The Financial Services Roundtable

November 27, 2002

Jonathan G. Katz, Secretary
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609

Reference: File No. S7-40-02

Dear Secretary Katz:

The Financial Services Roundtable (Roundtable)1 appreciates the opportunity to comment to the Commission on its proposed rule implementing section 407 of the Sarbanes-Oxley Act of 2002.2

General Comment

The Commission's proposed rule relating to the definition and disclosure of the term "financial expert" is too narrow and would severely limit the ability of companies to place a financial expert on their audit committee. If companies are unable to find a "financial expert" (as defined by the Commission's proposed rule) to serve on their audit committee, they would be forced to go without one. Even with an explanation, this factor could have a detrimental effect on investor confidence, the exact opposite intention of the stated goal of the proposed rule. Accordingly, recognizing that the Commission must operate within the confines of the statute, the Roundtable recommends that the Commission keep in mind the concepts of flexibility and unintended effects when drafting the final regulations. With this comment as background, the Roundtable makes the following specific suggestions for revision of the proposed regulation.

Specific Comments

The member companies of the Roundtable strongly suggest the following revisions to the proposed regulation:

    1) The final rule should state explicitly that designation as a "financial expert" does not impose any additional liability on the "financial expert," beyond those liabilities that would ordinarily apply to any director under the federal securities laws We believe that even the hint of additional liability would make persuading persons to serve as "financial experts" even harder, if not impossible.

    2) The Commission should promulgate a provision that would allow companies to lay out their own guidelines for qualification to serve as a "financial expert" on their audit committee and disclose that various appointed/elected persons on their audit committee meet these guidelines. This approach would relieve companies from disclosing the specific details of the financial experts' qualifications. Further, the final rule should recognize that anyone who recently has served on a public company's audit committee should be, de facto, a "financial expert." This would be similar to the way that the FDIC interpreted analogous provisions of FDICIA several years ago.

    3) The requirement of the proposed rule that the "financial expert" have experience applying accounting issues that are "generally comparable" to the particular company is too narrow and only serves to limit further the available talent pool. The Roundtable believes that if an individual has experience applying accounting principles for estimates, accruals and reserves in a business context, that experience should not be limited, as suggested in the proposal, to experience with generally comparable issuers. More specifically, the term "generally comparable issuers" should not be limited to companies required to file reports under section 13(a) or 15(d) of the Exchange Act. The relevant point of comparison should be the accounting principles that business entities must address, and Roundtable member companies believe that those principles are not limited only to companies required to file under the Exchange Act.

    4) The Commission asks if experience "reviewing or analyzing" such financial statements is sufficient as criteria for the financial expert instead of "preparing" the financial statements. The members of the Financial Services Roundtable believe that review and analysis of financial statements should suffice to qualify the financial expert and to prevent further restricting the talent pool.

    Additionally, the proposed rule's requirement that the "financial expert" have direct experience preparing or auditing financial statements unnecessarily serves to narrow the pool of possible candidates. Instead, this provision should be revised to include explicitly persons who have experience directly supervising those who prepare or audit financial statements. This change would increase the number of candidates for the position without undermining the intent of the proposed rule.

    Using the standards of "review or analyze" or "directly supervise those who have," would have the advantageous affect of expanding the pool of potential candidates who can qualify as financial experts, without undermining the intent of the section.

    5) The Roundtable believes that requiring companies to publish the names of their "financial expert" would only serve as further hindrance in recruiting "financial experts" to serve on audit committees. Accordingly, we recommend that the proposed requirement to that effect be eliminated.

    6) In response to the Commission's specific request, the Roundtable believes that it should be sufficient to disclose that at least one member of the audit committee qualifies as a "financial expert". If the final rule would require the exact number of "financial experts" to be disclosed, it would lead to incorrect and misleading inferences by the investing public about the relative strength or weakness of issuers based solely on the number of "financial experts" serving on the audit committee.

In conclusion, the Roundtable believes that the approach taken by the Commission in its draft regulation overestimates the number of professionals who could qualify as a "financial expert" for purposes of serving on the audit committees of our nation's corporations and, therefore, is unnecessarily narrow. A number of companies have indicated that none of their current audit committee members, who have decades of experience with accounting, would satisfy the proposed narrow test. Consequently, the Roundtable recommends that the Commission define the term "financial expert" broadly as suggested herein in order to ensure that there are sufficient candidates available to companies, without undermining the goals of the law and the proposed rule.

If the Roundtable or any of our member companies can be of any assistance in this matter, please do not hesitate to contact Scott Talbott of the Roundtable at 202 289-4322 or me.


Richard M. Whiting
Executive Director and General Counsel

1The Financial Services Roundtable is a national association whose membership is reserved for 100 companies selected from the nation's 150 largest integrated financial services firms. The member companies of the Roundtable engage in a wide range of financial activities, including banking, securities, insurance, and other financial service activities. The mission of the Roundtable is to unify the leadership of large, integrated financial service companies in pursuit of three primary objectives:

  1. To be the premier forum in which leaders of the United States financial services industry determine and influence the most critical public policy issues that shape a vibrant, competitive marketplace and a growing national economy;

  2. To promote the interests of member companies in federal legislative, regulatory, and judicial forums; and

  3. To effectively communicate the benefits of competitive and integrated financial services to the American public.

The Roundtable is a CEO-driven association that advocates the interests of integrated financial institutions primarily in the Congress, the federal Commission, and federal courts.

2 Pub L. 107-204, 116 Stat. 745 (2002).