November 29, 2002
Mr. Jonathan Katz
Re: Release No. 34-46685, Proposed Rule: Improper Influence on
Dear Mr. Katz:
The following comments are submitted on behalf of The Business Roundtable, an association of chief executive officers of leading corporations with a combined workforce of more than 10 million employees in the United States and $3.5 trillion in revenues. The Business Roundtable strongly supported enactment of the Sarbanes-Oxley Act of 2002 (the "S-O Act"), and we support the Securities and Exchange Commission's efforts to implement the S-O Act. We believe the law will go a long way toward establishing new, higher standards for America's corporations. As CEOs, we are committed to maintaining a strong economy, a vibrant workforce, and creating new jobs.
We appreciate the opportunity to provide you with our views on recent Securities and Exchange Commission ("Commission") proposals to implement Section 303 of the S-O Act relating to improper influence by officers and directors of a company on the conduct of an audit.
Standards of Intent
The Commission states in the proposing release that it is considering whether the word "fraudulently" (as used in Section 303 of the S-O Act in the phrase, "fraudulently influencing, coercing, manipulating, or misleading the auditor") should be replaced by the word "improperly" or "some other word to convey a mental state short of scienter."
We believe it would be inappropriate for the Commission to modify the standard adopted, after careful consideration, by Congress in Section 303. Congress expressly considered and rejected alternative formulations to the "fraudulently" standard when drafting Section 303. Similar provisions in alternative legislation that was considered prior to the introduction of the Sarbanes bill in the Senate contained both the "willfully and improperly" and the "improperly" standards. See H.R. 3763 (Feb. 24, 2002) and S. 2004 (March 8, 2002) (containing the "willfully and improperly" standard); see also S. 2460 (May 6, 2002) and H.R. 3818 (Feb. 28, 2002) (containing the "improperly" standard). Senator Sarbanes, in introducing his bill, and Congress in enacting the S-O Act, rejected these alternative standards, opting instead for the "fraudulently" standard. Thus, we believe the final rule must give effect to the plain meaning of the statute and retain the term "fraudulently."
Section 303 also applies only where the improper conduct is performed "for the purpose of" rendering the financial statements materially misleading. The Commission's proposed rule would depart from the language of the statute and substitute the phrase "knew or was unreasonable in not knowing that [the] action could, if successful, result in rendering [the] financial statements materially misleading," for the "purpose" language.
The proposing release also indicates that the Commission is considering whether intent should be eliminated completely as a criterion, which the Commission suggests it might do by allowing application of the rule if the improper conduct is performed "for the purpose of, or ha[s] the effect of, rendering the financial statements materially misleading." Again, the plain meaning of the phrase "for the purpose of" demonstrates that intent is a legislatively mandated statutory precondition that must be established with respect to a claim under Section 303. We believe the Commission should not attempt to exceed its statutory authority and therefore should delete the phrase "knew or was unreasonable in not knowing that [the] action could, if successful, result in rendering [the] financial statements materially misleading," and re-insert the phrase "for the purpose of".
Acting "Under the Direction" of an Officer or Director
The Commission has solicited comment on whether it should define by rule the scope of the phrase "any other person acting under the direction" of an officer or director. We believe the phrase "acting under the direction" of an officer or director provides sufficient clarity as currently stated and that further interpretation of this phrase in the final rule is unnecessary.
The Commission also suggests in the proposing release that it is considering replacing the phrase "under the direction" of an officer or director, with either "at the behest of" or "on behalf of" an officer or director. We do not believe either of these changes would be appropriate. Congress expressly sought to prescribe action by "person[s] acting under the direction" of an officer or director, not action by persons acting "at the behest of" or "on the behalf of" an officer or director. The alternative formulations could be used to establish a claim based on "voluntary" action by subordinate employees, irrespective of whether such individuals are acting at the direction of an officer or director. Thus, such language goes well beyond the activities prohibited by Section 303 and should not be adopted.
We appreciate your consideration of these comments, and we would be happy to discuss these matters further or to meet with you if it would be helpful.
cc: Hon. Harvey L. Pitt
Hon. Paul Atkins
Hon. Roel Campos
Hon. Cynthia A. Glassman
Hon. Harvey Goldschmid
Stephen M. Cutler
Giovanni P. Prezioso
Jackson M. Day