Steven K. Hazen, Esq.
777 South Figueroa Street
Los Angeles, CA 90017
February 15, 2003
Via E-Mail: email@example.com
Mr. Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609
re: SEC File No. S7-02-03
Release Nos. 33-8173; 34-47137; IC-25885
Proposed Rules under Section 10A(m)(1) of the
Securities Exchange Act of 1934, as added by
Section 301 of the Sarbanes-Oxley Act of 2002
"Standards Relating to Listed Company Audit Committees"
Dear Mr. Katz:
I am writing to comment on the above-referenced release and proposed rules (the "Proposing Release") issued by the Securities and Exchange Commission (the "Commission") in connection with Section 10A(m)(1) of the Securities Exchange Act of 1934, as amended (the "1934 Act"), which section was added by Section 301 of the Sarbanes-Oxley Act of 2002 ("SOXA"). These comments are provided in my individual capacity, albeit in the context of having served as legal counsel over the years to a number of major companies in Japan, some of which have ADRs listed for trading in the United States.
Over a period of many years, the role and authority of the Audit Committee has taken on relative clarity with respect to the laws of U.S. jurisdictions pursuant to which business entities are formed in the United States and to which procedures of corporate governance are subject. It appears that the Staff has made a very good effort in providing a framework for dealing with the intricacies of legal systems and corporate structures in countries other than the United States with respect to the role and authority of the Audit Committee. At first blush, it seems as if the framework set forth in the Proposing Release may actually work and work well.
Digging deeper into the specific fact standards of the proposed rules, however, results in significantly less clarity. Indeed, an ever-increasing number of uncertainties arise as to the implications under applicable laws of foreign jurisdictions in making the choice between adopting the U.S. model Audit Committee structure or continuing with long-standing procedures and requirements under such foreign laws. With respect to Japan, it is going to take much longer than provided in the comment period to complete consultations with bengoshi there sufficient to know whether the exemption provisions set forth in proposed Rule 240.10A-3(b)(1)(iv)(C) and (D), proposed Rule 240.10A-3(c)(2)(i)(B) through (F), and proposed Rule 240.10A-3(c)(2)(ii) will actually achieve the flexibility and recognition of non-U.S. systems otherwise apparently intended by the Staff in drafting those provisions and the text of the Proposing Release itself.
Frankly, there remains detailed factual determinations for many aspects of those provisions which could have a significant impact on the final analysis as to whether the provisions will actually apply in any meaningful way. The process required to arrive at clarity in that regard is not well-suited to definitive completion in the context of the rule-making process under the authority of Section 10A(m)(1). By contrast, the process pursuant to which the various exchanges themselves develop standards of listing is well suited to that endeavor.
In that context, the sole purpose of this letter is to urge the Commission to revise the proposed rules prior to final adoption such that they provide greater flexibility to such exchanges in using the time available to them for proposing listing standards to come up with either (1) a more thoroughly-vetted "one-size-fits-all" framework for exemptions applicable to foreign issuers, or (2) such framework which includes a case-by-case examination of whether the procedures applicable in the home jurisdiction of a specific foreign issuer accomplishes the protections otherwise intended under Section 301 of SOXA and a means for waiver of the listing standard if such examination demonstrates that is warranted.
To a certain extent, it might be realistic to demand that foreign issuers wishing to avail themselves of our markets adapt to the local corporate governance requirements for doing so as if they were not actually foreign issuers but rather domestic U.S. enterprises. On the other hand, there is clearly a benefit to the U.S. markets (and the investors in it) to avoid unnecessary barriers to access to such foreign issuers.
The proposed rules in their current form may achieve that balance, but they also may not. On their face, they present more uncertainty as to that outcome than clarity. For the foregoing reasons, I urge the Commission to give the exchanges clearer authority under the rules ultimately adopted to draw up listing standards and procedures in a manner which will achieve that balance. There is no benefit served in truncating the input provided to the exchanges by foreign issuers and/or their advisers in connection with preparation by the exchanges of proposed listing standards responsive to the mandates of Section 301 of SOXA.
Very truly yours,
Steven K. Hazen