OppenheimerFunds, Inc.
498 Seventh Avenue
New York, New York 10018

Robert G. Zack
Senior Vice President and General Counsel

January 13, 2003

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

    Re: SEC Release Nos. 33- 8154; 34-46934; 35-27610; IC-25838; IA-2088, FR-64 (December 2, 2002) (the "Release") - "Strengthening the Commission's Requirements Regarding Auditor Independence" (File No. S7-49-02)

Dear Mr. Katz:

OppenheimerFunds, Inc. submits these comments on the proposals by the Securities and Exchange Commission (the "Commission") to implement the requirements of Title II of the Sarbanes-Oxley Act of 2002 (the "Act"). OppenheimerFunds, Inc. is the investment manager for the more than sixty investment companies comprising the Oppenheimer family of mutual funds, which have more than $120 billion in assets and more than 7 million shareholder accounts.

We strongly support the goals of the Act to enhance the independence of auditors of issuers and to strengthen the role of issuers' audit committees, which will help protect the interests of investment companies as investors in the securities of public issuers, and will also help protect the interests of fund shareholders as investors in the securities of investment company issuers, which can be done by applying those goals in a reasonable and appropriate manner to the audit process of investment companies. We recognize that the Commission is under a mandate from Congress to implement the provisions of the Act, and that in some cases the Act is fairly specific as to the substance of the rules that Congress apparently intended to be adopted. However, we believe that in carrying out that mandate from Congress, the Commission should carefully consider the differences in the structure, operations and exemplary regulatory compliance history of investment companies compared to operating companies, to assure that any rules that are adopted to implement the Act are fair and appropriate to the nature of the entities to be regulated and to best protect the interests of the public. We believe that the Commission can accomplish the purposes of the Act by following a reasoned, flexible approach in fashioning the rules as they apply to investment companies, and we offer these comments in that spirit.

We do have some concerns about aspects of the Commission's proposals in the Release that would apply far broader standards for investment companies and investment company complexes than we believe are necessary to implement the purposes of the Act. Some of those proposals would broadly apply the reach of the restrictions contained in the proposals to investment advisers (and their affiliates) of investment companies, which we believe goes beyond the mandate of Congress set forth in the Act to prevent conflicts of interest between "issuers" and their auditors. While we recognize that the operational structure of investment companies poses special challenges to the Commission in applying Congressional intent embodied in the Act to investment companies, an examination of certain of the proposals contained in the Release demonstrates that the extension of those rules to investment advisers (and their affiliates) of investment companies poses particular burdens that we believe are unfair or perhaps unintentional.

Additionally, several of the rule proposals broaden the scope of the Act for all issuers, including investment companies, but will pose special burdens for investment companies. An unintended effect of applying wider-reaching standards than are required under the Act would likely be to reduce the number of qualified professional accountants available to audit investment company financial statements and to create unnecessary burdens on investment company audit committees.

Many of our objections to aspects of the proposed rules as over-broad stem from the use of the term "investment company complex" as the basis of the application of the proposed rules to investment companies, rather than applying the rules solely to the investment company as an issuer. The proposed rules would use the term "investment company complex," defined in Rule 2-01 of Regulation S-X, to include an investment company and its investment adviser and any entity controlled by or controlling an investment adviser, or any entity under common control with an investment adviser if the entity (1) is an investment adviser or (2) is engaged in the business of providing administrative, custodian, underwriting or transfer agent services to any investment company or investment adviser. This definition would cover an investment adviser's affiliates that provide services to any investment company, not just the investment company issuer in question. That could have the effect of reaching entities that happen to be affiliates of the investment company's investment adviser that do not have any relationship to the investment company issuer, do not provide services to the investment company, and therefore do not raise any of the issues that could lead an investment company's board of directors or trustees to question an auditor's independence.

The express language of the Act directs its requirements and prohibitions toward issuers and audit committees of "issuers." This unnecessary expansion of the Act is particularly burdensome on investment companies when applied to the provisions requiring partner rotation, the pre-approval of non-audit services and disclosure of fees related to non-audit services. It is not necessary to use that approach to accomplish the goals of the Act to promote auditor independence.

For those general reasons, discussed more fully below, we recommend the following:

  • The rule requiring a one-year "cooling-off" period for employment of former auditors should apply only to covered employment positions of the investment company "issuer."

  • The rules requiring audit partner rotation should be applied only to lead and reviewing partners.

  • The "cooling-off" period for audit partners on an engagement should be two years, not five years.

  • The rules should "grandfather" current audit partners as of the date of the rules' effectiveness to avoid disruption in audit teams and to assure smooth transitions.

  • The rules should require an investment company's audit committee to pre-approve only those non-audit services provided to the investment company issuer.

  • The disclosures as to accountants' fees in an investment company's proxy statements and annual reports should be limited to disclosures of fees for services provided to the investment company issuer.

Partner Rotation

We believe that the proposed rules requiring partner rotation should be revised in recognition of the unique nature of investment company audit practices and the available pool of auditors. We recommend that: 1) the rotation requirements should apply only to the lead partner and review partner of the audit engagement team, 2) rotated partners should be able to return to the engagement two years after a rotation, as is currently mandated by the American Institute of Certified Public Accountants SEC Practice Section ("SECPS"), and 3) the rule should prohibit rotated partners from providing audit services only to investment company issuers, and it should permit partners to rotate among different investment companies or other entities within the same investment company complex.

The proposed rules could have the unintended effect of significantly reducing the pool of qualified accountants available to audit investment company financial statements. Accounting issues unique to investment companies, such as asset valuation, compliance with Subchapter M of the Internal Revenue Code, accrual of fund expenses, and knowledge of investment company operations, require a specialized knowledge distinct from that required by auditors of operating companies. This specialized knowledge and experience limits the number of accountants qualified to audit investment company financial statements, especially in smaller cities that do not have a large presence of mutual fund firms. In addition, investment company financial statements generally do not contain the items that have given rise to corrupt or questionable accounting practices, such as those relating to leverage, off-balance sheet items, or subsidiaries. We believe that the small pool of qualified auditors, as well as the fact that investment company financial statements present a low risk of accounting and auditing problems, warrants changes to the proposed rules.

The proposed rules would require rotation of not only the lead and reviewing partners, as required by Section 203 of the Act, but would extend the rotation requirement to all partners who perform audit services for the audit client. We believe that the Commission should not extend the reach of the rotation requirement contemplated by the Act and that the rule should apply only to the lead and reviewing partner, because of the potential effect on the pool of available auditors for investment companies, as discussed above.

Section 203 of the Act states that it "shall be unlawful for a registered public accounting firm to provide audit services to an issuer if the lead . . . audit partner . . . or the audit partner responsible for reviewing the audit, has performed audit services for that issuer in each of the 5 previous fiscal years of that issuer." Current SECPS membership requirements call for the engagement partner to rotate off an engagement for seven years and to remain off the engagement for two consecutive years following the engagement. We believe that the existing standards sufficiently provide for a periodic fresh look at the accounting and auditing issues of investment companies. The Act does not require, nor have any deficiencies in industry practice been cited to justify requiring, rotation of all partners on an engagement or a lengthening of the time to five years before a rotated partner may return to an audit engagement.

We also think that accounting partners should be able to rotate among different investment companies or other entities within the same investment company complex. Four separate boards of trustees/directors oversee different funds within the Oppenheimer family of mutual funds. Three separate independent accounting firms serve as the independent auditors of the various funds under those respective boards and their audit committees (a fourth firm serves as auditors to our off-shore funds, which have a similar audit committee practice). Permitting audit partners to rotate from a set of investment companies within the purview of one board's audit committee to different investment companies under a different audit committee would not derogate from the purpose the Act or the rules to promote auditor independence. After a rotation, the funds would be audited under the supervision of different audit partners, and the audit committees would oversee the actions of and communicate with different audit partners. At the very least the proposed rule could be re-fashioned to allow the rotation of partners to the audit engagement of other investment companies having a different board of directors/trustees than the current investment company audit client. The funds and audit committees should not be precluded from availing themselves of the services of qualified, professional accounting partners simply because those partners audited different funds within a family of funds that have a different boards of directors or trustees and different audit committees.

We also believe that a transition period would be beneficial to the orderly administration of the new rules. In order to avoid the immediate rotation of partners upon the effective date of the rules, and thus disrupt an audit process that could be taking place at the time, we recommend the Commission allow partners currently on an engagement to remain following the effective date of the new rules.

Audit Committee Administration of the Engagement

Audit Committee Approval of Non-Audit Services

We believe that the requirement in the proposed rule that an audit committee of an investment company issuer must pre-approve non-audit services provided by an investment company's independent accountants should not apply to non-audit services provided to the investment adviser or its affiliates. Section 202 of the Act states that all "non-audit services, other than as provided in [the de minimis exception], provided to an issuer by the auditor of the issuer shall be preapproved by the audit committee of the issuer (emphasis added)." The proposed rules expand the requirements of pre-approval beyond what is required in the Act in a way that would unnecessarily increase the burden of investment company audit committees, without a significant benefit to shareholders of the investment company. Since many investment advisers and their affiliates are also publicly-held companies subject to the requirements of the Act, it could also subject those advisers to the requirement of having their non-audit services approved by two or more separate audit committees. We do not believe that the Act contemplates such approval at multiple levels or that the interests of fund shareholders would be served by such a process.

We believe that current industry practices are sufficient to safeguard the independence of investment company auditors. Current independence standards require auditors to disclose and fully describe in writing all relationships with entities related to the audited company that bear on the auditor's independence. Accounting firms must report to investment company audit committees all non-audit services provided to the affiliates of the investment company and investment adviser. Audit committees are aware of the non-audit services when they consider the selection and retention of accounting firms as independent auditors. Audit committees should not be burdened with having to approve accounting services provided to various entities other than the investment company. Audit committees might need to conduct additional meetings in order to approve the services requested by the investment adviser or its affiliates. The time, burden and expense of conducting these additional audit committee meetings are not justified by the minimal benefit to fund shareholders that the proposed rule would provide.

Audit Committee Approval of Audit Services

The Act requires that an audit committee of an investment company pre-approve all auditing services provided to the investment company. Section 32 of the Investment Company Act of 1940, as amended (the "1940 Act") requires that a majority of the members of an investment company's board of directors who are not interested persons of the investment company select the independent auditors. We recommend that the Commission conform the proposed rules to Section 32(a) of the 1940 Act by requiring the audit committee of an investment company to recommend the independent auditors it has selected to the disinterested directors for approval. We believe that requiring the disinterested directors of a board to ratify the audit committee's selection of the independent accountants effectively and efficiently serves the purposes of the Act and the 1940 Act.

Audit Fee Disclosure

The proposed rule would modify and expand the current requirements with respect to disclosure of auditor fees for services provided to investment companies. Among other things, it would require an investment company to disclose in proxies and Form N-CSR the fees paid for non-audit services provided not only to the investment company, but also to the investment company's adviser and any affiliate of the adviser that provides services to the investment company. We believe that this requirement is overly broad and the disclosure of fees for non-audit services should only apply to services provided to the investment company.

Information with respect to fees paid by the investment adviser and its affiliates would be of little interest to shareholders of the investment company, and may be difficult for the investment company's auditors to gather in a timely manner for such disclosure.

The proposed rules would also require an investment company to disclose (for each of four categories of fees) the percentage of those fees derived from services that were approved by the audit committee by (1) pre-approval, (2) approval pursuant to pre-approval policies and procedures, and (3) de minimis exception options permitted under the proposed rules. We strongly suggest that the Commission eliminate this requirement, because it places disproportionate emphasis on the process by which approval is accomplished, which appears to us to be unnecessary given that each method would be permitted by the rules.

OppenheimerFunds, Inc. appreciates the opportunity to comment on these proposals. Should there be any questions regarding these comments, please do not hesitate to contact the undersigned at 212-323-0250 or be e-mail at bzack@oppenheimerfunds.com.


Robert G. Zack
Senior Vice President and
General Counsel