GOLDEN WEST FINANCIAL CORPORATION
1901 Harrison Street, 17th Floor
Oakland, CA 94612
VIA EMAIL (firstname.lastname@example.org)
November 29, 2002
Mr. Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street NW
Washington, DC 20549-0609
Re: Proposed Rule Implementing Section 407 of the Sarbanes-Oxley Act
Ladies and Gentlemen:
Golden West Financial Corporation is a $67 billion, NYSE-listed financial services company whose principal subsidiaries are World Savings Bank and the Atlas group of funds. We appreciate the opportunity to comment on the SEC's proposed regulations concerning financial experts pursuant to Section 407 of the Sarbanes-Oxley Act of 2002.
Section 407 requires disclosure whether one or more "financial experts" are on a board's audit committee, and it directs the Commission to help define what constitutes a financial expert for these purposes. We understand some commentators believe this provision literally requires that a person, to meet the standard, must be a CPA, must have prepared audited financial statements (not simply overseen the people who do), and must have done so in the same industry as the relevant audit committee. Such a narrow reading would essentially be a full employment act for retired accountants and CFOs, never mind whether they have anything to contribute to a board.
Indeed, if such a narrow interpretation is given to this provision, one can only refer back to Charles Dickens' statement, "the law is a ass," and in this case, with an asinine result. Among other things, such a narrow reading would lead to the following anomalies:
- The current chairman of the Federal Reserve would not be qualified.
- Half of the persons comprising the newly created Accounting Oversight Board would not be qualified.
- A tenured professor who has taught accounting and economics for several decades, has sat on the boards of numerous publicly traded companies, has been on audit committees of such public company boards for ten or more years, and has reviewed each quarter (if not each month) the financial disclosures for such companies, would not be qualified.
- A CFO of a NYSE-listed company who is a CPA and has been preparing financial statements for two or more decades (whether at a company or at a major accounting firm) would not be qualified, at least with respect to boards that are not in the same industry as the company where he or she performed the accounting or financial function (which disqualification is highly likely, since it would be inconceivable for a senior officer of a company to sit on the board of a competitor!).
We hope the Commission will conclude it has sufficient authority to implement Section 407 in a way that achieves all the protections intended by the legislation without creating these kinds of foolish results.
1. A "financial expert" needs to be able to understand and question the financial statements; he or she is not meant to be the company's accountant.
The classic view of the role of a director is to hire and fire senior management and to interact with senior management on a sufficient basis to ascertain whether they are fulfilling their obligations to the company and the company's shareholders. Most companies now expect directors also periodically to review a company's strategic direction and (under Sarbanes-Oxley, if not before) to play a high-level role regarding the company's financial reporting. A director is not on the board, however, to micro-manage the company. Nor is a director expected somehow to make up for any deficiencies in senior management. Rather, if senior management is not fulfilling its responsibilities, the role of directors is to fire management and retain new management.
With respect to financial reporting, including the retention of the independent outside auditors, the role of directors is parallel to the role they play vis-a-vis senior management: that is, to hire and fire the auditors, and to interact with them on a sufficient basis to ascertain whether they are fulfilling their obligations to the company and the company's shareholders. It should not be the role of a director to be the company's super-auditor or super-CFO; the performance of financial and audit functions is the job of the internal and external financial and audit personnel.
In performing their financial oversight function, the directors, especially those on the audit committee, need to be independent, and they need to be financially literate so that they can ask the right questions and gauge the quality of the answers. But to perform this role properly, the same directors also need to understand sound business practices, the company's industry, risk factors that are unique to the industry, the relevant statutory and regulatory issues affecting the company and the industry, and a host of similar factors. Indeed, it is essential that a director understand these factors to be effective when using his or her "financial expertise" to watch for areas where there is potential risk or abuse.
We would urge the Commission to be careful not to define "financial expert" so narrowly that few if any directors who meet the "financial expert" test would also have the other attributes needed for the performance of their financial oversight role.
2. The Solution: Allow Boards an Appropriate Level of Discretion, Combined with Disclosure.
The explanatory text that accompanies the SEC's proposal refers to four (or sometimes five) attributes, which are based on the statute, and then the text says "to qualify as a financial expert, a person would, in all cases, have to possess all of the attributes listed in the proposed definition." (Emphasis added.)
The text of the proposal then says: "In determining whether a potential financial expert has all of the requisite attributes, the board of directors must evaluate the totality of an individual's education and experience. The company should consider a variety of factors in making that evaluation," and the proposal then lists some 10 factors (or 12, depending on how one counts clauses) that the board should take into account.
Frankly, if the Commission believes there is no leeway for interpretation and that the items referred to in Section 407 all must be satisfied, there is little if any reason to add this discussion of factors, or of discretionary decision-making by the board. A director either "has" the attributes or he or she doesn't, and if a literal interpretation is to be required, then there is no reason to go off exploring these factors.
And if the Commission adopts such a narrow approach, then most companies would be best advised simply to say they don't have directors who are "financial experts," at least as defined by the SEC, and to describe instead the factors the board felt were important qualities for a director of the company (including those we mentioned above); to enumerate the individual backgrounds of the company's directors, including those factors that the board feels contribute to "financial literacy," if not "financial expertise;" and then to leave it to the investing public whether this is a company in which they want to invest.
It would be a shame if this is the result of the SEC's rule-making, however, since the laudable purpose of the Sarbanes-Oxley Act is to assure that publicly traded companies make honest and accurate reports to the SEC and the investing public, and clouding the discussion with hair-splitting distinctions between "financial literates" and "financial experts" would help no one (except maybe outside law firms, which could hold more seminars on the subject).
Proposed Instruction 3 would permit the right result. It would allow a board to state what factors it deemed relevant in establishing financial expertise, and to discuss which directors the board believes meet the test.
Unfortunately, that flexibility is wholly removed by proposed Instruction 4: "Although the board of directors should consider the factors listed in Instruction 3, those factors are not a replacement for, and a financial expert must satisfy, all of the attributes listed in Instruction 1 to this Item." We would propose that Instruction 4 be deleted, and that Instruction 1 (and related instructions) be revised to give the board the ability to cite what education and experience, in the board's judgment, have satisfied the requirements for financial expertise.
As for the question whether the Commission has sufficient leeway under Section 407 to adopt this approach, we make the following observations:
(1) Subsection (b) of Section 407 says "the Commission shall consider" whether a person has been a public accountant, auditor or financial officer, or held a similar position, and the statute then goes on to list the four "attributes." That statutory language can be read to allow the Commission to consider other factors, or at very least to allow a board to consider other factors.
(2) By deleting Instruction 4 (and modifying other parts of the proposal), the Commission would give appropriate flexibility to the board to determine what, in their best judgment, is appropriate in terms of financial expertise; to disclose that determination and the underlying reasoning; and to allow the investing public to evaluate this information when making investment decisions, which is the whole point of this exercise.
(3) The Commission could also state in its final rule-making that it would welcome any clarification that Congress wished to provide on the issue of financial expertise, and thereby leave it to subsequent legislative action if this more flexible approach is not acceptable.
We appreciate the opportunity to comment on this proposal. If members of the Commission or its staff have any questions, please do not hesitate to contact the undersigned.
Herbert M. Sandler
Chairman and Chief Executive Officer
Executive Vice President and General Counsel