States, most notably the enactment of the Sarbanes-Oxley Act and the release of accompanying rules made by the SEC. I very much appreciate the opportunity to comment on those rules and am confident that the SEC's consultation process will ensure the development of a framework that can operate sensibly across a range of jurisdictions.
As you are aware, concerns have been raised regarding the extraterritorial application of the Sarbanes-Oxley Act whereby companies that have operations in the United States will have to apply certain provisions of the Act to their operations outside the United States. I recognise that Australian companies competing internationally will be subject to rules in other jurisdictions and to an extent this can impact on how they structure their domestic operations to comply with their home jurisdiction regulation. While this will inevitably be a feature of the cross border operations of companies, this becomes problematic where Australian companies are unable to comply with domestic regulation as a result of conflicting international legislative requirements. Further, where Australian companies are subject to rigorous regulatory requirements already existing in Australia, compliance with conflicting international requirements can create unnecessary or additional burdens. It is therefore essential to minimise any conflict by recognising legal requirements already existing in other jurisdictions.
While there may be differences in the form of United States and Australian corporate governance regulation, overall the regulatory requirements are aimed at achieving the same underlying policy objectives of enhancing transparency, accountability and integrity in corporate disclosure and corporate governance. Where regulatory requirements achieve the same functional outcomes, a case exists for at least some recognition of those standards.
I note that further rules are to be released by the SEC under the Sarbanes-Oxley Act and I am keen to encourage the SEC to minimise any compliance difficulties for Australian companies. Given the rigorous corporate and business regulatory framework existing in Australia and proposed reforms which will strengthen financial reporting and corporate disclosure requirements, I would urge the SEC to look favourably on any exemptions sought by Australian companies. I have enclosed for your information a short briefing on the Australian corporate governance framework and proposed reforms.
On the specific matter of audit committees, Treasury initially held concerns about requirements in the Sarbanes-Oxley Act that the audit committee must be directly responsible for the appointment of an issuer's registered public accounting firm. The Australian Corporations Act 2001 requires the shareholders to appoint an auditor at the Annual General Meeting of the company. It was considered that Australian companies would not be able to comply with rules made under the Sarbanes-Oxley Act which confer these responsibilities on the audit committee and, at the same time, comply with the Australian Corporations Act which confers the same responsibility on shareholders.
These concerns were raised by the Chairman and the Secretary of the Australian Financial Reporting Council when they met with SEC officials and US Treasury in October 2002.
The issue appears to have been addressed by an exemption in the proposed rules issued on 8 January 2003 which allow shareholders to select or ratify the selection of outside auditors, as is required in Australia and many other countries.
Loans to executives
One area where Treasury's concerns relate to broader questions of principle is in relation to section 402 of the Sarbanes-Oxley Act which prohibits personal loans to executives.
Australian Banks have raised two main concerns. Section 402 introduces a prohibition into the US Securities and Exchange Act which generally prohibits personal loans being made to directors or executive officers which would not generally be available on a commercial basis. Australian banks will be particularly disadvantaged by this restriction because the provision of concessional financial arrangements to executive officers is a standard banking industry practice and an integral component of remuneration. This practice has not given rise to any regulatory concerns in Australia.
The second concern relates to the fact that the Sarbanes-Oxley Act treats non-US financial institutions in a different and less favourable way to US financial institutions with respect to this issue. I understand that under the Sarbanes-Oxley Act, US insured depository institutions are exempt from the prohibition if they are subject to separate insider lending restrictions under the US Federal Reserve Act. This exemption is not available to non-US financial institutions.
I note that representations from the international banking community have been made to the SEC regarding the potential for relief from section 402 of the Sarbanes-Oxley Act for non-US financial institutions. We would urge the SEC to look favourably on such applications especially where domestic regulation is at least comparable to that provided in the US and serves to promote the sound corporate governance practices and prudential management of financial institutions. If detailed information on Australia's regulatory framework is required to assist you in your consideration of any applications for exemptions that you may receive, I would be happy to provide you with any necessary material.
I trust this information will be of assistance as you continue to advance the implementation of the Sarbanes-Oxley Act.
CORPORATE GOVERNANCE REGULATION IN AUSTRALIA
Australia's corporate governance framework contains a range of measures that promote accountability of management and transparency of financial and other information.
In the area of accountability, there are certain minimum obligations and responsibilities directors must fulfil including duties to:
Transparency and Disclosure
The principal objective of Australia's corporate regulatory framework is to enhance disclosure and ensure transparency of corporate information as a means of promoting proper conduct of directors and senior management.
Among the areas covered by the Corporations Act are:
Corporate Law Economic Reform Program
Australia's corporate governance and in particular disclosure framework were substantially strengthened in the 1990s through the Government's Corporate Law Economic Reform Program (CLERP), changes to the Australian Stock Exchange's Listing Rules, and initiatives by companies, business peak bodies and regulators to define and adopt industry best practice.
As part of CLERP, substantial changes have been made the Corporations Act and the corporate regulatory framework more generally, particularly in the areas of accounting standards, fundraising, directors' duties, takeovers and financial services reform. Policy proposal papers covering corporate fees and cross border insolvency have also been released and are in the process of being implemented.
As with previous reforms, the latest package of reforms (CLERP 9) rely on a co-regulatory approach that employs a mix of government regulation, guidance by regulators and market based initiatives to implement corporate governance reforms. The objective of CLERP 9 is to improve Australia's financial reporting and broader corporate disclosure framework and to encourage the participation and better monitoring by shareholders in the companies they own. Key proposals to be implemented under CLERP 9 regarding corporate governance include: