International Business Research (U.S.A.), Inc.
November 15th, 2002
Jonathan G. Katz
Re: File No. S7-40-02
Dear Mr. Katz:
International Business Research (U.S.A.), Inc. ("IBR") welcomes the opportunity to comment on Release Nos. 33-8138; 34-46701; IC-25775; File No. S7-40-02 dated October 23, 2002, in which the Securities and Exchange Commission ("the Commission") requests comment on a proposal to require companies to include a number of new disclosures in their Exchange Act filings pursuant to the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley", "the Act").i
International Business Research (U.S.A.), Inc.
IBR is an international corporate investigations firm. Our clients include many underwriters, Fortune 500 companies, financial institutions, private foundations, and law firms. We conduct comprehensive research on companies and their principals from a specialized "due diligence" perspective. Whenever securities are being offered publicly or privately, in-depth due diligence must be undertaken to confirm the accuracy and reliability of the information contained in the registration statements and other offering documents. Similarly, pre-employment background investigations must be undertaken in connection with the hiring of senior management at a company in order to ensure that a particular individual is qualified and appropriate for the position and that he is candid and honest about his personal and professional history.
Our research includes a thorough review of litigation filings, regulatory records, broadcast and print media, the Internet, and company documents. Further checks include verification of credentials and, if appropriate, discreet interviews with knowledgeable third parties in order to confirm our findings.
The breadth of IBR's inquiry is designed to protect investors from fraud and assure they receive complete and truthful information about a company and its principals; and to protect companies from making inappropriate hiring decisions. IBR has been performing these inquiries for nearly fourteen years. We undertake in excess of 500 such projects annually. Based upon our experience and expertise, we believe that we are qualified to comment upon the Commission's proposals as they relate to rules implementing Section 406 of Sarbanes-Oxley.
Summary of IBR's Comments: Apply the Code of Ethics to all Executives and the Board of Directors of a Company; Implement Procedures to Independently Verify Compliance with the Code of Ethics
The Commission proposes to require companies to include a number of new disclosures in their Exchange Act filings, and has requested comment on the proposed rules. In particular, the Commission proposes rules to implement Section 406 of Sarbanes-Oxley to require companies to disclose whether the company has adopted a code of ethics for it's principal executive officer, financial officer, accounting officer or controller or persons performing similar functions, or if it has not, why it has not; to disclose on a current basis amendments to, and waivers from, the code of ethics relating to any of those officers and to broaden the definition of the term "code of ethics".ii The Commission has requested comment on a number of matters relating to these proposals.
In our view, the code of ethics should apply to all executives of a company and to the board of directors. This is consistent with the Commission's goal to increase corporate accountability and oversight.
In addition, companies should be required to describe their procedures to ensure compliance with the code of ethics. These procedures should provide for independent verification of all information requested by the code of ethics. An inquiry by a licensed, independent qualified professional with particular skill in conducting investigative business research should be undertaken in order to ensure independent verification of disclosures made pursuant to a company code of ethics. We would therefore urge the Commission to require this process as a matter of course.
Apply the Code of Ethics to all Executives and the Board of Directors of a Company
As noted by the Commission, Sarbanes-Oxley was passed in response to diminished investor confidence in the U.S. financial markets as a result of recent allegations of misdeeds by corporate executives, independent auditors and other market participants. One of the goals of the Act is to improve investor confidence in the financial markets.iii
This may be accomplished in part by requiring companies to develop, implement and adhere to meaningful codes of ethics. The Act currently defines the term "code of ethics" to mean, in pertinent part, such standards as are reasonably necessary to promote:
Honest and ethical conduct, including the handling of actual or apparent conflicts of interest between personal and professional relationships.iv
The Commission proposes to define the term "code of ethics" to mean "a codification of standards that is reasonably designed to deter wrongdoing" and to add three items relating to avoidance of conflicts of interest, internal reporting of violations of the code and accountability for adherence to the code to supplement the above standard.
As noted by the Commission: "A comprehensive code of ethics should set forth guidelines requiring avoidance of conflicts of interests and material transactions or relationships involving potential conflicts of interests without proper approval". v
Comment is requested as to whether the code of ethics as proposed should cover a broader group of officers than is currently contemplated, to include the general counsel and all executive officers, as well as the board of directors.vi We agree with the Commission, that the code of ethics should apply to "as broad a spectrum of personnel and affiliates as practicable".vii If the purpose of the code of ethics is to deter wrongdoing and increase corporate accountability, then it should apply to as broad a base of professionals in the company as possible to ensure its effectiveness. The higher the standard to which corporate executives are held, the less room there will be for allegations of misconduct.
Implement Procedures to Independently Verify Compliance with the Code of Ethics
The Commission requests comment as to whether a company should be required to describe its procedures to ensure compliance with the code of ethics. We believe this is a critical component of the proposed rules. Just as disclosure of a company's code of ethics would allow investors to "better understand the ethical principles that guide the executives of companies in which they invest"viii a description of the company's compliance procedures would permit investors to understand the seriousness with which the company takes these principles.
In our view, the procedures should include a requirement that a qualified independent professional conduct the inquiry to determine whether a particular individual is in compliance with the code. Notwithstanding sanctions that may be in place, a code of ethics that relies entirely upon self-disclosure is insufficient to deter wrongdoing and prevent misconduct.
An independent licensed professional with experience conducting background investigations will have the skills necessary to perform an extensive, thorough and timely inquiry to ensure an individual's compliance with the policies and restrictions contained in a company's code of ethics. Investigative business firms have a particular expertise in gathering and verifying information, discovering conflicts of interest and detecting whether false and misleading disclosures have been made.
We believe the comfort level of investors, both individual and institutional, would be greatly enhanced knowing that information supplied pursuant to a code of ethics has been independently verified.
As noted above, one of the main objectives of the Act is "to improve investor confidence in the financial markets."ixThe proposed rules implementing section 406 seek to achieve this goal by "providing greater transparency regarding ... compliance of senior...officers with ethics codes of conduct."x Honest and ethical conduct, the avoidance of conflicts of interest and accountability for adherence to the code should be expected and required of every executive in a company, and procedures should be implemented to ensure compliance with the code. Use of a corporate investigations firm to verify compliance is consistent with the Commission's objective that a code of ethics be viewed as a codification of standards that is reasonably designed to deter wrongdoing.