Organization for International Investment

November 27, 2002

Mr. Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549

Re: Release 34-46685 (File No. S7-39-02) (Improper Influence)
Release 34-46778 (File No. S7-44-02) (Blackout Periods)
Release 33-8144 (File No. S7-42-02) (Off-Balance Sheet Arrangements)
Release 33-8145 (File No. S7-43-02) (Non-GAAP Financial Measures)
Release 33-8138 (File No. S7-40-02) ("Financial Expert," Internal
Control Reports, Codes of Ethics, Revisions to Certification Rules)

Dear Mr. Katz:

The Organization for International Investment ("OFII") is the leading business association in the United States representing the interests of U.S. subsidiaries of over 100 international companies (membership list attached). Many of these international companies are "foreign private issuers" under Commission rules and are required to file Form 20-F or Form 40-F and other reports with the Commission, often as a result of a listing of their securities on the New York Stock Exchange or another market. These companies are therefore subject to many of the provisions of the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley"), which was signed into law on July 30, 2002.

Our members fully support the intent of the U.S. Congress and the Commission to enhance investor confidence in the securities markets. In particular, Sarbanes-Oxley is an important legislative initiative aimed at increasing the accuracy and reliability of corporate disclosures made pursuant to the federal securities laws.

We commend the Commission's diligence in complying with the Congressional mandates for rulemaking responsive to the requirements of Sarbanes-Oxley. In this letter, we offer our comments on the Commission's proposed rules referred to in the caption to this letter as they apply to foreign private issuers. We urge the Commission to revise those proposals in order to accommodate the circumstances of foreign companies, in particular the widely disparate legal regimes to which they are subject and their justified reliance upon previous Commission accommodation.

I. Traditional Commission Accommodation of Foreign Private Issuers

The Commission has for many years as a matter of policy encouraged foreign private issuers to enter the U.S. capital and securities markets as "reporting companies" under the Securities and

Exchange Act of 1934 (the "1934 Act"). The Commission has implemented this policy by providing foreign private issuers with a number of accommodations to foreign practices and policies where such accommodations would not be inconsistent with the protection of U.S. investors. These accommodations include:

  • interim reporting on the basis of home country and stock exchange practice rather than mandated quarterly reports;

  • exemption from the proxy rules and the insider reporting and short swing profit recovery provisions of Section 16;

  • aggregate executive compensation disclosure rather than individual disclosure, if so permitted in an issuer's home country; and

  • use of home country accounting principles with a reconciliation to U.S. generally accepted accounting principles, with acceptance of certain International Accounting Standards; and

  • acquiescence in New York Stock Exchange and Nasdaq corporate governance standards that are tailored to the needs of foreign private issuers.

As of the end of 2001, more than 1300 foreign private issuers from 59 countries had become reporting companies in reliance on the Commission's accommodations.

It is important to note that none of the Commission's accommodations of foreign private issuers has been based on express Congressional authorization. Rather, the Commission has made use of its exemptive powers under the federal securities laws (even before the general grant of 1933 Act exemptive authority in 1996) "to balance the information needs of investors with the public interest served by opportunities to invest in a variety of securities, including foreign securities." SEC Release No. 33-7745 (September 28, 1999).

Although Sarbanes-Oxley makes no distinctions between U.S. companies and foreign private issuers, neither does it diminish in any way the Commission's pre-existing exemptive authority. Indeed, we understand from members of Congress and staff members of relevant committees that Congress fully intended to leave to the Commission its historical responsibility of deciding what accommodations could and should be made to foreign private issuers.

II. Specific Shortcomings of Current Commission Rulemaking

A. Section 303(a) (improper influence)

SEC Release No. 34-46685 proposes revisions to Rule 13b2-2 that would prohibit officers and directors of a reporting company, or persons acting under the direction of an officer or director, from taking any action to fraudulently influence, coerce, manipulate or mislead the auditor of the company's financial statements for the purpose of rendering the financial statements materially misleading.

In principle, no one could object to the proposed revisions. The proposing release makes it clear, however, that the Commission intends the revisions to be far more comprehensive than the text of the revisions would suggest. For example, the Release states that the revisions would reach non-fraudulent conduct, would be in effect during time periods when no active audit work is being conducted, would apply to persons who are "instructed" by an officer or director, would apply if the actor knew or was unreasonable in not knowing that the act could result in rendering the financial statements materially misleading and would apply to attempts whether or not successful. The Release also requests comment on whether the revisions should extend to conduct that is "at the behest of" or "on behalf of" an officer or director, to conduct that is undertaken with an "improper" purpose and to conduct that is either for the purpose of or that would have the effect of rendering the financial statements materially misleading.

It is not clear to us how U.S. companies would operate under a regime such as that proposed in the Release, much less under the more general language on which the Release invites comment. It may be that U.S. companies will be able to adapt to a regime that requires strict controls on communications between company personnel and auditing personnel or that sets up informational barriers for this purpose. It may also be that U.S. generally accepted auditing standards will adapt to such controls and barriers.

It is by no means certain, however, that such a regime will be consistent with the disparate laws, customs and auditing procedures in the 59 foreign countries where foreign private issuers are located. Nor is it clear whether the relevant definition of "officer" and the final rules' formulation of "instruction" will be clear or workable under the laws and practices of these countries.

As the Release points out, fraudulent interference with an audit is already punishable by the Commission as aiding and abetting. In addition, the Commission can commence cease-and-desist proceedings against a person who "causes" an issuer's reporting violation. We urge the Commission to exclude foreign private issuers from its final rules on "improper influence" or, alternatively, to postpone the application of such rules to foreign private issuers for at least one year to permit foreign private issuers to observe how U.S. companies are responding to such rules.

B. Section 306(a) (blackout periods)

SEC Release No. 34-46778 proposes to adopt a new Regulation BTR that would clarify and prevent evasion of Section 306(a) of Sarbanes-Oxley by prohibiting the directors and executive officers of a reporting company from directly or indirectly buying or selling equity securities of the company during any "pension plan blackout period" if the equity securities were acquired in connection with the directors' or officers' service or employment as directors or officers. A "blackout period" occurs if the ability to buy or sell equity securities of the issuer in a plan is suspended by the issuer "or by a fiduciary of the plan" for more than three consecutive business days with respect to at least 50% of the participants or beneficiaries under all of the issuer's plans that permit participants or beneficiaries in the United States to acquire or hold the issuer's equity securities. As the Commission notes, Section 306(a) was designed to address "the apparent unfairness of an issuer's directors and executive officers being able to sell their equity securities when the issuer's employees cannot."

Under the proposed rules, the prohibition would apply in the case of foreign private issuers only where (in addition to the 50% threshold described above) the number of restricted participants or beneficiaries comprise more than 15% of the participants or beneficiaries under all of the issuers plans that permit participants or beneficiaries - wherever located - to acquire or hold the issuer's equity securities.

In the case of foreign private issuers, the prohibition would apply only to "inside" directors, i.e., non-management directors, and only to the principal executive, principal financial and principal accounting officer or officers. On the other hand, the prohibition would extend to immediate family members sharing the same household as covered directors and officers and to certain partnerships, corporations, trusts or other entities that give a covered director or officer a "pecuniary interest" in a transaction.

Trading in violation of the prohibition is subject to sanctions by the Commission and to private rights of action by the issuer or by any of the issuer's shareholders.

With certain exceptions, issuers must give directors and officers notice of blackout periods at least 15 days in advance. A foreign private issuer must include the content of such notices in its next 20-F, but the Commission "encourages" foreign private issuers to make the required disclosure under cover of a Form 6-K.

We appreciate the Commission's efforts to alleviate the effects of Section 306(a) for foreign private issuers, but we urge the Commission to go farther and to exempt foreign private issuers from the scope of Section 306(a) and proposed Regulation BTR. Our reasons for this request are as follows:

Since 1935, the Commission has exempted the directors and officers of foreign private issuers from the reporting and short-swing profit recapture provisions of Section 16 of the 1934 Act.

As the complexity of the Commission's rules in this area has grown, the exemption for foreign private issuers has assumed a major significance in the willingness of such issuers to list their securities in the United States. Far fewer foreign private issuers would have come to the U.S. markets over the past 20 years if the price had included a detailed regime of keeping track of transactions by "insiders" and their family members. The reasons for such reluctance are clear: the Commission's detailed rules put in place to prevent evasions of Section 16(a) and the direct right of action provided by Section 16(b) would represent massive intrusion into the corporate governance and internal affairs of foreign private issuers.

Regulation BTR is nearly as intrusive as the Commission's regulations under Section 16(a), and the private right of action provided by the regulation is nearly as intrusive as that provided by Section 16(b). Fairness requires that foreign private issuers who have relied upon Rule 3a12-3 for so many years be exempted from the "blackout period" obligations.

C. Section 401(a) (off balance sheet transactions)

SEC Release No. 33-8144 proposes to expand MD&A requirements to include a comprehensive explanation of an issuer's off-balance sheet arrangements as well as an overview of its aggregate contractual obligations and contingent liabilities and commitments.

We support the Commission's objective of promoting greater disclosure and transparency regarding an issuer's relationships with unconsolidated entities or other persons that have or may have a material effect on the issuer's financial condition, changes in financial condition, evenues or expenses, results of operations, liquidity, capital expenditures or capital resources. We also support the concept of an overview of aggregate contractual obligations and of contingent liabilities and commitments.

In view of the scope of the Commission's proposals, however, we would suggest that the MD&A enhancements not become effective for foreign private issuers except for fiscal years commencing on or after January 1, 2003.

E. Section 401(b) (non-GAAP measures)

SEC Release No. 33-8145 proposes to attach certain conditions to the inclusion in Commission filings of "non-GAAP financial measures" and to adopt a new Regulation G that would regulate public disclosures by "or on behalf of" reporting companies of material information that includes a non-GAAP financial measure.

In the case of a foreign private issuer, covered filings are limited to Form 20-F, and references to GAAP include the principles under which the issuer's home country financial statements are prepared. Non-GAAP financial measures exclude "operating and other financial measures and ratios or measures calculated using only ... [f]inancial measures calculated in accordance with GAAP; and ... [o]perating measures or other measures that are not non-GAAP financial measures."

The conditions for including non-GAAP financial measures in a foreign private issuer's 20-F filing would not apply if the non-GAAP financial measure is included in the issuer's home country annual report and is "expressly permitted" under home country accounting principles.

Public disclosures by a foreign private issuer would not be subject to the new Regulation G if the issuer's securities are listed outside the United States, the non-GAAP measure is not presented as comparable to a GAAP measure and the non-GAAP disclosure is made outside the United States or is included in a written communication that the issuer releases only outside the United States.

For purposes of the Regulation G exception for foreign private issuers, the non-GAAP information may be released outside the United States to foreign or U.S. or other journalists, and it may appear "[f]ollowing its release or disclosure" on one or more websites not available exclusively to or targeted to U.S. investors. It may also be submitted to the SEC as part of a Form 6-K.

We urge the Commission for the following reasons to exempt foreign private issuers entirely from the conditions applicable to 20-F filings and from the public disclosure conditions of proposed Regulation G:

  • We do not believe that U.S. investors are likely to attach undue significance to non-GAAP information released by foreign private issuers, given the greater reliance by such investors on analysts to interpret announcements by foreign issuers.

  • Non-GAAP financial measures are seldom "expressly permitted" under home country GAAP, making the exception for such disclosures of doubtful value.

  • It will often be ambiguous under foreign legal regimes whether a given person is acting "on behalf of" an issuer in connection with a public disclosure of a non-GAAP financial measure.

  • We do not believe the exemption in Regulation G for foreign private issuers is workable. It will often be unclear whether an announcement is made "outside the United States," and the Commission's experience with electronic communications related to securities offerings demonstrates the difficulty of determining whether a website announcement is "targeted" to U.S. investors. Also, the condition that a website posting follow a previous announcement "outside the United States" may conflict with foreign law requirements that such announcements be posted simultaneously to the website.

  • The public disclosures that could trigger Regulation G could include statements made at customer or supplier meetings in the United States and in similar venues. Sales or manufacturing

representatives of foreign private issuers may be unaware of the nuances of what constitutes a non-GAAP financial measure and, in particular, how such information is to be distinguished from "operating information." Such uncertainties may discourage direct participation by these individuals in meetings in the United States.

F. Section 404 (management assessment of internal controls)

SEC Release 33-8138 proposes amendments to Form 20-F and Form 40-F that would require a foreign private issuer to disclose the conclusions of its chief executive officer and principal financial officer about the effectiveness of the company's disclosure controls and procedures and the company's internal controls and procedures for financial reporting. The issuer would also be required to disclose any significant changes to its internal controls and procedures for financial reporting during the period covered by the annual report, including any corrective actions taken. The report must also include a management report that (i) describes management's responsibilities for the internal controls and procedures for financial reporting, (ii) contains management's conclusions about the effectiveness of such internal controls and procedures for financial reporting, and (iii) contains a statement that the issuer's independent accountant has attested to and reported on management's evaluation of the issuer's internal controls and procedures for financial reporting (as well as the accountants' attestation report).

We support the Commission's objectives in this area, but we would suggest that the amendments to Form 20-F and Form 40-F not become effective for foreign private issuers except for fiscal years commencing on or after January 1, 2003.

G. Section 406 (codes of ethics)

SEC Release No. 33-8138 proposes amendments to Form 20-F and 40-F that would require a foreign private issuer to disclose whether it has adopted a "code of ethics" applicable to its chief executive and principal financial officer (and, if not, why not). Amendments or waivers must be described in the foreign private issuer's annual report. The Release states that the Commission plans "to strongly encourage foreign private issuers to make these disclosures promptly" and requests comment on whether such disclosures should be required within two business days under cover of a Form 6-K.

The Commission requests comment on whether the amendments should apply to foreign private issuers.

We urge the Commission to exempt foreign private issuers from the requirements of the "code of ethics" amendments. Given the large number of countries represented by foreign private issuers that file reports with the SEC, the relevant codes of ethics are likely to differ considerably in the type of conduct they cover. This means that the frequency of amendments and waivers will be greater for companies in some countries than in others, possibly misleading investors.

H. Section 407 (financial experts)

SEC Release No. 33-8138 proposes amendments to Form 20-F and Form 40-F that would require an issuer to identify the persons that the board of directors has determined to be the "financial experts" serving on the issuer's audit committee (and, if there are no such persons, why not) and whether these persons are "independent" (and, if not, why not). The amendments also describe the attributes a "financial expert" must have in order to be eligible to be identified as such by the board of directors and identifies factors that should be considered in evaluating such a person's education and experience. The Release advises that a foreign private issuer's board should also consider such a person's "experience with public companies in the foreign private issuer's home country, generally accepted accounting principles used by the issuer, and the reconciliation of financial statements with U.S. generally accepted accounting principles." In the case of a "two-tier" board of a foreign private issuer, the amendments specify that the determination must be made by the "supervisory or non-management" board.

The Commission should exclude foreign private issuers from the proposed "financial expert" rule, for the following reasons:

  • Both the NYSE and the NASD recently concluded, after extensive study by blue ribbon groups, that the interests of investors could be fully protected by requiring foreign private issuers merely to disclose any differences between their corporate governance practices and those of U.S. issuers.

  • It will be difficult for a foreign private issuer to locate a management board member that not only meets the home country auditing and accounting qualifications relevant to a "financial expert" but also has expertise in U.S. GAAP reconciliations. Such expertise is not needed to ensure the accuracy of the issuer's financial disclosures, which are primarily dependent on the issuer's compliance with its home country financial reporting standards.

  • The requirement that the financial expert be familiar with U.S. GAAP reconciliations is in any event of diminishing importance, since members of the Commission and its staff have

identified 2005 as a possible target date for dropping the requirement of U.S. GAAP reconciliations.

  • Disclosing that a foreign private issuer does not have a "financial expert" is not likely to be an acceptable outcome for most foreign private issuers listed in the United States. We expect that large companies that do not name a financial expert will be subject to criticism from the financial press and investors' groups and that such criticism will not likely distinguish between U.S. issuers and foreign private issuers.

I. Section 302 Certifications

SEC Release No. 33-8138 also proposes revisions to the Commission's recently-adopted rules under Section 302 of Sarbanes-Oxley requiring a company's principal executive and financial officers to certify the company's periodic reports (limited in the case of foreign private issuers to annual reports on Form 20-F).

We urged in our August 19, 2002 petition for rulemaking that the Commission's rulemaking under Section 302 of Sarbanes-Oxley not cover submissions under cover of Form 6-K and that it not require individual officers of foreign private issuers to make the relevant certifications. We pointed out that the individual officer certification requirement was particularly inappropriate where, under home country law, the responsibility for the accuracy of disclosure documents is assigned to a collective body such as a board of managers rather than to individual members of that board.

We are pleased that the Commission's final Section 302 rulemaking excluded submissions under cover of Form 6-K, but we are disappointed that the Commission did not even acknowledge the validity of our objection that the Commission should not require individual officers of foreign private issuers to take on responsibilities that are not contemplated by home country law and practice. For the Commission to do so is an unwarranted intrusion into the affairs of foreign private issuers, particularly because it is difficult to imagine how U.S. investors would be prejudiced, e.g., by a requirement that the certifications be made by the entire management board if that is required by home country law or practice.

III. Special Situation of Foreign Private Issuers with Listed Debt Securities

Certain of our U.S. and foreign members are subject to Sarbanes-Oxley only because they have listed their debt securities in the United States. Many such companies are subsidiaries of public companies whose equity securities are listed on foreign securities exchanges.

The relationship between an issuer of debt securities and the holders of those securities is much more a matter of contract than the relationship between a public company and its shareholders. In most cases, a corporate trustee is appointed to represent the interests of debtholders. In addition, most holders of corporate debt are institutions and not individuals. To the extent that the issuer of listed debt is a subsidiary of a foreign publicly-held corporation, debtholders are also indirect beneficiaries of the parent company's corporate governance regime.

Companies that have listed their debt securities in the United States do not enjoy all of the benefits that come with the listing of stock. They do not enjoy the same high profile or exposure; they do not gain the ability to issue registered stock to their employees; and they do not have the ability to use their stock as an acquisition currency in the United States.

In addition, it is easier for such companies to escape the burdens of Sarbanes-Oxley. Unlike their counterparts that have listed equity securities in the United States, the issuer of listed debt securities may elect at any time to delist from the exchange and deregister its debt securities under the 1934 Act.

Even if the Commission does not fully exempt foreign private issuers from the obligations discussed in this letter, we believe it should consider exempting such issuers or their U.S. affiliates who have listed debt securities from certain of such obligations. We believe the obligations that should be the subject of such an exemption are those that are of a "corporate governance" nature, e.g., the blackout period prohibitions, and the requirements relating to non-GAAP financial measure requirements, codes of ethics and financial experts.

Such an exemption would be consistent with New York Stock Exchange listing standards (see 303.00 of the Listed Company Manual).

IV. Inability of Foreign Private Issuers to Drop Reporting Obligations

Having thus been encouraged to enter the Commission's reporting system, many foreign private issuers are now facing a significant increase in their reporting obligations and an unprecedented intrusion of U.S. federal rulemaking into their domestic corporate governance procedures.

Some foreign private issuers have, since the enactment of Sarbanes-Oxley, indefinitely postponed or even abandoned plans to enter the Commission's reporting system. Others are awaiting the adoption of Commission rules implementing the provisions of Sarbanes-Oxley discussed in this letter.

As a result of Sarbanes-Oxley and related Commission rulemaking, foreign private issuers may well seek to delist their securities and to exit the Commission's reporting system. Many will find, however, that they are unable to do so because the Rule 12g3-2(b) exemption is unavailable for companies that have been reporting companies at any time during the preceding 18 months.

It is unfair to change the rules in midstream for foreign private issuers that have been attracted to the United States with the promise of tailored regulation and then refuse to permit those companies to leave the Commission's reporting system when they conclude that the benefits of that status no longer exceed the related costs and burdens. The Commission should amend Rule 12g3-2(b) to eliminate the 18-month "lookback" or provide other exemptive relief to permit foreign private issuers to exit the Commission's reporting system.

Please do not hesitate to contact me regarding these comments or any aspect of Sarbanes-Oxley and its impact on foreign issuers.


Todd M. Malan
Executive Director

cc: Hon. Cynthia A. Glassman, Commissioner
Hon. Harvey J. Goldschmid, Commissioner
Hon. Paul S. Atkins, Commissioner
Hon. Roel C. Campos, Commissioner
Hon. Isaac C. Hunt, Jr., Commissioner
Mr. Alan Beller, Director, Division of Corporation Finance
Mr. Paul Dudek, Chief, Office of International Corporate Finance

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