Goldman Sachs Trust
Ashok N. Bakhru
14 Dogwood Lane
Glen Mills, Pennsylvania 19342
November 29, 2002
Jonathan G. Katz, Secretary
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
RE: Proposed Financial Expert Regulations under Section 407 of the Sarbanes-Oxley Act of 2002: SEC File No. S7-40-02
Dear Mr. Katz:
I am an independent Trustee, and serve as Chairman of the Board of Trustees, of Goldman Sachs Trust, a family of registered mutual funds. I am writing in response to your request for comments on the proposed regulations relating to financial experts under Section 407 of the Sarbanes-Oxley Act.
As a Trustee of mutual funds that invest in the capital markets, I fully support your goal to restore investor confidence in the financial markets and to ensure the integrity of the financial statements of public companies. I have, however, have two concerns about your proposed regulations under Section 407, which I think are important.
First, I think you have made it more difficult than Section 407 itself for a mutual fund director to qualify as a financial expert. Section 407 gives you the authority to define the term "financial expert" for mutual funds based on your consideration of certain stated criteria. In your proposed regulations you have chosen to exercise your authority by requiring each board of directors to undertake this definitional process. By doing so, you have declined to define "financial expert" yourself. I question whether this is the best regulatory approach to implement Section 407 with respect to mutual funds, which adhere to fairly homogenous accounting standards.
My principal point, however, is that, having taken this approach, you have added further hurdles to the qualification process. More specifically, your proposed regulations mandate, in some detail, a process by which a mutual fund board of directors must consider ten specified factors (and may, in its discretion, consider others) in order to determine whether a director has the five required attributes, plus the education and experience, that qualify that director as a financial expert. The very length of the regulations implies a board procedure that is very involved and that could divert the time and energies of mutual fund directors from what I believe to be more important responsibilities, such as the review of investment performance, the monitoring of conflicts-of-interest and the review of the financial statements themselves.
In addition, although you have stated that a financial expert does not need to meet each of the ten stated factors that a mutual fund board of directors must consider, these factors nevertheless appear to establish a standard that will be difficult, if not impossible, for anyone to meet. For example, how many people have been certified as having accounting or financial experience or have served as a principal financial officer of a public company? Of those people, how many people have earned an advanced degree in finance or accounting? Of those people, how many have had specific duties that related to financial statement preparation or auditing? Of those people, how many are familiar and experienced with all applicable laws and regulations regarding the preparation of financial statements? And of those people, how many will think that, after retirement or promotion to other duties, they are still familiar and experienced with all such applicable laws and regulations, even if they previously were? In short, to me your proposed regulations will discourage, rather than encourage, directors to accept the designation of financial expert because they will feel that they do not meet the express or implied standards in your proposed regulations.
My second concern relates to the potential liability of directors who are identified as financial experts. Although you believe that directors who are financial experts should not have any more liability than directors who are not financial experts, you seem to recognize that you cannot guarantee that this is the case. Moreover, by requiring that mutual fund financial experts be named in public disclosure documents you have heightened, rather than lessened, this concern. I believe that it is likely that, because of their legitimate concern of greater potential liability, mutual fund directors who may otherwise qualify as financial experts, and who, in fact, are diligently sharing their experience and talents in connection with their oversight of mutual fund accounting and financial statement matters, will choose to decline the designation of "financial expert." To me, this result will impede rather than advance your objectives.
In conclusion, I think the objectives of Section 407 and your proposed regulations are laudable and appropriate for mutual funds. I am concerned, however, that as drafted your proposed regulations make it very difficult for a mutual fund director to qualify as a financial expert and that, once identified as a financial expert, a director may have more potential liability exposure than other directors.
Thank you for this opportunity to comment on your proposal.
Very Truly Yours,
Ashok N. Bakhru