Independent Bank Corp.
January 13, 2003
Jonathan G. Katz
Re: File No. S7-40-02
Dear Mr. Katz:
I appreciate the opportunity to comment on the portion of the above-referenced release relating to proposed disclosure about financial experts serving on a company's audit committee.
I am the Chief Executive Officer of Independent Bank Corp., a publicly held bank holding company whose common stock trades on The NASDAQ Stock Market under the symbol INDB. Independent Bank Corp. is the sole stockholder of Rockland Trust Company, a $2.3 billion community-oriented commercial bank doing business in southeastern Massachusetts. I have been employed by Independent Bank Corp. and Rockland Trust Company since December 1991. I have 31 years of experience in the banking industry and 40 years of experience with publicly traded companies. I am retiring in June 2003 but am taking the opportunity to comment because of the importance that I attach to this issue.
I recognize the importance of corporate governance reform and support the Commission's efforts to increase investor confidence by drafting rules that seek to improve the quality of a company's financial disclosures. However, I believe that the proposed definition of "financial expert" is unduly restrictive, particularly as it applies to the boards of publicly held community-based financial institutions. I am concerned that such institutions, including ours, will not be able to find a candidate that meets this very narrow definition. Thus, I respectfully urge the Commission to adopt a more flexible definition of "financial expert" that considers the different types of companies to which it will apply and the regulatory framework in which they operate.
The definition of "financial expert" proposed by the Commission is so narrow that I do not think any individual short of an auditor or chief financial officer of a public reporting company can qualify. With all due respect, although the Commission discusses in the release the impracticality of adopting a "bright line" test, it has done just that with the "financial expert" definition it has proposed. By setting forth a very limited list of required expertise and experience and specific attributes, all of which would have to be present in order for a person to qualify as a financial expert, the definition does, in the Commission's own words, "limit the pool of potential financial expert candidates." As it would be extremely difficult to find such a person in a small community, thousands of smaller community banks around the country may be unable, as a practical matter, to even find a director who satisfies the proposed definition. In my view, the only individuals who satisfy the definition are public accountants and chief financial officers or comptrollers, a group that is too small to meet the needs of numerous public companies.
Furthermore, in addition to the small applicant pool, many of these qualifying individuals may not be willing to accept the increased risk of liability inherent in the position. Although the Commission assures us that the "mere designation [of an individual] as a financial expert should not impose a higher degree of individual responsibility or obligation" on the individual, the reality is that the public perception is that there is indeed a higher degree of risk.
I wholeheartedly agree and fully support the Commission's efforts to draft rules that will ensure that audit committees have the financial sophistication and expertise to carry out their functions. However, the requirement that a financial expert must possess experience in the preparation or auditing of financial statements of generally comparable issuers loses sight of the practical purpose and function of an audit committee. The Commission recognizes that the role of a financial expert "is to assist the audit committee in overseeing the audit process, not to audit the company," and that the purpose of the audit committee is to "oversee the work and independence of auditors" and "the corporate accounting and financial controls and reporting of companies." Many qualified and capable individuals have business experience that qualifies them to discharge those responsibilities.
Neither the audit committee nor the financial expert was intended to serve as a second auditor or preparer of a company's financial statements. As stated in the Report and Recommendations of the Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees (1999):
Section 407 of the Sarbanes-Oxley Act states that the Commission should "consider" the listed criteria in defining the term "financial expert." The four attributes listed in the Sarbanes-Oxley Act are very relevant, but they should not be exclusive. They should be used as guidelines (not mandatory qualifications) which boards should consider in their best judgment, along with other relevant factors, in determining whether a particular individual is a "financial expert." To do otherwise could lead to decisions which frustrate the intent of the Sarbanes-Oxley Act. Publicly traded community-based financial institutions (such as Independent Bank Corp.) will be forced to look outside their local communities in an effort to find someone who meets the very narrow definition of "financial expert." Therefore, costs will be incurred that are not beneficial to investors. The same institutions may be forced to accept someone that satisfies the strict and very literal definition of "financial expert," but fails to meet the institution's internal standards for board membership. Let's not forget that these "financial experts" should be first and foremost directors of the company. Over the years, financial institutions (such as the institution I serve) have prided themselves in attracting as directors those individuals who are leaders in their community. Thus, I believe that if the Commission proposed the "financial expert" definition, many financial institutions will have no choice but to annually disclose that they do not have a "financial expert."
Furthermore, because we are a NASDAQ listed company, we are already required under NASD Rule 4350(d)(2) to always have at least one member of the audit committee "that has past employment experience in finance or accounting, requisite professional certification in accounting, or any other comparable experience or background which results in the individual's financial sophistication, including being or having been a chief executive officer, chief financial officer or other senior officer with financial oversight responsibilities." Publicly owned financial institutions operate in such a highly regulated environment that to impose a definition with mandatory attributes (in lieu of guidelines for boards to take into consideration), is not only unnecessary, but may undermine the intended purpose of improving the quality of audit committees in order to protect investors.
I believe that an individual with business experience, financial sophistication, and/or banking expertise should be able to qualify as a "financial expert" suitable for an audit committee of the board of a public owned financial institution. Furthermore, the Commission's rule should encourage disclosure of the steps institutions are taking to increase the financial expertise of the audit committee, including recruitment of more qualified audit committee members.
I appreciate the opportunity to comment and thank you for your consideration.