MGIC Investment Corporation

January 13, 2002

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

Re: File Number S7-49-02

Dear Mr. Katz:

We are pleased to comment on the proposed amendments to the Commission's auditor independence requirements proposed in Release 34-46934. In view of the extraordinarily heavy workload of the Commission and the Staff to meet the deadlines imposed by the Sarbanes-Oxley Act of 2002 ("SOXA"), we are limiting our comments to the need for the amendments to provide a transition period for the portion of the rules covering non-audit services in Reg. S-X 2-01 (c) (4) and (7). This portion of the proposed rules was not mentioned in the examples in Section I of the Release of the types of provisions for which the Commission was considering delayed effectiveness.

  1. The Commission should provide a transition period for the non-audit services provisions because

    • As explained on the attachment to this letter, we believe SOXA itself provides an inherent transition period through its use of the terms "registered public accounting firm" and "non-audit services." Under SOXA Section 208(a), the Commission is adopting these rules to "carry out" the non-audit services provisions of SOXA.

    • In these circumstances, to adopt rules without any transition period seems to us to be at variance with SOXA and, notwithstanding the Commission's authority to set independence standards under Reg. S-X, to be inconsistent with the stated basis of the Commission's rulemaking.

    • To adopt rules without a transition period would be unfair to issuers who, since July 25, 2002 when SOXA's text became widely available, were entitled to rely on the inherent transition period in SOXA. Until some days after December 2, 2002, when the release proposing the rule was posted on the Commission's website, issuers had no notice that the transition period would be eliminated.

  2. If the Commission desires an effective date before an auditor is registered with the Board, July 30, 2003, the first anniversary of SOXA, is an appropriate effective date.

    • The transition date that we view as consistent with SOXA is the date an auditor becomes registered with the Board. However, if the Commission desires an effective date that may occur prior to registration, we suggest it be the earlier of the auditor's registration with the Board or July 30, 2003.

    • While a July 30, 2003 effective date will likely make the non-audit services provisions effective earlier than they would be under SOXA's timetable, a July 30, 2003 outside date strikes a reasonable balance and provides for a single outside date for all issuers.

    • The non-audit services portion of the independence rules have raised numerous issues and will have significant effects on issuers. A July 30, 2003 outside effective date recognizes that when the period from proposal to adoption for a rule of this complexity and importance is less than two months, a material portion of that period occurs over the Holiday Season, and the Commission has many other items on its agenda that must be completed by January 26, 2003, additional time to make changes before effectiveness, if changes are warranted, is a prudent precaution.

    • SOXA Section 201(b) permits the Board to grant exemptions from the non-audit services restrictions. The Board must be functioning by April 23, 2003. A July 30, 2003 outside effective date, when the Board will have been functioning for at least two months, preserves some portion of the ability granted by SOXA to obtain individual exemptions by the effective date.

    • The performance of any non-audit services that may be performed under the provisions of Reg. S-X today without impairing independence could continue to be performed without impairing independence until the earlier of July 30, 2003 or the auditor's registration with the Board.

  3. A July 30, 2003 outside effective date eliminates the need for grandfathering in the case of the non-audit services provisions because issuers will have had one year's notice that prohibited non-audited services could no longer be performed.

    • SOXA does not appear to contemplate that services being performed at the time Section 201 became effective would be categorically grandfathered to permit such services to be completed. Hence, issuers could not have reasonably expected the Commission's rules would permit categorical grandfathering.

    • If an issuer (or auditor) believes the effective date should be extended in its particular case, it can seek an exemption from the Board under SOXA Section 201(b).

I would be happy to discuss these comments with the Staff and can be reached at 414-347-6406.

Very truly yours,

Jeffrey H. Lane


cc: Samuel L. Burke, Associate Chief Accountant Robert E. Burns, Chief Counsel, Office of the Chief Accountant

Analysis of why the non-audit services provisions of SOXA are not effective under SOXA until the auditor becomes a "registered public accounting firm."

  1. Structure of Title II of SOXA

    1. Use of terms in Title II of SOXA

        (i) Sections 201(a), 203, 204, 206, 207 and 208(b) of SOXA's Title II-Auditor Independence use only the term "registered public accounting firm" in: restricting non-audit services (Section 201); requiring audit partner rotation (Section 203); requiring reports to the audit committee of critical accounting policies and other matters (Section 204); prohibiting certain former employees of the issuer's auditor from holding certain positions with the issuer (Section 206); requiring a study of mandatory rotation of auditors (Section 207); and prohibiting auditors from issuing audit reports if the auditor has not complied with Sections 201, 203, 204 or 206 (Section 208(b)).

        (ii) Section 209 (considerations for state accounting regulators) uses the term "nonregistered public accounting firms," which is not defined in SOXA but whose meaning is apparent.

        (iii) "Registered public accounting firm" is defined in Section 2(a)(12) as a public accounting firm registered with the Board in accordance with SOXA.

        (iv) "Non-audit services" are defined in Section 2(a)(8) as services provided to an issuer by a registered public accounting firm, other than services provided in connection with an audit (a term which is itself defined in Section 2(a)(2)) or a review of the issuer's financial statements.

        (v) Section 201(b) (the Board's authority to grant exemptions) uses the term "public accounting firm," which is defined in Section 2(a)(11) as a firm engaged in public accounting.

        (vi) Section 202 (pre-approval requirements for non-audit services) uses the term "auditor," which is not defined in SOXA.

        (vii) Section 205 amends Sections 10A, 12(b) and 17 of the 1934 Act to change "independent public accountant" to "registered public accounting firm."

    2. Exemption authority

      Section 202(b) gives the Board case by case authority to exempt any person from the non-audit services prohibitions.

  2. Principles of statutory construction

    The Supreme Court wrote last year in Barnhart v. Sigmon Coal Co., 534 U.S. 438, _ (2002):

    As in all statutory construction cases, we begin with the language of the statute. The first step "is to determine whether the language at issue has a plain and unambiguous meaning with regard to the particular dispute in the case." Robinson v. Shell Oil Co., 519 U.S. 337, 340 (1997) (citing United States v. Ron Pair Enterprises, Inc., 489 U.W. 235, 240 (1989)). The inquiry ceases "if the statutory language is unambiguous and `the statutory scheme is coherent and consistent,' " 519 U.S. at 340.

    The Court in Robinson v. Shell Oil Co. wrote:

    The plainness or ambiguity of statutory language is determined by reference to the language itself, the specific context in which that language is used, and the broader context of the statute as a whole. Robinson v. Shell Oil Co. at 341.

  3. Legal analysis Applying the principles enumerated in Robinson v. Shell Oil Co. and Barnhart v. Sigmon Coal Co., it is clear to us that the non-audit services restrictions take effect only upon an auditor's registration with the Board.

    1. With exception of Section 202, Title II consistently defines its prohibitions by reference to "non-audit services" and "registered public accounting firms." An auditor does not become a "registered public accounting firm" until it is registered with the Board. The deadlines for the creation and organization of the Board in Section 101 of Title I of SOXA (appointment by October 28, 2002; SEC certification that the Board is functioning by April 26, 2003) and for registration of auditors in Section 102 (by October 23, 2003) demonstrate that Congress was aware that the effectiveness of the non-audit services and other provisions of Title II could be delayed for almost 15 months after SOXA became law.

    2. Indeed the definition of "non-audit services" depends on registration with the Board because "non-audit services" must be performed by a "registered public accounting firm."

    3. Because there is no express transition period in SOXA Title II, unless the registered public accounting firm and non-audit services definitions provide a transition period, the non-audit services prohibitions would have taken effect on July 30, 2002. This result is not credible. That Title II would have a substantial transition period is reasonable given that Title II makes significant changes in the relationship between issuers and their auditors and the persons affected would need time to make alternative arrangements so that they are in compliance with the law.

    4. The exemption authority in Section 201(b) also indicates that Congress contemplated a substantial transition period. If the prohibition on non-audit services is to take effect before the Commission has certified under SOXA Section 101(d) that the Board is able to discharge its responsibilities, it does not seem that anyone will be able to grant the exemptions contemplated by Section 201(b) until the Board is functioning. When the non-audit services prohibition takes effect upon registration with the Board, there is built-in delay between the time the Board is functioning and the deadline for auditor for registration (180 days thereafter). This period of up to six months would enable any individual relief that may be warranted to be given, with the possibility that the resolution would be timely enough so that alternative arrangements could be made if relief was denied.

    5. The amendments to Sections 10A, 12(b) and 17 of the 1934 Act made by Section 205 to substitute "registered public accounting firm" for "independent public accountant" could not be reasonably read to mean that the operation of these provisions of the 1934 Act is no longer effective pending registration of the auditor. The failure to defer the effective date of these changes is an obvious legislative oversight that should not be used to support an argument that the numerous other references in Title II do not mean what they plainly say and what is sensible against the broader context of Title II. (Indeed accepting this argument means that "registered public accounting firm" and "independent public accountant" are synonymous throughout Title II, which in turn would mean that the non-audit services and other prohibitions of Title II took effect on July 30, 2002, a result that is not possible to support.) In effect, under the principles of Barnhart and Robinson, Section 205 (but not the rest of Title II) is ambiguous and may be interpreted to reach the only reasonable result.