Fidelity Management & Research Company

Eric D. Roiter
Senior Vice President and General Counse
Fidelity Management & Research Company
82 Devonshire Street
Boston, MA 02109-3614

January 21, 2003

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

Re: Proposed Rule: Strengthening the Commission's Requirements Regarding Auditor Independence (Release Nos. 33-8154; 34-46934; 35-27610; IC-25838; IA-2088; FR-64; File No. S7-49-02)

Dear Mr. Katz:

On behalf of Fidelity Management & Research Company, 1 I am writing to comment on the proposal of the SEC under the Sarbanes-Oxley Act of 2002 (the "Act") regarding auditor independence. This letter address two key parts of the SEC's proposal, relating to non-audit services and rotation of audit partners. We are aware that the Commission has scheduled a public meeting for January 22, 2003, and urge that our views be taken into account.

Non-Audit Services

At the outset, we recognize the importance of the SEC's rulemaking, which aims to ensure that auditors meet their obligations to maintain independence in audit work done for public companies. As applied to mutual funds, the proposed rule goes beyond what is required under the Act by calling for a mutual fund's audit committee to pass upon non-audit services not only for the audit client issuer (the fund), but for certain third parties - namely, the fund's investment adviser and any affiliate who provides services to the fund. If the SEC goes forward with this rule, it is crucial that a fund's audit committee not be placed in the position of having to approve in advance, on a case-by-case basis, every non-audit service obtained by the fund's adviser or affiliate. It is also important to bear in mind that the primary responsibility for ensuring compliance with auditor independence must be placed upon the auditor itself.

As we read the proposed rule, prior approval by an audit committee of every non-audit engagement, on a case-by-case basis, would not, and should not, be required. Instead, the rule would give sufficient flexibility to a fund's audit committee and the fund's adviser to work out between themselves other arrangements to foster compliance by a fund's auditors with its obligation to maintain independence in the conduct of audit work. This could include an arrangement that enables the adviser to obtain non-audit services from a fund's auditor so long as the services do not fall within any of the nine prohibited services under the Act, the adviser is provided a written representation to this effect by the fund's auditor, and the adviser provides the audit committee with timely and regular reports regarding all new non-audit service engagements.

In the case of an audit engagement above some agreed-upon threshold, there could be an understanding between the audit committee and fund adviser that the engagement is subject to prior approval by the audit committee. Non-audit services that fall under this threshold could be subject to ratification by the audit committee or could fit within standing approvals of the audit committee. It is important that the SEC's rule preserve this type of flexibility for a fund's board and adviser. This would be similar to the approach taken with regard to a fund's code of ethics, where the SEC has allowed for flexibility in crafting the details of the code to meet the broad requirements of Rule 17j-1, in recognition of the differences in business structures among fund complexes.

The flexible and practical approach that we endorse takes into account that the Act was adopted in response to accounting failures involving operating companies, not mutual funds. It will avoid inefficiencies and delays in carrying out business arrangements in the ordinary course between an auditing firm and the adviser. This is especially true where a fund complex has multiple boards and audit committees for different funds. Requiring, in advance, case-by-case approval by all fund audit committees within a fund complex would be unnecessarily burdensome, and is not necessary for any single fund's audit committee to exercise sound judgment in overseeing how the fund's auditor is complying with its professional and legal obligations to maintain independence in the conduct of its audit work.

Our flexible approach will avoid undermining the ability of an organization like Fidelity to manage its many lines of businesses. Fidelity bears the entrepreneurial risk and commits its capital and resources to manage an enterprise involving many lines of business in addition to and distinct from management of mutual funds. With this risk and commitment of capital, an organization like Fidelity must be able to make crucial business decisions on a timely basis, including decisions about the use of outside consultants, including (but certainly not limited to) accounting firms. This is especially true when the services to be furnished by an accounting firm consultant have little or nothing to do with the operations of any of the mutual funds managed by the adviser. If advance approval of every non-audit service on a case-by-case basis were required (unlike the flexibility allowed for under the SEC's proposed rule) it would leave the adviser bearing all business risks while inappropriately conferring business decision-making responsibility on the fund's audit committee.

Audit Partner Rotation

Section 203 of the Sarbanes-Oxley Act of 2002 provides that the engagement and reviewing partners of an accounting firm may serve on an engagement in that capacity for no more than five consecutive years. This rotation requirement is designed to ensure that the accounting firm will take a periodic "fresh look" at the accounting and auditing issues confronting the company.

While Fidelity supports the goals of Section 203, the Commission's proposed amendments go beyond the statutory requirement in significant respects that may unnecessarily sacrifice the quality of mutual fund audits. We have the following specific comments:

Engagement and Review Partners: As required by Section 203, the rule would require the engagement and review partners to rotate off the engagement after five years and remain off the engagement for five years. We believe that a five-year time out is not necessary to achieve the "fresh look" objective of the rotation requirement. We recommend that the Commission consider a time out period shorter than five years. An engagement or review partner should be permitted to rejoin the engagement after a three-year time out if the audit committee makes an affirmative finding that a shorter time out is in the best interests of the issuer.

Other Partners: The proposed partner rotation requirement would apply to any partner involved in the engagement and would require any partner rotating off the engagement to remain off the engagement for five years. The Commission's rationale for going beyond the requirements of Section 203 is that all partners "make significant decisions that can affect the conduct and effectiveness of the audit." While this statement may be correct, it does not provide a sufficient rationale for requiring the rotation and time out requirements to apply to partners other than engagement and review partners. It is not necessary to apply the rotation and time out requirements to these partners in order to achieve the "fresh look" objective, particularly if the partner's involvement was not central to the audit engagement. We believe that the partner rotation and time out requirements should apply only to the engagement and review partners. With respect to all other partners, the Commission should require the audit committee to specifically consider whether and how frequently these partners should rotate from the engagement. If the Commission concludes that other partners should be subject to a rotation requirement, audit committees should be given the flexibility to determine appropriate time outs for these partners.

Non-Fund Partners: The scope of the Commission's proposal is particularly broad when applied to funds: a partner could perform audit services for a fund only if the partner had not performed such services for any entity within the "investment company complex" during the previous five consecutive years. An investment company complex includes any entity that controls or is controlled by the fund's investment adviser and any entity that is under common control with the investment adviser and is engaged in the business of providing certain services to any fund or investment adviser. The breadth of this definition would preclude a partner who worked on accounting and auditing issues wholly unrelated to funds from joining a fund audit team. In other words, a partner would be precluded from joining the fund audit engagement even though he would be taking a "fresh look" at the accounting and auditing issues confronting the fund. In the case of the Fidelity Funds, this breadth may result in the Funds not having the benefit of the best audit partners that their firms can provide, even though the partners' prior work would not compromise the quality of the audit.

Generally, we believe the Commission should avoid adopting a rule that relies too heavily on mechanistic, bright-line tests in addressing issues of quality control and the potential for fraudulent financial reporting. Rather, the rule should reflect the Commission's recognition of the audit committee's "responsibility for evaluating and determining that the audit engagement team has the competence necessary to conduct the audit engagement in accordance with GAAS." The Commission should emphasize the responsibility of the audit committee to monitor partner rotation and services and financial reporting.

* * * * *

In devising rules to ensure that auditors comply with their obligations to maintain independence in the conduct of their audit work, we urge the SEC to provide sufficient flexibility in its final rule so that a fund's audit committee and adviser can work out arrangements that are responsive to the needs of the adviser and its affiliates in carrying out their business and meeting their fiduciary responsibilities in furthering the interests of fund shareholders. We would be pleased to provide any further information or respond to any questions that the SEC or the staff may have.


Eric Roiter

cc: The Honorable Chairman Harvey L. Pitt
The Honorable Paul S. Atkins
The Honorable Roel C. Campos
The Honorable Cynthia A. Glassman
The Honorable Harvey J. Goldschmid
Paul F. Roye Director, Division of Investment Management

1 Fidelity Management & Research Company is the investment adviser for over 260 registered investment companies in the Fidelity Group of Funds with aggregate assets in excess of $680 billion.