The Wisconsin Bankers Association
November 27, 2002
Mr. Jonathan G. Katz
RE: File No. S7-40-02; Disclosure Required by Sections 404, 406 and 407 of the Sarbanes-Oxley Act of 2002
Dear Mr. Katz:
The Wisconsin Bankers Association (WBA) is a statewide trade association comprised of nearly 320 state and federally chartered banks, savings banks and savings and loan associations located throughout Wisconsin. WBA welcomes the opportunity to comment on the proposed rule issued by the U.S. Securities and Exchange Commission (SEC) implementing the disclosure requirements in Sections 404, 406 and 407 of the Sarbanes-Oxley Act of 2002.
Many WBA members are publicly traded companies and are, therefore, directly affected by the SEC's proposed rule. All of these financial institutions are generally supportive of the concepts behind the Sarbanes-Oxley Act of 2002 and the proposed SEC rule affecting corporate disclosure and financial reporting reform. However, some of the provisions in the SEC's proposed rule are enormously difficult, burdensome and costly for such Wisconsin financial institutions to comply with, particularly those publicly traded financial institutions that are smaller in size. As a result, WBA strongly encourages the SEC to reconsider certain provisions in its proposed rule to make them more flexible for all financial institutions.
The definition of "financial expert" is too narrow, making it virtually impossible for community banks to obtain someone of that caliber to serve on an audit committee.
New Item 309 to Regulations S-K and S-B essentially requires that at least one person serving on a company's audit committee be a "financial expert." While this is not expressly stated, the practical implications of the proposed rule are such that not having a person qualified as a "financial expert" serving on a bank's audit committee would detrimentally affect the bank, including having a negative effect on the bank's stock price.
"Financial expert" is defined in the proposed rules to mean a person who has, through education and experience as a public accountant or auditor or a principal financial officer, controller, or principal accounting officer of a company that, at the time the person held such position, was required to file reports pursuant to section 13(a) or 15(d) of the Exchange Act, or experience in one or more positions that involve the performance of similar functions and has the following attributes:
The rules also go on to provide factors that the company should consider in making such an evaluation as to whether a person qualifies as a financial expert.
WBA believes several changes need to be made to the definition of "financial expert" to broaden the pool of potential candidates. An individual should not need experience as a public accountant, auditor, principal financial or accounting officer or controller of a public company, or actually have prepared or audited financial statements, to be qualified as a financial expert under the rule. Persons who review or analyze financial statements generally need the same level of knowledge as someone who actually prepares the financial statements or conducts the audit. In addition, eligible experience should not be limited to serving a publicly reporting company. Moreover, such an individual qualifying as a "financial expert" should not be required to have experience applying GAAP in comparable situations used in the registrant's financial statements. All of these requirements narrow the potential field of candidates down significantly for any publicly traded company.
The SEC should keep in mind the role of an audit committee when revising the "financial expert" definition. The audit committee's role is not to duplicate the work of others involved in preparing and auditing financial statements and preparing periodic reports. It is to oversee the process and help ensure that any disagreements over reporting requirements are resolved. Given the extensive new requirements elsewhere in Sarbanes-Oxley involving the certification of financial statements and related requirements, it is difficult to understand why a "financial expert" would need the type of experience required by the proposed rule. In the event that the audit committee needs additional expertise, it will have the authority to retain other outside advisers.
Many Wisconsin financial institutions that are publicly traded companies are located in smaller cities where the universe of people who qualify as a "financial expert" under the current proposed definition is small. In addition, of those people who may qualify under the proposed rule, the cost of having them serve on the bank's audit committee would be enormous.
Moreover, the SEC should broaden the definition for financial institutions, which are already extensively regulated and are subject to regular examination by banking regulators for safety and soundness, to parallel existing banking law. It is simply not necessary for a financial institution to have on its audit committee someone with such an extensive, but narrowly-focused level of expertise as is currently described in the proposed rule for a "financial expert." Audit committees of financial institutions with more than $3 billion in assets are required under banking law to have members with banking or related financial management expertise. This definition is broader than the definition of financial expert in the SEC's proposed rule and, significantly, more appropriate for financial institutions.
Many community banks have relatively simple operations and it would seem more important for a financial expert to understand financial statements and banking operations, and the laws and rules governing those operations, than for the expert to have experience auditing or preparing financial statements. The SEC should tailor the definition to the specific industry in which a company operates to broaden the pool of candidates and serve the public interest by ensuring that the financial expert has relevant education or experience.
Finally, the SEC should provide at least one year after the effective date of this rule for companies to name a financial expert to an audit committee. This is particularly important since the SEC is seeking comments on the definition of "financial expert" and, therefore, only after the rules are finalized will companies know the qualifications of a "financial expert." No matter how the SEC changes the definition, a transition period will be needed.
The SEC should lengthen the timeframe within which a public company must report changes and waivers on a Form 8-K.
WBA and its members support the requirement that public companies disclose whether they have a code of ethics covering certain financial officers, and supports expanding this requirement to include directors, executive officers and all employees. However, it is important that the required disclosure of changes to, and waivers from, the code not be overly burdensome or so vague that the requirement is more likely to result in unintentional disclosure violations. Therefore, the disclosure requirement should cover only changes of, and waivers from, material terms of the code that affect directors and executive officers to avoid overwhelming investors with insignificant information and to encourage adoption of comprehensive codes.
Moreover, WBA opposes the requirement to report changes and waivers on a Form 8-K within two business days. This very short deadline is completely unreasonable in light of the often-limited staff resources of small, publicly traded financial institutions. WBA recommends the SEC change this to at least a ten-business day reporting requirement.
The SEC should conform its internal control provisions to parallel banking law for publicly traded financial institutions.
WBA believes that the SEC's proposed rules regarding internal control report, assessment and attestation for public depository institutions and their holding companies should parallel the similar banking law requirements imposed by the Federal Deposit Insurance Corporation Improvement Act (FDICIA), which has been in existence for over ten years. Accordingly, the SEC should recognize the substantial protections to depositors and investors provided by the laws that govern financial institutions and mirror FDICIA by exempting financial institutions with less than $500 million in assets or their holding companies from the internal control report, assessment and attestation requirements. For larger financial institutions and their holding companies, compliance with FDICIA requirements should constitute compliance with the SEC rule. Financial institutions should not be required to comply with inconsistent or conflicting requirements.
WBA understands the importance of the need to strengthen public company corporate governance and financial disclosure in an effort to restore investor confidence in public markets. However, WBA believes that certain provisions in the proposed rule must to be changed to recognize the significant regulation financial institutions are already subject to and to broaden the pool of candidates who qualify as a "financial expert."
WBA appreciates this opportunity to comment on the SEC's proposed rule. If you have any questions regarding this letter, please do not hesitate to contact me. Thank you.