FINANCIAL SERVICES AGENCY
GOVERNMENT OF JAPAN
3-1-1 Kasumigaseki Chiyoda-ku Tokyo 100-8967 Japan>
May 8, 2003
Mr. Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609
Re: Notice of Filing of Proposed Rule Change and Amendment No. 1 Thereto by the New York Stock Exchange, Inc. Relating to Corporate Governance (File No. SR-NYSE-2002-33)
Dear Mr. Katz:
As the Director for International Financial Markets of the Financial Services Agency of Japan ("FSA"), I am pleased to submit this letter on behalf of the FSA in response to the request of the Securities and Exchange Commission ("SEC") for comments on the Proposed Rule Change and Amendment No. 1 thereto ("Proposal") by the New York Stock Exchange, Inc. ("NYSE") relating to corporate governance, as contained in Release No. 34-47672.
The SEC issued last month the final rule on the standards relating to listed company audit committees under Section 301 of the Sarbanes-Oxley Act of 2002. While we appreciate that the final rule includes general exemptions which will apply to Japanese private issuers with the board of corporate statutory auditors system, it is our regret that an exemption for Japanese private issuers with the committees system is not included in the final rule.
The SEC's final rule (Rule 10A-3) has been adopted to direct the national securities exchanges and national securities associations to adopt appropriate listing rules relating to corporate governance. Therefore, for the Japanese private issuers listed on the NYSE, the NYSE's listing standards and practices are also crucially important. This is the reason that I am submitting this letter, and we will continue to have an interest in this area. We respectfully request the SEC and the NYSE to continue to take into consideration carefully the views and concerns of individual listed Japanese corporations and to respond appropriately and flexibly.
In this line, we would like to make the same request to the SEC in case that an individual Japanese private issuer with the committee system seeks an exemption of a particular relationship with respect to audit committee members from the independence requirements by utilizing Rule 10A-3(b)(1)(iv)(F).
II. Appreciation for Respect of the Japanese Corporate Governance System
We recognize that the NYSE has a traditional approach of deferring to home-country practices as its corporate governance standards are applied to foreign private issuers. We appreciate very much that under the Proposal the NYSE, consistent with its traditional approach, would require listed foreign private issuers to comply only with the requirements of the Sarbanes-Oxley Act and the SEC rule adopted thereunder, but not with any additional requirements to be codified in Sections 303A of the Listed Company Manual.
Therefore, we fully support the paragraph of the Proposal under the heading Foreign Private Issuers in Equity Listings of Section 303A, which states that listed companies that are foreign private issuers are permitted to follow home country practices in lieu of the provisions of Section 303A.
III. Comments on the Proposal
On the other hand, we have some concerns about the clarity of some provisions of the Proposal. The Proposal states that listed foreign private issuers are required to comply with the requirements of Section 303A(6) (including the applicable commentary), 7(a) and (c), (11) and (12)(b).
The proposed Section 303A(6) includes the reference to "subject to the exemptions provided for in Rule 10A-3(c)." We understand this reference confirms the applicability of all of the general exemptions contained in Rule 10A-3(c) to listed foreign private issuers. Also, for clarity, we believe that there should be a reference to Rule 10A-3(b)(1)(iv) (so that "Rule 10A-3(c)" at the end of this section should be replaced with "Rule 10A-3(b)(1)(iv) and (c)"), since Rule 10A-3(b)(1)(iv) provides exemptions from the independence requirements set forth in Rule 10A-3(b)(1).
With regard to the proposed Section 303A(7)(a), we are concerned that it is not clear enough that the general exemptions contained in Rule 10A-3(c) are also available in the case of this provision. In particular, proposed Section 303A(7) could be read to require that the audit committee members must be directors, even in the case of Japanese foreign private issuers who qualify for the exemptions contained in Rule 10A-3(c) with a board of corporate statutory auditors who are not directors. We believe that the best way to clarify this would be to amend as follows the language of Section 303A that appears under the heading Foreign Private Issuers in Equity Listings:
"Listed companies that are foreign private issuers (as such term is defined in Rule 3b-4 under the Exchange Act) are permitted to follow home-country practice in lieu of the provisions of this Section 303A, except that such companies are required to comply, subject to the exemptions provided for in Rule 10A-3(c), with the requirements of Sections 303A(6) (including the applicable commentary), (7)(a) and (c), (11) and (12)(b)."
Alternatively, it might be possible to address our concerns by adding to the proposed Section 303A(7)(a) a phrase like "subject to the exemptions provided for in Rule 10A-3(b)(1)(iv) and (c)".
Similarly, with regard to the proposed Section 303A(7)(c), we would recommend the addition of a phrase like "subject to Instructions to Rule 10A-3" because these instructions are important for listed foreign private issuers. In addition, we would suggest that the word "evaluate" in paragraph (i) be deleted because neither Section 301 of the Sarbanes-Oxley Act nor Rule 10A-3(b)(2) includes this word. Instead, the language of Section 303A(7)(c) should be made consistent with that of Rule 10A-3(b)(2).
The proposed Section 303A(11) is acceptable to the FSA. We believe what is stated in the commentary is important such that foreign private issuers are not required to present a detailed, item-by-item analysis of these differences between their corporate governance practices and those followed by U.S. domestic companies under NYSE listing standards, and that the NYSE underscores that what is required is a brief, general summary of the significant differences, not a cumbersome analysis. We expect and believe that the NYSE will implement this disclosure requirement for listed foreign private issuers in line with this commentary. From this viewpoint, with regard to the paragraph under the heading Foreign Private Issuers in General Application, we would suggest that the phrase "(11) (including the applicable commentary)" be used in place of just "(11)."
The proposed Section 303A(12)(b) is also acceptable to the FSA.
Finally, we believe that there should be a provision in Section 303A relating to appropriate procedures to cure any defects that would be the basis for a prohibition of the continued listing of a security on the NYSE, as expressly mandated by Rule 10A-3(a)(3).
We respectfully request that the SEC and the NYSE take full account of our comments in promulgating the final listing rule.
Director for International Financial Markets
Financial Services Agency
Government of Japan