From: leslie_hoy@orix.co.jp Sent: Friday, November 29, 2002 3:27 AM To: rule-comments@sec.gov Subject: File No. S7-40-02 ORIX Corporation Submitted by Leslie Hoy, Senior Manager, Corporate Communications On behalf of Yoshihiko Miyauchi, Chairman and Chief Executive Officer E-mail: orixir@orix.co.jp November 29, 2002 Mr. Jonathan G. Katz, Secretary U.S. Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549-0609 Subject File: S7-40-02 Re: Concerns Regarding the Proposed Rule Defining "Financial Expert" in Section 407 of the Sarbanes-Oxley Act of 2002 Dear Mr. Katz: It is the intent of this letter to raise with you our concerns respecting the recently proposed rule (the "Proposed Rule") of the Securities and Exchange Commission (the "SEC") defining the term "financial expert" as used in Section 407 of the Sarbanes-Oxley Act of 2002 (the "Act") and the impact of the application of Sections 301 and 407 of the Act to ORIX Corporation, a Japanese corporation registered with the SEC, and to foreign companies generally. Proposed Rule Defining "Financial Expert" in Section 407 of the Act For the reasons stated below, it is our belief that foreign companies, such as ORIX Corporation, should be exempt from Section 407, in addition to other provisions, of the Act. If, however, Section 407 of the Act is to be applied to foreign companies, we have the following comment regarding to the Proposed Rule of the SEC defining "financial expert" in Section 407 of the Act. The SEC requested comments as to why or why not a "financial expert" should be required to have direct experience preparing or auditing financial statements of reporting companies. We believe such a requirement would be excessive. We further believe that the experience of reviewing or analyzing financial statements of reporting companies would be sufficient experience to require of "financial experts". Alternatively, the SEC should recognize in its final rule that "performance" includes "supervision" of people who performed the enumerated functions in the Proposed Rule. Our reasons are as follows. We understand the purpose of requiring a "financial expert" on an audit committee is to ensure that the activities of the audit committee, in particular the activities of independent auditors and internal accountants, are effectively monitored. To be in a position to effectively monitor such activities, a "financial expert" must be capable of understanding and evaluating financial information and making thorough inquiries of management and the aforementioned parties. Though persons with direct experience preparing and auditing financial statements may have the requisite skills, it would be incorrect to presume that without the ability to prepare or audit financial statements one lacks the requisite skills to be a "financial expert". Were the SEC to adopt its Proposed Rule of "financial expert" without further amendment, the result would be to disqualify persons who may be better qualified as "financial experts" than those who would be eligible under the proposed rule. Those would include, for example, academic accounting experts and management consultants, such as an expert with a Ph. D. in business administration from a U.S. university. We understand that the intent of the Act is to remedy those defects in the corporate governance systems of listed companies which resulted in the fall of Enron and WorldCom. To that end, we believe that a key qualification should be the ability to effectively monitor the activities of independent auditors and internal accountants. From this perspective, it seems that adequate ability to review or analyze financial statements of reporting companies, even in the absence of direct experience of preparing or auditing such statements, should be sufficient to qualify an individual as a "financial expert" for the purpose of Section 407 of the Act. We believe that such individuals should be recognized to have the background and experience necessary to properly monitor the performance of the independent auditors and internal accountants. If the SEC were to impose a requirement that "financial experts" have direct experience preparing or auditing financial statements in accordance with US GAAP, practical candidates in Japan for this position would be those CFOs and accounting officers of Japanese companies listed on the NYSE or NASDAQ. However, there are only thirty-six such companies and Japanese companies would experience significant difficulties retaining financial experts from within Japan. As a result, Japanese companies would be forced to retain "financial experts" from other jurisdictions. Considering the difficulties in finding such individuals who are both financial experts and able to communicate with the board in Japanese, the number of candidates would be limited and the costs would be considerable. In sum, the definition as proposed unduly limits our company's choice of who we could choose to sit on our board; particularly when taking into account the need for specific industry experience and the need to avoid too many overlapping board memberships. Application of Sections 301 and 407 of the Act to Foreign Companies As the Act, in certain circumstances, imposes requirements on foreign companies that conflict with those imposed by the laws of their home jurisdictions, we strongly feel that foreign companies, such as ORIX Corporation, should be exempt from such conflicting provisions of the Act. Examples of these conflicting requirements are presented in Exhibit 1 attached hereto. In particular, if the intention of the Congress is that Sections 301 and 407 of the Act should be applied both to U.S. companies and non-U.S. companies indiscriminately, then Congress must assume that foreign companies apply the same corporate governance system as is applied by U.S. companies. This assumption is not warranted as foreign companies will have adopted systems of governance which are in keeping with the laws and customs of their incorporating jurisdictions. The Japanese legal requirements relating to corporate governance present an example of how many foreign companies will be in violation of the laws of their incorporating jurisdictions if they attempt to comply with the Act. If ORIX Corporation and other Japanese companies were to modify their corporate governance systems to be in compliance with the Act, they would then be in violation of the Japanese Commercial Code. Another circumstance where the requirements of the Act conflict with the legal requirements of a foreign company's incorporating jurisdiction, results from Section 301 of the Act. In Japan those persons capable of acting as effective "independent directors" are still few in number. Therefore, the SEC requirement that all statutory committees be comprised entirely of independent directors will not be attainable for U.S. listed Japanese companies. Lastly, it is important to remember that the Act was enacted in reaction to the recent spate of corporate scandals not at non-U.S. companies but at U.S. companies. It was the flawed corporate governance systems of those U.S. companies which allowed such scandals to take place. Congress appears to be cognizant of the Act's true target, namely U.S. companies, and the intended limited extraterritorial application of the Act. For example, Senator Enzi of the U.S. Congress commented in the deliberation of the draft Act as follows: "In addition, I believe we need to be clear with respect to the area of foreign issuers and their coverage under the bill's broad definitions. While foreign issuers can be listed and traded in the U.S. if they agree to conform to GAAP and [NYSE] rules, the SEC historically has permitted the home country of the issuer to implement corporate governance standards. Foreign issuers are not part of the current problems being seen in the U.S. capital markets, and I do not believe it was the intent of the conferees to export U.S. standards, disregarding the sovereignty of other countries as well as their regulators." (148 Cong. Rec. S7350-7365 (daily ed. July 25, 2002) (Statement of Sen. Enzi)) The board of directors of ORIX Corporation wishes to express its true appreciation and support for the actions taken and proposed by Congress and the SEC which are aimed at restoring investor confidence in the U.S. capital markets. In particular, we commend the enactment of the Act and related rules and regulations. All of our comments herein and made in our planned future comment letters are directed at the practical implementation of the Act, not at the spirit of the Act and the initiatives of Congress and the SEC. However, we emphasize that in attempting to achieve its goals, it is imperative that Congress and the SEC strive to prevent the extraterritorial effect of its legislation from encroaching on the sovereignty of other nations and from hindering the laws of foreign countries which are enacted in their attempts to maintain investor confidence in their own markets and in the world. We kindly ask the SEC to give due consideration to the concerns raised herein. We further hope this letter will prove of assistance to the SEC as it finalizes its rule making process and makes decisions regarding the implementation of the Act and the provisions thereof. Please note that this letter mainly focused on the issues with respect to the Proposed Rule under Section 407 of the Act, and that we will separately submit our detailed comments regarding the application of Section 301 of the Act to foreign companies. Should you have any questions concerning the above, or should we be able to assist you in identifying solutions to the concerns raised herein, we would welcome the opportunity to be of assistance. Sincerely, Yoshihiko Miyauchi Chairman and Chief Executive Officer ORIX Corporation Exhibit 1 Examples of inconsistencies between the Act and the Japanese Commercial Code With respect to companies based on a Board of Corporate Auditors, the boards of corporate auditors differ from auditing committees in that they are bodies comprised of corporate auditors who inherently lack executive authority under the Japanese Commercial Code. It is inconsistent with Japanese law to authorize or require a corporate auditor (or a board of corporate auditors) to take any action listed as an executive function under Section 301 (such as determining the amount of fees payable to an accounting firm, the retention of outside counsel or other advisors, or the appointment, discharge or reappointment of an accounting firm). Because of the differences in the fundamental structure of the auditing process and corporate governance, it would be impossible to subject Japanese companies (other than those companies that have opted to become "Companies with Committees", the summary of which is posted on the homepage of the Japanese Ministry of Justice ) to Se ction 301 by simply replacing the term "auditing committee" with "board of corporate auditors" in the interpretation of the text of the Section. There are also limitations due to the specified limited authorities of auditing committees (Article 21-8, Paragraph 2, etc., of the Special Exceptions Law for the Commercial Code of Japan (as amended in 2002) (the "New Special Exceptions Law")), which apply to any "Company with Committees". If a company opts to become a "Company with Committees" under the New Commercial Code (as revised in 2002) (the "New Code") and establishes an auditing committee, then Section 301 will require the auditing committee to be directly responsible for appointing an independent accounting firm. This result will be inconsistent with the New Code, under which, with respect to all companies including "Companies with Committees", the appointment of such accounting firm must be determined by a general shareholders' meeting.