January 17, 2003
VIA E-Mail: Rule-Comments@SEC.gov
Jonathon G. Katz, Secretary
RE: File No. S7-02-03
Dear Mr. Katz:
I am writing this comment letter on behalf of Harleysville Group Inc., a holding company engaged through its subsidiaries in the property/casualty insurance business, regarding the proposed rules under §301 of the Sarbanes-Oxley Act pertaining to independence of audit committee members as set forth in Release Nos. 33-8173, 34.47137 and IC-25885 dated January 8, 2003.
We would like to see proposed Rule 240.10A-3 clarified to provide that an audit committee member of an issuer does not lose his or her independence if the law firm of which that audit committee member is a partner, associate, employee, counsel, etc., receives compensation from the issuer if the receipt of that compensation was not the result of a voluntary action on the part of or otherwise caused by the issuer. We make this request because in the insurance industry events can occur that can cause an insurance company issuer to pay compensation to law firms even though the insurance company did not choose to retain or otherwise select that particular law firm. On rare occasions that law firm could turn out to be a firm of which an audit committee member is an affiliate. Let me provide an example:
A business is sued for an act that allegedly damages the plaintiff(s). The business turns the complaint over to its current insurance carrier which then selects a law firm to represent the insured. In its representation of the insured, the law firm, of course, searches for all other insurance coverage that could be implicated by the law suit, and, especially in, but not limited to, environmental matters, other carriers who have issued policies to the business over a substantial period of time may be required to participate in the defense. A carrier that is required to participate, on rare occasion, could be the issuer on whose audit committee a member of the retained law firm works. Under many court rules, the issuer-carrier would not be permitted to hire a separate attorney to represent solely its interest but instead is required to contribute to the legal fees of the law firm selected by the other carrier(s). Typically, in a shared representation, the amount of legal fees would not be substantial. Nevertheless, under the rule as proposed, this would render the audit committee member non-independent.
Accordingly, we think that there should be an exception to proposed Rule 240.10A-3 to permit payment to the audit committee member's law firm where the issuer did not select the audit committee member's law firm initially. We think this exception makes sense and is certainly not inconsistent with the overall intent of Sarbanes-Oxley or the proposed regulation to create independence of the audit committee member. There is no quid pro quo at work in this situation. Alternatively, the phrase "indirectly compensate" could be clarified to provide that payment directly to the insured of the share of the legal fees would not be deemed indirect compensation to the audit committee member. We anticipate that this unique type of event would happen only very rarely, but obviously if it does happen, it would, under the proposed rule as we currently read it, result in a determination that the audit committee member was not independent and thus subject an innocent issuer to possible sanctions from both the Securities and Exchange Commission and the stock market on which it is listed for having an audit committee that is not wholly comprised of independent members. Where all parties have acted in good faith with no intent to evade the law or regulations, this would be a harsh and inequitable result. The unattractive alternative is to bar an otherwise valuable and experienced director from serving on the Audit Committee to the detriment of the Company and its shareholders and, indeed, its policyholders.
Thank you for your consideration of this matter.