Commercial Federal Corporation
Mr. Jonathan G. Katz, Secretary
Dear Mr. Katz,
Commercial Federal Corporation (CFC) welcomes the opportunity to comment on the proposed rules to implement Sections 404, 406, and 407 of the Sarbanes-Oxley Act. CFC's stock (ticker: CFB) has been actively traded on the NYSE since August 1995.
Commercial Federal Corporation's primary subsidiary is Commercial Federal Bank (CFB). CFB is a $13 billion federal savings bank, headquartered in Omaha, Nebraska, and regulated by the Office of Thrift Supervision. CFB operates 188 branches across seven states, including Arizona, Colorado, Iowa, Kansas, Missouri, Nebraska, and Oklahoma.
The overriding goal of the Sarbanes-Oxley Act was to strengthen corporate governance. And, CFC strongly supports the SEC's efforts to enhance investor confidence in corporate America through the rule-making process. However, we also find a few of the more recent proposals to be beyond the scope of legislation's actual intent. In this vein, we are taking this opportunity to share our perspective on certain of the "Request for Comment" questions posed in the proposed rules release no. 33-8138. (As appropriate, we have combined related questions and answered accordingly.)
Would investors benefit from disclosure of the number of the financial experts serving on the company's audit committee? Or would it suffice to require disclosure only of whether at least one financial expert serves on the audit committee?
In our view, it would suffice to disclose that at least one member of the committee qualifies as a financial expert. Disclosure of the number seems to imply that the more financial experts that serve on an audit committee results in a better committee. Since the committee deals with issues other than just financial matters, the greater diversity in skills and backgrounds generally leads to a more well rounded and engaged committee. Disclosing that "at least one financial expert serves on the committee" (as determined by the full Board), should satisfy the goal of providing assurance to the investing public that the committee has sufficient knowledge resident in the committee to execute and discharge their financial oversight responsibilities.
Do investors need to know the names of the financial experts on the audit committee? Would disclosure of the names discourage people from serving as financial experts on an audit committee?
In our view, disclosure of the names has a number of implications we consider being more negative than positive in relation to what the benefit of having one or more financial experts on the committee accomplishes. Disclosure of the names will not necessarily provide the investing public with any useful information, and opens the door for holding this board member(s) to significantly higher standards of responsibility, obligation and, most concernedly, liability. This could lead to a potential environment that strongly discourages qualified candidates from wishing to serve as an identified financial expert on an audit committee.
Should the Commission specifically address the issue of the degree of individual responsibility, obligation or liability under state or federal law of a person designated as a financial expert as a result of the designation? If the Commission should address this issue, how should it do so?
We strongly believe that it is not appropriate to hold the deemed "financial expert(s)" to a higher standard than any other director. We note that the SEC, in its release, stated that " . . . the mere designation of the financial expert should not impose a higher degree of individual responsibility or obligation on a member of the audit committee." The SEC also stated that " . . . we do not intend for such a person to be considered an expert for purposes of Section 11 solely as a result of his or her designation as a financial expert on the audit committee . . . A conclusion that a financial expert is an `expert' for purposes of Section 11 might suggest a higher level of due diligence than is consistent with the audit committee's oversight responsibilities." We believe that it could help deter future litigation against, and minimize unintended liability for, persons designated as financial experts if the SEC were to specifically incorporate these views into its regulations rather than having these views merely suggested in the preamble to proposed rules.
Should our rules require the company to disclose the persons who are responsible for making the financial expert determination on behalf of the company? Is the board of directors the appropriate body to make such determination?
We believe that, to ensure the integrity of the process, the only logical persons would be the board of directors, in their entirety, to independently make the final determination on behalf of the company. Depending on the scope and direction of the implementing rules under the NYSE corporate governance proposals, a committee such as the Nominating/Corporate Governance Committee could also potentially make such a determination, or, at a minimum, offer a recommendation to the full board.
Code of Ethics
Should we require the company to describe its procedures to ensure compliance with the code of ethics? Should we require the company to describe its procedures for granting a waiver from a provision of its code of ethics? Should we require the company to disclose the date of adoption of its code of ethics and the date of the most recent update or the company's frequency of review of the code? Should the company have to file the code of ethics as an exhibit to its annual report as proposed? If not, should we also require the company to describe the principal topics that the code addresses? Should we require disclosure regarding the existence of a code of ethics in our other reports and registration statements, including our Securities Act and Exchange Act registration statements? Should we require a company to also provide the proposed code of ethics disclosure in its quarterly reports? Should such disclosure be made in a company's proxy and information statements? Should it be disclosed in Securities Act registration statements?
It does not seem that extensive disclosures associated with the code of ethics will do much to foster higher levels of investor confidence. It should suffice that any such disclosures cover the following: (1) that a code of ethics exists, (2) whether the board approved it, (3) what the process is for periodic review and ratification, (4) what the process is for making changes, (5) whether any substantive and/or material changes were made (and what they were), (6) who the code covers, (7) how it gets revised, (8) the process for requesting waivers, (9) whether any waivers occurred, and, if applicable, (10) what the waivers were. We believe that disclosure of this information might best be included in an annual disclosure such as proxy material or 10-K filings.
Should we propose a definition of internal controls and procedures for financial reporting? If so, is the proposed definition appropriate? Should we define the term using AICPA's Codification of Statements on Auditing Standards Section 319 definition? If not, are there any other definitions we should use?
The AICPA's Statement on Auditing Standards Section 319 is largely consistent with the Committee of Sponsoring Organization's (COSO) definition of internal control, as promulgated by the Treadway Commission and published in the early 1990's. This has become the most widely used and referred to definition of internal control in the United States. We would support this definition.
Should we propose changes to Exchange Act Rules 13a-14, 13a-15, 15d-14 and 15d-15 to require periodic evaluations of both the company's disclosure controls and procedures and its internal controls and procedures for financial reporting?
The banking industry has operated under the FDIC Improvement Act of 1991 (FDICIA) for the better part of the last ten years, and has a well-established process of evaluating its internal controls and procedures over financial reporting on an annual basis. We would support this as a more robust and appropriate process, of which, it could be argued; disclosure controls would act as a subset of the already defined "internal controls over financial reporting." We do not, however, feel that it is cost beneficial to have such a thorough and all encompassing process that evaluates the controls and procedures over financial reporting occur more frequently than annually. (The proposed rules are suggesting this review and certification occur quarterly.) Anything that occurs more frequently may result in more of a superficial and/or cursory review activity, which could become overly routine and mechanic. We encourage the SEC to continue to study the banking industry's processes, enacted under FDICIA, as a possible model to be leveraged.
If you have any questions or would like to discuss the comments provided above, I can be reached by telephone at (402) 554-9235 or by e-mail at HalGaryn@CommercialFed.com.