JPMorgan Chase Bank
February 13, 2003
Mr. Jonathan G. Katz
Re: Standards Relating to Listed Company Audit Committees
Dear Mr. Katz:
The ADR Group of JPMorgan Chase Bank is pleased to have the opportunity to comment on the proposed rules promulgated by the Commission in the above-referenced release regarding audit committee standards for listed companies.
Through its ADR Group, JPMorgan Chase Bank serves as depositary bank for 231 issuers of American Depositary Receipts in 38 countries. Since the implementation of the Sarbanes-Oxley Act (the "Act") on July 30, 2002, we have been active in educating our clientele as to the implications of the Act for non-U.S. issuers. We have communicated with our clients on a regular basis, through a series of white papers and in-person meetings, to inform them about rulemaking activities and other developments under the Act. We have also sponsored a number of corporate governance roundtables attended by many of our foreign private issuer clientele. Through these efforts, JPMorgan Chase Bank has become aware of the concerns raised by such foreign private issuer clientele. We believe that some of these concerns are addressed in the proposed audit committee rules, and we are encouraged by the Commission's efforts in this regard. We are hopeful that the Staff will continue to focus on the problems and conflicts for foreign private issuers raised under the Act and are hopeful that the Commission will continue to move towards solving these problems and reconciling these conflicts.
A specific concern for many foreign private issuers relates to the date by which the self regulatory organizations ("SROs") are required to adopt their own conforming audit committee rules. It is currently contemplated that the SRO rules must be operative no later than the first anniversary of the publication of the Commission's final rules, which would result in an operative date of April 26, 2004 or sooner. This will create substantial difficulties for companies that have non-calendar year fiscal periods, particularly where the fiscal closing date is in close proximity to the publication of the final rules. For example, many foreign issuers (including most Japanese companies) have a March 31 fiscal year end and typically hold their annual meetings in June. To the extent these companies must alter the composition of their boards in order to comply with the audit committee rules, it will be effectively impossible for them to do so on a timely basis. For a number of reasons (discussed in detail below), it is not feasible to make board changes in time for a June 2003 annual meeting. However, it will be too late to make such changes at the 2004 annual meeting, as the proposed operative date will have already passed.
In our view, a significant problem with the April 2004 operative date is that it fails to take into account the timing of the SRO rulemaking process. The proposing release requires the SROs to finalize their own audit committee rules within 270 days after the publication of the Commission's final rules. The principal securities markets will likely adopt additional requirements beyond those proposed by the Commission. For example, both the New York Stock Exchange and Nasdaq seek to impose cooling off periods for directors who were employed by the company or its auditors or served on interlocking compensation committees. As a result, issuers holding an annual meeting in June, or on any date prior to the issuance of the final SRO rules, will have no way of knowing the full scope of the independence criteria that will apply to them. Thus, even if such issuers are able to constitute an audit committee that qualifies under the Commission's rules, it may nevertheless fall short of the final SRO requirements.
In addition, the proposed operative date poses serious practical concerns for issuers holding their next annual meetings in June 2003 or otherwise within a short period after the publication of the final rules. It is unrealistic to expect companies to identify, evaluate and recruit qualified directors within a two-month period, particularly when coupled with the task of determining whether candidates meet the newly-enacted independence criteria. In this limited period, issuers also would not have adequate time to absorb and understand the effects of the new rules in advance of the annual meeting, and to incorporate appropriate provisions into the materials they distribute to shareholders.
In summary, the proposed implementation timetable for the audit committee rules would have an unintended effect on many issuers who are scheduled to hold annual meetings shortly after the final rule publication date. These companies will be forced to elect new directors without due deliberation and evaluation, and without knowing what additional requirements will be imposed by the relevant SROs. While it may be possible for such issuers to hold a special or extraordinary meeting at a later date, this would create significant financial and administrative costs, a burden that in all likelihood would fall disproportionately upon foreign issuers. This would also be inconsistent with the Commission's stated policy of allowing at least one annual meeting for purposes of making any necessary changes in the composition of the board.
In view of these timing issues, we respectfully suggest that the proposed rules should become operative within not less than 15 months after the issuance of the final SRO rules. This would give issuers the ability to incorporate and comply with all relevant regulatory requirements. We believe a 15-month period is preferable to one year, as it addresses the situation in which an annual meeting is due to be held shortly after the operative date. In that circumstance, an issuer should not be forced to comply within an unrealistic time frame. A 15-month implementation period would ensure that issuers have a minimum of three months to prepare for an annual meeting, which is the shortest time in which such an undertaking can reasonably be accomplished. Alternatively, if the Commission believes that the operative date should remain linked to the publication of the Commission's final rules, we suggest that a 15-month period (ending July 31, 2004) would also be more practicable and fair in that context.
Subject to the above concerns, we strongly support the exemptions intended to address conflicts between the requirements of the Act and certain foreign corporate governance standards and practices. In their current form, these exemptions provide that: (1) non-management employees of foreign private issuers can serve as audit committee members if they are elected or named as directors or audit committee members pursuant home country legal or listing requirements; (2) foreign private issuers having boards of auditors or statutory auditors pursuant to legal or listing requirements will be exempt from certain of the audit committee requirements; (3) if a shareholder or shareholder group owns more than 50% of the voting securities of a foreign private issuer, one member of the audit committee can be a representative of such shareholder or group if the representative receives no compensation from the company (other than for board service), is not an executive officer, serves on the committee only as an observer on a non-voting basis, and does not chair the committee; and (4) one member of the audit committee can be a representative of a foreign government or foreign governmental entity if the representative receives no compensation from the company (other than for board service) and is not an executive officer.
We believe these proposed exemptions demonstrate the benefits of addressing conflicts between the Act and foreign corporate governance rules in the rulemaking process. In our view, it is critical to demonstrate respect for non-U.S. corporate governance regimes that achieve, through different means, the objectives and policies that underlie the Act. This approach does not diminish shareholder protection in any meaningful way, and could prove essential to maintaining the long-term strength of our financial markets. As a result of uncertainty concerning conflicts between foreign and U.S. law, certain foreign issuers have already deferred listings in the U.S. or are considering de-listing from U.S. exchanges and migrating to The London Stock Exchange and other non-U.S. markets. In order to prevent the future migration of foreign private issuers, we urge the Commission to implement the audit committee rules in their proposed form and continue the policy of accommodating the legitimate concerns of foreign issuers.
Thank you for considering our comments. We would be pleased to answer any questions you may have or provide additional information. If it would be helpful, we are available to meet with you and may be able to arrange for certain of our clients to participate in any such meetings.