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U.S. Securities and Exchange Commission

Summary of Comments:
Related to Proposed
Standards Relating to Listed Company Audit Committees

Securities Act Release No. 8173
Exchange Act Release No. 47137
Investment Company Act Release No. 25855
File No. S7-02-03

Prepared by:
Jeffrey J. Minton
Special Counsel
Office of Rulemaking
Division of Corporation Finance

March 25, 2003


  1. List of Commenters

  2. Overview

  3. General Applicability of the Proposals

  4. Audit Committee Member Independence

    1. General Comments

    2. Consulting, Advisory or Other Compensatory Fee Prohibition

    3. Affiliated Person Prohibition

    4. New Issuer Exemption

    5. Holding Company Exemption

    6. Requests for Other Exemptions

  5. Responsibilities Relating to Registered Public Accounting Firms

    1. General Comments

    2. Proposed Instruction Regarding Shareholder Approval of the Auditor

    3. Audit Committee Responsibility for the Internal Auditor

  6. Procedures for Handling Complaints

  7. Authority to Engage Advisors

  8. Funding

  9. Implementation

  10. Securities Affected

    1. Multiple Listings and Non-Equity Listings by Subsidiaries

    2. Security Futures Products and Standardized Options

    3. Requests for Other Exemptions

  11. Issuers Affected

    1. Foreign Issuers

      1. General Comments

      2. Two-Tier Boards of Directors

      3. Employee Exemption

      4. Controlling Shareholder Exemption

      5. Foreign Government Representative Exemption

      6. Board of Auditors Exemption

      7. Requests for Other Foreign Exemptions

    2. Small Businesses

    3. Issuers of Asset-Backed Securities

    4. Investment Companies

    5. Comments Regarding Other Issuers

  12. Determining Compliance with Proposed Standards

  13. Opportunity to Cure Defects

  14. Disclosure Changes Regarding Audit Committees

    1. Disclosure Regarding Exemptions

    2. Identification of the Audit Committee in Annual Reports

    3. Updates to Existing Audit Committee Disclosure

    4. Audit Committee Financial Expert Disclosure for Foreign Private Issuers

    5. Other Disclosure Comments

  15. Cost-Benefit Analysis

  16. Miscellaneous Comments

  17. Pre-Proposal Comments

I. List of Commenters

  a) Academics
    1. Professor James Fanto, Brooklyn Law School ("Fanto")
  b) Accounting Firms and Accountants
    2. Deloitte & Touche LLP ("Deloitte")
    3. Ernst & Young LLP ("EY")
    4. KPMG LLP ("KPMG")
    5. C. H. Moore, Jr., CPA ("Moore")
    6. J. Lavon Morton, CPA ("Morton")
    7. PricewaterhouseCoopers LLP ("PWC")
  c) Associations
    8. America's Community Bankers ("ACB")
    9. American Association of Bank Directors
a. Letter dated March 4, 2003
b. Letter dated March 12, 2003
    10. American Bankers Association ("Am. Bankers")
    11. American Bar Association ("ABA")
    12. American Institute of Certified Public Accountants ("AICPA")
    13. Association of the Bar of the City of New York ("NYCBA")
    14. Association of Private French Enterprises - Association of Large French Enterprises
a. Letter dated February 10, 2003
b. Memorandum of February 10, 2003 meeting
    15. Canadian Bankers Association ("CBA")
    16. Deutsches Aktieninstitut ("DAI")
    17. Edison Electric Institute ("EEI")
    18. European Federation of Accountants ("FEE")
    19. European Federation of Financial Executive Institutes ("EFFEI")
    20. Financial Executives International ("FEI")
    21. The Institute of Internal Auditors ("IIA")
    22. Italian Association of Limited Liability Companies ("Assonime")
    23. Investment Company Institute ("ICI")
    24. Japan Corporate Auditors Association ("JCAA")
    25. National Association of Corporate Directors ("NACD")
    26. National Association of Real Estate Investment Trusts ("NAREIT")
    27. National Venture Capital Association
a. Letter dated February 14, 2003
b. Memorandum of March 12, 2003 meeting
c. Memorandum of March 14, 2003 meeting
    28. New York State Bar Association ("NYSBA")
    29. Nippon Keidanren (Japan Business Federation) ("JBF")
    30. Transparency International-USA ("TI-USA")
  d) Corporations and Corporate Executives
    31. Allianz AG ("Allianz")
    32. ASML Holding N.V. ("ASML")
    33. AuditConcerns, Inc. ("AuditConcerns")
    34. Aventis SA ("Aventis")
    35. AXA SA ("AXA")
    36. Barclays Global Investors, N.A. ("Barclays")
    37. BASF Aktiengesellschaft ("BASF")
    38. Buckeye Partners, L.P. ("Buckeye")
    39. Canon Inc. ("Canon")
    40. CenturyTel, Inc. ("CenturyTel")
    41. A Letter on Behalf of Four Chinese Companies ("Chinese Cos")
    42. Cingular Wireless ("Cingular")
    43. Compania Cervecerias Unidas S.A. ("CCU")
    44. Computer Sciences Corporation ("CSC")
    45. Confidential Communications Services, LLC ("CCS")
    46. Corning Incorporated ("Corning")
    47. Dow Corning Corporation ("Dow Corning")
    48. Duchossois Industries, Inc. ("DII")
    49. Edison International ("Edison")
    50. Marcus B. Elliott, Vice President - Internal Audit, JPI Partners, LLC ("Elliott")
    51. Emerson Electric Co. ("Emerson")
    52. Enbridge Energy Parners, L.P. ("Enbridge")
    53. Enterprise Products Partners L.P.
a. Letter from O.S. Andras, President and CEO
b. Letter from John Smith, Assistant General Counsel
    54. Equity Officer Properties Trust ("Equity Office")
    55. Telefonaktiebolaget LM Ericsson ("Ericsson")
    56. F.N.B. Corporation ("FNB")
    57. Ferrellgas Partners, L.P. ("Ferrellgas")
    58. Financial Security Assurance Holdings, Ltd. ("FSA Holdings")
    59. Ford Motor Company ("Ford")
    60. France Telecom SA ("FT")
    61. Fulton Financial Corporation ("Fulton")
    62. General Electric Company ("GE")
    63. General Motors Acceptance Corporation ("GMAC")
    64. General Motors Corporation ("GM")
    65. Letter on Behalf of German Chief Financial Officers ("German CFOs")
    66. Harleysville Group Inc. ("Harleysville")
    67. The HR Hotline, Inc ("HR")
    68. Inergy, L.P. ("Inergy")
    69. Internet Initiative Japan, Inc. and Crosswave Communications Inc. ("IIJ")
    70. A Delegation of Six Japanese Companies ("Japanese Cos")
    71. JPMorgan Chase Bank ("JPMorgan")
    72. Kinder Morgan Energy Partners, L.P., et al. ("Kinder Morgan")
    73. Matsushita Electric Industrial Co., Ltd. ("Matsushita")
    74. Natural Resource Partners, L.P. ("NRP")
    75. The Network, Inc. ("Network")
    76. The News Corporation Limited ("News")
    77. Nomura Holdings, Inc. ("Nomura")
    78. Northern Border Partners, L.P. ("Northern")
    79. NTT DoCoMo, Inc. ("NTT")
    80. ORIX Corporation ("Orix")
    81. Pacific Energy Partners, L.P. ("Pacific Energy")
    82. Penn Virginia Resource Partners, L.P. ("Penn Virginia")
    83. Perusahaan Perseroan (Persero) PT Telekomunikasi Indonesia Tbk ("PT Telekom")
    84. Plains All American Pipeline, L.P. ("Plains")
    85. Public Service Enterprise Group Incorporated ("PSEG")
    86. Reed Elsevier PLC and Reed Elsevier NV ("Reed Elsevier")
    87. Regions Financial Corp. ("Regions")
    88. Royal Dutch Petroleum Company and The "Shell" Transport and Trading Company
a. Letter dated January 29, 2003
b. Memorandum of February 11, 2003 meeting
("Royal Dutch/Shell")
    89. Siemens AG ("Siemens")
    90. Southern Company ("Southern")
    91. State Street Corporation ("State Street")
    92. Sunoco Logistics Partners L.P. ("Sunoco Logistics")
    93. AB Svensk Exportkredit AB (Swedish Export Credit Corporation) ("SEK")
    94. Telefonica, S.A. ("Telefonica")
    95. Telekom Austria AG ("Telekom Austria")
    96. TEPPCO Partners, L.P. ("Teppco")
    97. Toyota Motor Corporation, et al. ("Toyota")
    98. Transamerica Finance Corporation
a. Letter dated February 19, 2003
b. Memorandum of February 6, 2003 meeting
    99. Unilever PLC / Unilever N.V.
a. Letter dated February 14, 2003
b. Memorandum of February 6, 2003 meeting
    100. Williams Energy Partners L.P. ("Williams")
  e) Governmental Bodies and Representatives
    101. The Treasury of the Government of Australia ("Australian Treasury")
    102. Brazilian Securities Commission ("CVM")
    103. California Board of Accountancy ("CBA")
    104. Canadian Department of Finance ("Canada")
    105. Commissione Nazionale per le Societa e la Borsa ("Consob")
    106. Financial Services Agency of Japan
a. Letter dated February 14, 2003
b. Letter dated March 11, 2003
    107. Japanese Ministry of Economy, Trade and Industry ("Japan-METI")
    108. Alexander Schaub, Internal Market Director General, European Commission ("Schaub")
  f) Law Firms and Attorneys
    109. Baker & McKenzie (Russia) ("BM-Russia")
    110. Baker & McKenzie (Ukraine) ("BM-Ukraine")
    111. Christensen, Miller, Fink, Jacobs, Glaser, Weil & Shapiro, LLP ("Christensen")
    112. Cleary, Gottlieb, Steen & Hamilton ("Cleary")
    113. Cravath, Swaine & Moore ("Cravath")
    114. Curtis Thaxter Stevens Border & Micoleau LLC ("Curtis")
    115. David C. Fischer, Loeb & Loeb LLP ("Fischer")
    116. Davis Polk & Wardwell ("Davis Polk")
    117. Michael Groll, LeBoeuf, Lamb, Greene & MacRae ("Groll")
    118. Steven K. Hazen, Esq. ("Hazen")
    119. D. Michael Jones, McGuireWoods LLP ("Jones")
    120. Kelly Hart & Hallman, A Professional Corporation ("KHH")
    121. Linklaters ("Linklaters")
    122. Frederick D. Lipman, Blank Rome LLP ("Lipman")
    123. Elliot Miller, Kleban & Samor, P.C.
a. Letter dated February 14, 2003
b. Letter dated January 27, 2003
    124. Osler, Hoskin & Harcourt LLP ("Osler")
    125. Piper Rudnick LLP ("Piper")
    126. Jeffrey S. Robinson, White & Case LLP ("Robinson")
    127. Sullivan & Cromwell LLP ("S&C")
    128. Vinson & Elkins L.L.P.
a. Letter dated February 14, 2003
b. Memorandum of March 6, 2003 meeting
  g) National Securities Exchanges and National Securities Associations
    129. American Stock Exchange ("Amex")
    130. The Nasdaq Stock Market, Inc.
a. Letter dated February 27, 2003
b. Letter dated March 18, 2003
    131. New York Stock Exchange, Inc. ("NYSE")
  h) Pension Funds, Institutional Investors and Institutional Investor Associations
    132. American Federation of Labor and Congress of Industrial Organizations and the Federation of German Unions, Deutscher Gewerkschaftsbund ("AFL-CIO")
    133. California Pubic Employees' Retirement System ("CalPERS")
    134. California State Teachers' Retirement System ("CalSTRS")
    135. Council of Institutional Investors ("CII")
    136. International Brotherhood of Teamsters ("Teamsters")
    137. Office of the State Comptroller of New York ("NY Comptroller")
    138. State of Wisconsin Investment Board ("SWIB")
    139. Teachers Insurance and Annuity Association - College Retirement Equities Fund ("TIAA-CREF")
  i) Individuals
    140. Wayne Avellanet ("Avellanet")
    141. Francisco J. Barragan ("Barragan")
    142. Melody Boehl ("Boehl")
    143. Michael Chenkin and Gregory Warren
a. Letter dated January 15, 2003
b. Letter dated February 18, 2003
    144. Kenneth Christenson ("Christenson")
    145. David Gold ("Gold")
    146. Ralph S. Saul ("Saul")
    147. Daniel S. Shook ("Shook")
    148. Greg Swalwell ("Swalwell")
  a) Academics
    149. Samuel C. Thompson, Jr., University of Miami Law School ("Thompson")
  b) Associations
    150. America's Community Bankers ("ACB")
    151. American Bankers Association ("Am. Bankers")
    152. Association of Private French Enterprises - Association of Large French Enterprises ("AFEP-AGREF")
    153. British Bankers Association ("BBA")
    154. European Banking Federation ("FBE")
    155. The Irish Bankers Federation ("IBF")
    156. Italian Association of Limited Liability Companies ("Assonime")
    157. Organization for International Investment ("OFII")
    158. Vereniging Effecten Uitgevende Ondernemingen ("VEUO")
  c) Corporations and Corporate Executives
    159. Letter on Behalf of German Chief Financial Officers ("German CFOs")
    160. Letter on Behalf of Japanese Corporations ("Japanese Cos.")
    161. CEMEX, S.A. de C.V. ("Cemex")
    162. Confidential Communications Services LLC
a. Letter dated November 18, 2002
b. Letter dated November 20, 2002
    163. E-cerv, inc. ("E-cerv")
    164. The News Corporation Limited ("News")
    165. Nomura Holdings, Inc. ("Nomura")
    166. ORIX Corporation ("Orix")
  d) Governmental Bodies and Representatives
    167. Frits Bolkestein, Member of the European Commission
a. Letter dated August 29, 2002
b. Letter dated November 11, 2002
    168. Financial Services Agency of Japan
a. Letter dated September 13, 2002
b. Letter dated November 6, 2002
c. Letter dated November 29, 2002
d. Memorandum from December 5, 2002 meeting
    169. Narciso Munoz, President, Comision Nacional de Valores, Argentina ("Munoz")
    170. Alexander Schaub, Internal Market Director General, European Commission ("Schaub")
    171. Superintendencia de Valores y Seguros, Chile ("SVS")
    172. David Syz, State Secretariat for International Affairs, Switzerland ("Syz")
  e) Law Firms
    173. Locke Liddell & Sapp LLP ("Locke")
    174. Sullivan & Cromwell ("S&C")
  f) Individuals
    175. Michael M. Gitin ("Gitin")
    176. David Gold ("Gold")
    177. Everit Sliter ("Sliter")

II. Overview

We received over 185 responses regarding the proposals. Commenters expressed general overall support for the Commission's approach to implementing Section 10A(m) of the Exchange Act. Advocates of investors in particular endorsed the Commission's proposals, though not all believed Section 10A(m) and the Commission's proposals went far enough, particularly with respect to independence.

Commenters provided general overall support for the independence requirements. As noted above, several investors supported having the Commission mandate additional independence criteria, as compared to leaving such responsibility to the self-regulatory organizations (SROs). However, a greater number of commenters did not support having the Commission impose additional criteria, preferring to leave additional requirements to the SROs.

Several commenters requested additional clarification on the independence standards, particularly the impact of several terms used by the Commission. Several commenters also requested greater clarification regarding the types of commercial relationships that would not be prohibited. While many supported the proposed definition of "affiliate" with minimal modifications, several expressed concern regarding the impact of the proposal on significant shareholders and their designees. A large number of commenters also expressed concern about the impact of the proposals on master limited partnerships. Commenters overall supported the limited exemptions from the independence requirements proposed by the Commission, such as the holding company exception, multiple listing exception and the new issuer exception, although several requested extensions for these exemptions.

Commenters were mixed on several requests for comment regarding independence, with commenters representing investors generally advocating against weakening the proposals and commenters representing issuers generally requesting more flexibility. For example, commenters were mixed whether there should be a de minimis exception to payments and whether issuers should be allowed to request case-by-case exemptions.

Commenters generally supported the proposals regarding Section 10A(m)'s remaining audit committee responsibilities, such as responsibility relating to accounting firms, although several commenters representing predominately accounting firms requested clarification on the oversight requirement and believed the proposal should be limited. In addition, commenters were mixed on whether the Commission should mandate specific procedures regarding handling complaints. The majority preferred the Commission's proposal of leaving authority and flexibility to the audit committee to develop appropriate procedures in light of a company's circumstances. However, a significant minority representing some investor groups and several providers of complaint outsourcing services argued that specific procedures are necessary to ensure a sufficiently independent procedure.

The application of the proposals to foreign issuers attracted the largest number of commenters, including comments directly from many foreign issuers and their representatives. The commenters expressed overwhelming support for the Commission's approach of providing tailored exemptions where the requirements of Section 10A(m) would result in a direct conflict with home country legal or listing requirements. In accordance with the Commission's request for comment, many outlined refinements to the Commission's proposals, with the majority of comments directed to the board of auditors exception and the proposed instruction regarding possible conflicts with shareholder approval requirements. Several commenters also came forth with additional areas they believed should be accommodated to avoid conflicts with home country requirements.

While several commenters believed the proposed implementation periods were adequate, a majority requested additional time to comply, particularly because the operative date for the requirements would fall before or during the 2004 annual meeting period for many issuers. Several commenters also recommended delayed implementation for foreign issuers. Commenters were nearly unanimous that there should not be different requirements for smaller issuers, although a few did support accommodations, such as a delayed implementation period.

Commenters overall supported the Commission's proposed disclosure changes with few suggested refinements. Apart from the Commission's proposals, several commenters expressed support for expanded disclosure on the determination of an audit committee member's independence. Several commenters representing foreign issuers did not support the proposed disclosure that an issuer relying on an exemption disclose its assessment of whether such reliance would materially adversely affect the ability of the audit committee to act independently and satisfy the other requirements.

The responses are discussed in more detail below. The Commission received several comments before the proposals were issued by the Commission, the majority of which related to application to foreign issuers. These comments are summarized in a separate section at the end of the comment summary.

III. General Applicability of the Proposals

  • One commenter urged the Commission to steer away from specificity where possible to give companies and their boards flexibility to apply the requirements in good faith.1

  • Two commenters urged the Commission to use specificity and bright line tests where possible for consistency, investor confidence and to avoid evasion and gamesmanship.2

  • Three commenters supported that in the absence of a separate committee, the full board must comply with the proposals.3

  • One commenter believed that in the absence of a separate committee, the audit committee should be deemed to be all non-executive directors, not the full board.4 To do otherwise forces an issuer to have a separate audit committee.

  • One commenter recommended a provision, similar to the safe harbor provision in the audit committee financial expert rule, to the effect that the rule shall not be deemed the basis for a private civil action and is not intended to increase the responsibilities of audit committee members under state law.5

  • One commenter believed that the board of directors should be fully informed about the actions and deliberations of the audit committee, continue to monitor all aspects of a listed company's business and affairs, including the performance of the audit committee, and be in a position to take whatever steps necessary should an audit committee fail to perform its duties or undertake actions the board determines are contrary to the best interests of the company and its shareholders.6

IV. Audit Committee Member Independence

A. General Comments

  • Ten commenters supported independence criteria beyond in Section 10A(m), such as:7

    • Additional independence standards endorsed by the Council of Institutional Investors, requiring all SROs to observe the same definition.8 Allowing different definitions is confusing and encourages a race to the bottom. The CII definition allows only nontrivial professional, familial or financial connections to the issuer, its chairman and its executive officers.

    • Otherwise adding relationships with an audit committee member or an affiliate apart from board service (some advocating a cap on such relationships), including affiliations with a significant customer, supplier, tax-exempt entity or other entity in which the member has significant business, financial or other interests, as well as personal service contracts.9

    • Restrictions on service by former audit partners or employees.10

  • Thirteen commenters did not support expanding beyond the criteria in Section 10A(m) (including ordinary course commercial relationships), preferring to leave additional requirements to the SROs.11

  • Seventeen commenters believed the board of directors is the appropriate body to determine audit committee member independence.12 Two suggested the board be required to consider the nature and significance of ordinary course commercial relationships.13

  • One commenter believed that instead of board determination, independence should be determined by strict bright-line tests, with disclosure of how they were followed.14

  • One commenter said it should be left to the SROs to decide whether the board should be required to determine independence.15

  • Two commenters supported a more principles based approach to independence as opposed to detailed rules.16

  • One commenter suggested that independence could be viewed less as a series of qualifications considered at the beginning of tenure but instead as an annual examination required for continued service based on the member's actions.17

B. Consulting, Advisory or Other Compensatory Fee Prohibition

  • Four commenters expressed specific support for the formulation of the restriction, including the extension to indirect payments and family members.18

  • Three advocated an extension to more family members, such as all children, siblings, parents and parents-in-law.19

  • Two urged deleting the "sharing of home" requirement.20 One would apply it to all children,21 and the other would not apply it to legally emancipated children.22

  • One commenter suggested that the limitation should apply to all household members, as well as others with a relationship that could pose significant influence over the audit committee member.23 The commenter also believed all persons currently employed by the issuer's accountants and lawyers should be prohibited from any board service.

  • Seven commenters expressed support for an exception for non-executive family members employed by the issuer.24 One and an additional commenter urged that if there is an exception, it should be limited to non-management, not just non-executive, employees.25

  • One commenter did not believe a non-executive family member exception is necessary given the narrow application to family members.26

  • Fourteen commenters supported applying the prohibitions only to current relationships and did not support a look back or cooling off period, instead preferring to leave any additional requirements to SROs.27 In particular, two believed retired audit partners, investment bankers, attorneys, etc. should be permitted, consistent with the auditor independent rules.28 Some offered suggestions if there was such a period, such as (1) it should be no longer than one year,29 (2) there should be a phase-in,30 and (3) there should be a one year exemption of a look back period for new issuers.31

  • Nine commenters supported a look back period.32 One advocated one year,33 four advocated three years34 and three advocated five years.35 One argued that the same logic justifying a cooling off period before audit partners can assume issuer management and audit partner rotation argues for a cooling off period for audit committees.36

  • Two commenters mentioned that if there is a look-back period, it should not be applicable to affiliation based on share ownership.37

  • One commenter recommended prohibiting consulting, advisory or compensatory fees from any affiliate thereof.38 Another commenter noted that the release discussion describes the prohibition this way, but the rule text refers to just the issuer and requested clarification of whether this refers to fees on behalf or for the benefit of the issuer.39

  • Sixteen commenters supported clarifying that "compensatory fees" or "indirect" fees do not include compensation received under a retirement or similar plan (some specified non-contingent or non-discretionary plans) in which a former officer or employee participates.40 An additional commenter supported leaving it to the SROs to decide.41 Several noted that the NYSE and Nasdaq have such clarifications in their proposed listing standards. Two supported incorporating wording from the auditor independence rules.42

  • Two commenters requested payments made to a director arising from or in connection with direct or indirect investments by the director in the issuer are not considered consulting, advisory or compensatory fees.43

  • One commenter believed "indirect" payments should include payments made to any employees-not just partners or similar high level executives-working for companies that receive consulting, advisory or other consulting fees from the issuer.44

  • One commenter recommended against any prohibition on "indirect" payments.45

  • Two commenters believed the term "partner, member or principal" is over inclusive (i.e., captures limited partners and non-managing members).46 One believed it should not be applied to any member of an organization providing a service if the audit committee member's compensation was not directly affected by payments received from the issuer for the relevant services.47 The other believed indirect payments should be limited to entities in which an audit committee member is an executive officer, rather than a partner, member or principal.48 In the absence of ability to control the associated entity, no policy purpose is served by applying the indirect prohibition beyond executive officers. In the alternative, limit to either (2) executive officers and persons with more than 10% interest in the profits or capital of the entity, or (2) limit partner and member to a general partner and managing member and delete the vague reference to principal.

  • Four commenters believed the term "partner, member or principal" requires further definition.49 Two questioned the application to large, diversified corporation organizations that do not have partners or members (i.e., is an executive officer of an investment bank owned by a conglomerate covered).50 One requested confirmation that services as a non-management director or supervisory board member would not constitute a partner, member, principal or similar position.51 One would define it as a natural person if he or she holds an equity interest in the issuer that entitles him or her to participate in the management of the company, or in the case of a stock corporation, if he or she has been appointed as a member of senior management (which in the case of dual board companies normally involves membership on the management board).52

  • One commenter asked for clarity of the meaning of "similar positions."53 Does it include associates or senior managers? Retired partners or principals should be permitted.

  • One commenter was unsure of the phrase "or any other similar services" and believed it should be eliminated as it raises more questions than it answers.54

  • Three commenters expressed support that the proposal would continue to allow ordinary course commercial business relationships, including allowing issuers that are banks to continue ordinary course loans and other banking relationships with directors and their related entities, consistent with existing Federal and Sarbanes-Oxley Act provisions.55

  • Six commenters believed more guidance is required on the types of ordinary course commercial relationships that are not prohibited.56 One requested more examples.57 One gave an example of an audit committee member's firm that repossesses cars for a bank when loans default. If the member suggests that certain cars be towed first, the commenter assumes this is not an "advisory" service58 One encouraged a definition.59 One commenter recommended confirmation that routine services, such as custodial, cash management and stock brokerage services in the case of an investment banking firm constitute ordinary course commercial relationships.60

  • Seven commenters requested more clarification regarding relationships with banks.61 For U.S. issuers that are banks, independence should not be impaired as a result of banking relationships between the issuer's banking affiliate and a director or his/her related interests, if the relationships are made in the ordinary course of business and on the same terms as comparable transactions with non-affiliates, and any extensions of credit comply with applicable law, including Regulation O and Exchange Act Section 13(k). Two recommended a specific exception for banks,62 and one provided a definition of "banking relationship."63 In addition, in some foreign jurisdictions, it is customary for a representative of a long-term relationship bank to sit on the audit committee. These banks occasionally engage in investment banking or financial advisory work as part of ordinary-course commercial relationships. But these relationships arguably would fall under "advisory" or "financial services" in the proposed rule. For example, would the prohibition include a bank that participates in a syndicate of banks which provides a revolving credit facility (even if the bank is not the arranger)? Would it include a member of an underwriting syndicate (even if the bank is not a lead underwriter)? Commenters suggested clarifying that these relationships are acceptable.64 To do otherwise unnecessarily restricts the pool of available candidates. One believed the advisory prohibition should be limited to advisors to the issuer in its role as a securities issuer.65

  • Four commenters recommended codifying that independence would not be precluded on the basis of ordinary course business relationships.66 One would include a statement that a director who would otherwise be considered independent should not be disqualified from service because he or she is associated with an entity which supplies consulting, advisory or similar services where such services, in the ordinary course of commercial business relationships, are supplied incidental to the supply of goods or other kinds of services or are otherwise part of an ordinary course commercial relationship.67 One believed no relationships should be precluded unless the director is directly or indirectly compensated based on such transactions of business relationships, similar to the cross-selling compensation prohibition in the auditor independence rules.68 An additional commenter believed there should be a specific exception for arms-lengths relationships, with annual disclosure.69

  • One commenter believed the test for indirect law firm relationships should be whether a director shares in legal fees paid by the issuer to the firm.70 The commenter is of counsel at a firm that represents an issuer of which the commenter is a director. While a firm employee, the commenter does not share in billed fees. The commenter may need to resign from the firm, which would make him more dependent on the issuer for compensation.

  • One commenter requested that the rule make clear that only compensation for advisory services are covered by the restrictions on direct and indirect compensation.71

  • One commenter noted that without further clarification, the following should be acceptable as long as they are accorded directors by virtue as their status as directors:72

    • Participation in employee purchase discount plans;

    • Maintenance of life insurance policies

    • Loans to directors permissible under Section 402 of the Sarbanes-Oxley Act

    • Participation in company health and welfare benefit plans.

  • Four commenters recommended clarification of the scope of permissible compensation as a director.73 For example, could a director's compensation consist of a fixed monthly fee, and a percentage contingent on profits? One recommended explicit statements that reimbursements of reasonable and necessary director expenses are permitted. One believed independence should address share-based compensation, such as stock options. [Note: The proposal does not apply to compensation paid for capacity as a director]

C. Affiliated Person Prohibition

  • One commenter recommended that the prohibition be modified to prohibit an audit committee member from being an affiliated person of the issuer or any affiliate thereof (vs. the proposed prohibition which applies to the issuer or any subsidiary thereof).74

  • Eight commenters supported the proposed definition of affiliate.75 Two specifically agreed with the 10% shareholder threshold.76

  • One commenter, while supporting some objective criteria to aid in determining affiliate status, believed it cannot be reliably assumed that less than 10% owners are not affiliates, and recommended a lower threshold, perhaps 5% or lower.77

  • One commenter believed all owners over a 20% threshold should be disqualified.78

  • Four commenters supported a 20% threshold if there will be a safe harbor.79

  • One commenter recommended that a control criterion based on ownership should be a 30% threshold or the majority of voting rights for the last three shareholder meetings.80 The 30% threshold in many European jurisdictions is the threshold for a mandatory take-over bid.

  • One commenter believed the safe harbor test relating to beneficial ownership be available to: (1) a person who beneficially owns no more than 10% of the voting power in the election of the issuer's directors and (2) a person who owns more than 10% but less than 20% of the voting power in the election of the listed issuer's directors and who does not have a right to designate any of the company's directors.81 Regarding (2), a shareholder would not be deemed to have the right to designate a director merely because it possesses up to 20% of the voting power.

  • Two commenters did not support relying on a definition similar to Exchange Act Rule 12b-2 or Securities Act Rule 144, believing it is overly broad.82 Instead, the focus should be on improper relations with management. It is inappropriate to prohibit in all cases significant stockholder representatives when the focus should be on independence from management. The 10% threshold could become viewed as a ceiling for ownership. One would eschew any threshold in the safe harbor and leave affiliate status to the board.83 According to the other commenter, a majority stockholder should be presumed to be an affiliate (which could be rebutted by the board) and all other stockholders should be presumed to be not affiliates.84 Any safe harbor threshold should be far higher than 10%. The fact that a shareholder can elect a minority of directors should not preclude independence. The release should state venture capital and other private equity investors qualify so long as they otherwise meet the requirements.

  • Six commenters were concerned that the proposal may impact the opportunity of significant (but non-controlling) shareholders or their representatives to serve as members of audit committees.85 These commenters believed significant stockholders enhance, not impair, director independence and increase shareholder value.

    • One argued that independence should not be based just on an ownership level that indicates control under conventional affiliate analysis.86 Venture capital fund directors pose no material risk of control abuse and instead bring benefit to issuers and shareholders. While in theory a significant owner could wield control, in practice there are mitigating facts (checks and balances and lack of motive and opportunity) that would prevent abuse. Several studies show that large shareholder directors enhance corporate performance and increase value. A facts and circumstances approach is urged. In the alternative, provide a safe harbor for directors like venture capital fund directors to reflect their minimal risk of abuse.

    • One urged removing the 10% shareholder aspect of the safe harbor altogether and leave affiliate as traditionally defined by non-quantitative concepts of control.87 Any quantitative level will in practice become a ceiling and 10% is too low.

    • Two, while supporting the adoption of a Rule 12b-2 definition and a safe harbor, believed the 10% threshold is too limiting because many will feel uncomfortable serving if they do not meet the safe harbor.88

    • One suggested defining affiliate so as not to disqualify persons who are otherwise unaffiliated but who are associated with entities that beneficially own less than 50% of voting power and do not have to power to designate and do not in fact constitute a majority of the board.89 In the alternative, owners of between 10% and 49% should be permitted to serve on the audit committee. If neither approach is followed, grant issuers formal liability relief from determinations or judgments made by the independent audit committee of equity investees.

  • One commenter supported the clarification that a director, executive officer, partner, member, principal or designee of an affiliate would be presumed to be an affiliate.90

  • One commenter believed the clarification that a director, executive officer, partner, member, principal or designee of an affiliate would be presumed to be an affiliate should be removed as it contrasts with the facts and circumstances analysis contemplated by the definition of affiliate.91 It is over inclusive and captures those who may not control the affiliate (for example, would "partner" include a limited partner?). If it is to be retained, it should be limited to executive officers of the affiliate, which are the only ones said to control the affiliate. "Principal" and "designee" are undefined and unclear.

  • Another commenter requested clarification that passive ownership positions that do not involve management or control (such as limited partner status) should not be presumed to be disqualifying.92

  • Three commenters were concerned with the specification that any director of an affiliate is an affiliate.93 One requested clarification that a non-management director or supervisory board member of an affiliate should not be deemed an affiliate based solely on such relationship.94 One believed the specification should be removed since the director may be otherwise independent and not an affiliate of such entity under a facts and circumstances analysis.95 The language is inconsistent with the justification for the holding company exemption. Another requested the Commission make clear that outside directors of a controlling shareholder who would otherwise qualify as independent are excluded from the "presumed to be an affiliate" requirement.

  • One commenter requested a modification for the clarification that a "partner" and "member" would be presumed to be an affiliate to deal with limited partnerships and limited liability companies.96 The commenter would limit the formulation to general partners, managing members and anyone owning more than 10% of the limited partnership or non-managing member interests.

  • Fifteen commenters believed the safe harbor requirement of not being a director is ambiguous as audit committee members are directors.97 Eight recommended deleting it.98

  • One commenter suggested that the safe harbor be clarified to make clear that it applies to entities other than the issuer and not just the issuer.99

  • Two commenters believed safe harbor also should refer to beneficial ownership of any class of "voting equity securities" rather than any class of "equity securities."100

  • One commenter recommended a rebuttable presumption that those who cannot rely on the safe harbor are considered affiliates.101 The presumption could be rebutted by a consideration of individual facts and circumstances on the ability to exercise control.

  • Six commenters recommended against a rebuttable presumption that those who can not rely on the safe harbor are considered affiliates.102 One requested a stronger statement on this point.103 Boards should have discretion to determine that even a greater than 10% shareholder is independent based on all facts and circumstances.

  • One commenter believed the inclusion of the term "designee" in the definition of affiliate is an expansion of the affiliate concept beyond its traditional meaning and beyond similar state law concepts and requested that it be deleted.104 For new and significantly owned issuers, all directors could be deemed designees of an affiliate and not independent.

  • One commenter requested clarity on whether the term "director" in the definition of affiliate refers to a director of a management board (preferred) and/or a director of the supervisory board (not preferred).105

  • One commenter believed the rules should adopt a principles-based approach for affiliate status and address the total wealth portfolio of the individual.106

D. New Issuer Exemption

  • One commenter did not believe the exemption was necessary and believed audit committees should consist solely of independent directors, without exception.107

  • One commenter supported the 90 day period, arguing it would achieve an adequate balance between the need for independence and the need for historical experience.108

  • One commenter believed it should not extend beyond one member, at least a majority of the committee must be independent and the period should not exceed 180 days.109

  • An additional commenter did not support an extension beyond one member.110

  • Two commenters recommended an 180 day period,111 with one advocating an extension to a minority of the committee.112

  • One commenter believed the exemption should be for one member provided that (1) the member is not a member of management and (2) at least one member does meet the independence criteria for the period from the date on which the issuer's initial registration statement becomes effective until the date of the annual meeting of the issuer following the first anniversary of the date on which the issuer's initial registration becomes effective (but in no event more than 180 days after the first anniversary of the date on which the issuer's initial registration statement becomes effective), with a longer transition period for a companies with a public float of less than $75 million.113

  • Eight commenters recommended a one-year period,114 with one advocating application to the full committee,115 and another advocating application to a minority of the committee.116

  • Three commenters recommended the historical approach of the NYSE's listing standards that two of three independent members must be appointed within 90 days and the third must be elected within one year.117

  • One commenter requested a two-year period for all audit committee members.118

  • Another commenter requested an extension of time, but did not provide specifics.119

  • Two commenters recommended an extension to issuers listed in their home jurisdiction at the time they first become listed in the U.S.120 One advocated an extension for the whole committee until the first annual meeting following the U.S. listing.121

E. Holding Company Exemption

  • One commenter did not believe the exemption was necessary and believed audit committees should consist solely of independent directors, without exception.122

  • Eleven commenters expressed specific support for the exemption as proposed.123

  • Four commenters recommended extending the exemption to any subsidiary of a holding company.124 The exemption should not be limited to just majority owned or consolidated subsidiaries, and the commenters did not see the relevance of these qualifications. One of the commenters instead recommended using the definition of "subsidiary" in Exchange Act Rule 12b-2 that defines subsidiary of a specified person as "an affiliate controlled by such person directly, or indirectly through one or more intermediaries."125 Alternatively, replace "consolidated, majority-owned subsidiary" with "controlled subsidiary." One of the commenters was concerned about accommodating master limited partnerships.126

  • One commenter recommended extending the exemption to any entity supported by the holding company's credit.127 An entity whose securities are fully and unconditionally guaranteed by a parent should be exempted, regardless of ownership level or consolidation status, as investors will be looking to the parent because of the guarantee.

  • One commenter urged an extension to unconsolidated 50% owned joint ventures.128

  • One commenter recommended eliminating the consolidation requirement and requiring boards to make a determination of whether the operations and strategy of the parent and subsidiary are aligned.129 If they are not, the exemption should be unavailable.

  • Four commenters recommended expanding the exemption to not just parent/subsidiary situations but also to directors that sit on sister subsidiaries (or in the case of a master limited partnership, a subsidiary and a general partner) under common control of a parent, regardless of whether the parent is listed.130 One would modify the language to include directors that sit on the board of both a listed issuer and any affiliate.131

  • One commenter did not believe the qualification that the audit committee member receives only ordinary course compensation for board service is necessary.132

  • One commenter believed that representatives of parents of consolidated subsidiaries should be allowed to constitute a minority of the subsidiary's audit committee as long as the representative is otherwise independent of the subsidiary (but not of the parent).133

  • One commenter believed the exception disfavors natural persons since they cannot consolidate accounts of entities.134

  • One commenter recommended an accommodation for mutual insurance companies that are not required to prepare or publish GAAP financial statements.135 While the exemption would permit an audit committee member to sit on the boards of both a listed issuer and its parent, the parent may not be required to prepare or publish GAAP financial statements that would reflect subsidiary consolidation. The exemption should be modified to apply also to a direct or indirect majority owned subsidiary of a parent if the financial statements of the listed issuer would be consolidated with those of its parent if the parent were required to prepare GAAP financial statements. There would still be a unity of interest contemplated by the original consolidation requirement.

  • Two commenters questioned whether the parent could use the audit committee members of a subsidiary without the members themselves being parent directors.136

F. Requests for Other Exemptions

  • Six commenters did not believe any additional relationships should be exempted, including any de minimis exceptions or exceptional and limited circumstances exceptions.137 Several believed the existing exceptional and limited circumstances exceptions have been applied in practice more broadly than intended.

  • Six commenters supported an exceptional and limited circumstances exception.138 One suggested a one-year term,139 another six months,140 and another two years.141 Two of the commenters requested the exception for smaller issuers.142 A commenter that did not recommend such an exception urged that if there is one, it should be one year and disclosure should be required.143

  • Seventeen commenters supported some form of de minimis or immaterial exception, at least with respect to the indirect fee prohibition.144 One supported a 1% limit of annual fees received by the entity,145 three supported a 5% limit,146 one supported a 15% limit,147 and one supported $20-25,000.148 Four referred to the standards in Item 404 of Regulation S-K.149 Others supported a materiality standard.150 One supported such an exception for small issuers only.151 Precluding an advisor from service simply because his/her firm received immaterial compensation for services seems unfair, overly restrictive and narrows the pool of candidates. One commenter supported disclosure of any materiality determinations by the board.152

  • One commenter believed SROs should be permitted to develop criteria or procedures to allow incidental or immaterial compensatory payments to a relative of a director.153 The commenter did not support a de minimis or immaterial exemption for payments directly made to a director. An additional commenter recommended a de minimis exception for payments to firms of family members.154

  • Eight commenters did not believe companies should be permitted to request exemptive relief on a case-by-case basis.155 However, one recommended delegation to the Director of the Division of Corporation Finance if new foreign conflicts arise.156

  • Eight commenters supported case-by-case exemptions by the Commission or SROs.157 Two urged SRO authority to exempt small businesses on a case-by-case basis.158 One requested case-by-case exemptions for alternative governance structures, but not for issuers who believe they have extenuating circumstances.159

  • Seven commenters believed the rule should provide built-in flexibility to adapt to evolving standards of corporate governance throughout the world, and should allow SROs or the Commission to accept, on a case-by-case basis, foreign corporate governance rules and practices when they conflict with or are equally or more protective of investors.160

  • One commenter believed the SROs should be able to decide if there should be de minimis exceptions, case-by-case exceptions and exceptional and limited circumstances exceptions.161 Another commenter believed SROs should be primarily charged with interpreting the new standards.162 In recognition of this role, the SROs should publish their interpretations, similar to Commission staff no-action letters.

  • Fifteen commenters requested accommodations for master limited partnerships, or MLPs (or LLCs with managing and non-managing members).163 One of these commenters and four additional commenters raised this concern generally where any issuer is controlled by a large shareholder.164 An MLP, whose common limited partner interests are generally listed for trading, is governed by a general partner. The general partner's directors, including its independent directors, are selected by an affiliate (the owner or controller of the general partner) commonly called the sponsor. The limited partner has no employees or directors, and the limited partner interests generally have no right to elect the directors of the general partner. It could be argued that the directors of the MLP's general partner, because they are selected by the sponsor, are "designees" of an affiliate and therefore not independent. The commenters requested clarification as to the application of the rule to MLPs. As possible solutions:

  • Clarify that for purposes of limited partnerships, the relevant board of directors is the board of directors of the general partner. This could be done by including the parenthetical (or equivalent body) after the term "board of directors" in Rule 10A-3(b)(1)(i).

    • Delete designee from the definition of affiliate

    • Define designee to clarify that something more than mere nomination and election by a sponsor is required to render a person ineligible (should instead exclude only directors who are under the control or direction of another person)

    • Expand the holding company exemption to also include persons designated by, but otherwise independent of, an affiliate, whether that affiliate is listed or not, a majority owner or not, or consolidates or not. The exemption should be available regardless of the source of control.

    • Create an affiliate exemption for MLPs allowing a sponsor to designate audit committee members who are independent of the sponsor (not an executive officer or employee, or 10% stockholder of the general partner or its other affiliates)

    • In addition, accommodations should be made where an intermediate management company exists between the MLP and the general partner or if the MLP is a limited liability company with its own board. The proposed specification that a director of an affiliate is an affiliate would disqualify service. The holding company exemption would not be not available because of no consolidation.165

  • One commenter believed the rules should provide that a director who is independent in all other respects should not be disqualified based solely on association with a 20% shareholder.166 SROs should be able to review the totality of the circumstances in such case. If circumstances indicate the director is under management's influence or likely to abuse its power, SROs should have the authority to deem the director not independent.

  • One commenter requested an exception for attorneys that serve on audit committees if the law firm with which that attorney is associated receives compensation, if such compensation was not the result of voluntary action on the part of, or otherwise caused by, the issuer.167 For example, an issuer that is sued turns the complaint over to its insurance carrier, which in turn selects a law firm to represent the insured. A member of that law firm is on the audit committee of a separate carrier. The law firm searches for other insurance coverage that could be implicated by the suit. Additional carriers may be required to participate, which may include the carrier on which the attorney serves as director. Court rules may prohibit the carrier from hiring separate attorney, and it may need to contribute its portion of legal fees to the original carrier's law firm. While the commenter admitted this is rare, it would render the attorney not independent.

V. Responsibilities Relating to Registered Public Accounting Firms

A. General Comments

  • Five commenters supported the proposal as written, believing additional specificity is not needed and flexibility should be given to the audit committee regarding the execution of those responsibilities, without rigid rules.168

  • One supported the proposal, but asked for clarity that the rule is limited to responsibility only for the auditor of the issuer's financial statements and any audit or attest reports provided by other auditors included or required in a Commission filing.169 An additional commenter believed the rules should cover only the auditor of the issuer's financial statements and not other accounting firms.170

  • One commenter focused on the extension in the rule to oversight of "other audit, review or attest services."171 The commenter believed that Section 10A(m) was only intended to cover the engagement of the principal auditor for the audit and related work (review of interim financials, assessment of internal controls, etc.). For other services by the principal auditor or other accounting firms (i.e., tax services), the audit committee's responsibilities should be limited to engagement pre-approval consistent with Regulation S-X Rule 2-01(c)(7) and no further oversight should be required.

  • One commenter requested a statement by the Commission that the auditor responsibility requirement extends only to auditors that are in fact required to be registered with the Public Company Accounting Oversight Board, and Rule 10A-3 itself imposes no independent registration requirement for foreign public accounting firms.172 The commenter also encouraged clarification that the audit committees responsibilities are not inconsistent with, and are not intended to undermine, the committee's responsibility to report regularly to the full board so as not to interfere with the oversight function of the full board.

  • One commenter was concerned that the release's reference to ultimate authority to approve of all "engagement fees and terms" may cause some to infer that the audit committee must execute the contractual engagement letter."173 The commenter requested clarity that while the audit committee may have ultimate authority, the Commission is not suggesting that the committee must, or even should, review and approve the terms of individual engagements, or execute engagement letters.

  • Three commenters requested guidance regarding the level of audit committee oversight required.174 One noted that given that the audit committee meets only periodically, day-to-day oversight is not feasible.175 One recommended the rule clearly delineate management's responsibility for financial reporting practices, policies and procedures and coordinating day-to-day work of the outside auditor from the audit committee's oversight responsibility.176 To do otherwise runs the risk that the audit committee ends up managing such day-to-day affairs. The other commenter noted the following:177

    • The audit process may involve more than one firm. The rules should identify for which firms the audit committee is directly responsible. Firms (other than the principal auditor) that report on financial statements of a subsidiary that constitutes less than 20% of assets or revenues should be excluded (consistent with the partner rotation rules), although the audit committee should be free to choose to be directly responsible for these firms if it wants.

    • Additional clarity should be provided if oversight is intended to mean more than retention and authority to approve engagements (which are the only specific points mentioned in the release). Oversight should include matters required to be communicated under AU 380 and Rule 2-07 of Regulation S-X.

    • Additional clarity should be given to what level of involvement is implied for resolution of disagreements. It should not be debates resolved by the auditor and management during the audit process, but rather SAS 61, AU 380 and Rule 2-07 of Regulation S-X.

    • Consider whether audit committees should meet periodically with external auditors in private.

    • The release reference to approval of "significant" non-audit engagements should be deleted. The auditor independence pre-approval rules should be sufficient.

  • One commenter requested clarity whether "related work" is used in the same sense as "audit-related" in the auditor independence rules and whether "audit," "review" and "attest" services are used as defined in GAAS.178

  • One commenter believed that, despite the language in the statute, the responsibility for resolving disagreement between management and the auditor should be eliminated.179 Also, oversight of consulting services by the principal auditor should not be covered.

  • One commenter believed internal auditors should manage the external audit contract for the committee under SPPIA 2050 and SPPIA Practice Advisories 2050-01 and 2050-2.180

  • One commenter noted that in engaging the outside auditor, the audit committee or full board, not the issuer, should be designated as the client.181 The board or audit committee should seek competitive bids for outside auditors no less frequently than every five years.

  • One commenter believed that in addition to the auditor independence rules, audit committee pre-approval for non-audit services should be added to Rule 10A-3.182

  • One commenter believed the full board should be required to ratify the audit committee's auditor decisions.183

B. Proposed Instruction Regarding Shareholder Approval of the Auditor

  • Fourteen commenters expressed specific support for the instruction as proposed.184

  • Eight commenters recommended extending the instruction to also include auditor compensation and termination.185 Some foreign laws (i.e., Canada, Italy, UK) rest these powers with shareholders, but the proposed instruction only relates to appointment. One recommended also extending the instruction to auditor oversight.186

  • Five commenters believed the instruction should be turned into an explicit exemption.187

  • One commenter expressed specific support for the position that if local law requires the auditor to be appointed by a body other than the audit committee, the audit committee be required to make a recommendation on such appointment.188

  • Eight commenters believed the instruction does not address a conflict in some countries that prohibit the board from delegating power to make nominations or recommendations to shareholders.189 Several requested accommodations, such as (1) expanding the part of the instruction dealing with instances where directors are prohibited from delegating responsibility to also include the responsibility to make a recommendations to shareholders (with the audit committee having advisory powers to the extent permitted by law), or (2) exempting foreign issuers from the requirement that the audit committee must provide a recommendation to shareholders in such instances.

  • One commenter believed management boards of French companies are prohibited from delegating oversight of external auditors to the supervisory board of any of its committees.190 It proposed that it should be sufficient for French companies to have the audit committee pilot the external auditor selection process, express an opinion on nomination/removal to the full supervisory board (which in turn makes corresponding recommendations to the management board), and have the ability to require the outside auditors to provide reports and information to the audit committee upon request.

  • One commenter noted that some jurisdictions allow shareholder to make counter-proposals for the appointment of the auditor, and believed the instruction should state that it will not conflict with such requirements.191

  • One commenter recommended extending the instruction to also cover voluntary selections of the auditor by shareholders (i.e., not just where local law or listing requirements require it).192

  • Three commenters noted that some jurisdictions allow the outside auditor to only be removed by court order upon specified circumstances.193 Thus, there would be a conflict with the requirement that the audit committee be responsible for the outside auditor's termination. One suggested the instruction should be clarified that the requirement is satisfied by the ability to recommend against reappointment at the end of the auditor's term. Alternatively, the instruction should clarify that the committee be given this responsibility to the extent permitted by law.

  • One commenter noted that the French government is required to select its auditor, not shareholders or the board of directors.194 The proposed instruction would not provide relief. The final rule should include an explicit exemption (1) that a foreign issuer's auditors are to be appointed by the persons or organs specified by mandatory provisions of its home country law, and (2) that where a foreign issuer's home country law subjects the removal of auditors to mandatory procedure, Rule 10A-3's only additional requirement in this regard is that the committee issue a recommendation to the board.

  • One commenter believed the rules should make clear that, in cases where an audit committee does not have legal power to act, it will make a recommendation or report, and that report will be communicated to the body that is legally empowered to act.195

  • One commenter believed the language of the instruction should be improved to state affirmatively that where home country law requires shareholder selection of the auditor, the issuer will satisfy Exchange Act Rule 10A-3's requirements when the auditor recommended by the audit committee is presented to shareholders.

  • One commenter requested clarification that the instruction does not conflict with the U.K. Smith Report that the audit committee provides a recommendation to the board, and thence to shareholders for approval.196 If the board does not accept the committee's recommendation, it shall disclose in its report a statement from the committee's recommendation and why the board has taken a different position.

  • One commenter noted that to the extent U.S. state law requires shareholder appointment, states would be well advised to fix any such conflicts to fall in line with the Sarbanes-Oxley model that gives audit committees this responsibility.197

C. Audit Committee Responsibility for the Internal Auditor

  • Six commenters believed the audit committee should be directly responsible for the appointment, compensation, retention and oversight of the internal auditor, or at least the chief audit executive.198 Only through this relationship would the internal auditor be sufficiently independent to bring malfeasance to the appropriate parties.

  • One commenter believed professional literature and most charters already include oversight responsibility as a matter of best practice and would not object to codifying this responsibility.199

  • Ten commenters did not support requiring the audit committee to be directly responsible for the internal auditor, as it may overwhelm the audit committee, although many did support access and broad oversight of the function.200

  • Four commenters recommended a dual reporting structure both to management and the audit committee.201 The internal auditor should not report to the CFO. The audit committee should determine who the chief audit executive reports to administratively.

VI. Procedures for Handling Complaints

  • Eighteen commenters did not support mandating specific procedures, but instead preferred the proposal of leaving flexibility to the audit committee to develop appropriate procedures in light of a company's circumstances.202 Several mentioned issuers have in place procedures and that such procedures are being modified to address the specific requirements of the proposal. Four believed the audit committee should have the flexibility to utilize an issuer's existing internal compliance infrastructure (i.e., those established under the United States Sentencing Commission's Guidelines for Organizations and its progeny), including internal employees.203 One did suggest guidance on typical practices such as employee training and a rigorous process for reporting questionable accounting or auditing matters.204 Another believed the complaint mechanism should include allegations of management fraud.205 Another believed a telephone hotline should be an example of a preferred procedure.206

  • Ten commenters believed the Commission should mandate specific procedures, arguing that complete flexibility should not be left to the audit committee and the proposal does not establish a sufficiently independent procedure.207 Examples included:

    • Independent third party systems should be required for receiving complaints.208

    • The rule should clarify the period of retention. Three requested at least seven years.209

    • Companies should at least be required to provide the opportunity to file written complaints, protect employees from retaliation, offer an avenue for submitting complaints to independent directors not on the audit committee, provide an avenue for follow-up communications, and retain complaints and records for three years and make them available to the SEC and the PCAOB upon request.210 Also, the regulation should extend to complaints "relating to" (not just "regarding") accounting, internal accounting controls or auditing matters.

    • There must be a widely publicized, confidential and anonymous process that provides employees with reassurance that they will have unfettered access to the audit committee independent of management without fear of reprisal and with an opportunity for employee follow-up where possible.211

    • People providing complaints must be ensured that their confidentiality will be protected.212 Accurate reports of complaints must be quickly generated and maintained by audit committees, independent of management.

    • Monitoring for complaints must occur weekly (and daily before filings), a log of complaints and their treatment (with standardized codes) should be required and made available for periodic Commission inspection. In addition, voluntary guidelines should be issued for employee education and certifications as well as employee rewards for submitting complaints. Disclosure would be required only if an issuer complies with the voluntary guidelines.213

    • Procedures should be standardized for all issuers by the Commission.214

  • An additional commenter urged further guidance, including:215

    • Defining anonymity as providing complaint channels such that no one at the issuer can become aware of the complainant's identity solely be virtue of the complainant's use of the channel; nor solely of any identifying content in the complaint received by the audit committee (e.g., gender, position, location, etc.).

    • Not mandating use of outsourcing or any other particular form of compliance.

    • Treating as a complaint (to avoid confusion between "complaint" and "concern" in the Act) any communication regarding accounting, internal accounting controls or auditing matters that reach the audit committee, whether from the mandated anonymous employee channels or from other direct or indirect channels-and regardless of known, presumed or unknown source.

    • All employees, including part time and contract employees, are covered.

    • Treatment of complaints includes both investigative actions and disposition of the complaint, and that all records be retained for seven years.

    • Providing a safe harbor based on an issuer's use of external complaint handling channels, at least with respect to compliance with the proposed requirement.

    • Treating complaint procedures as part of a system of internal accounting controls.

  • Two commenters recommended an earlier implementation date for the requirement.216

  • One commenter recommended that despite the statutory language, the rule should restrict those who can submit complaints to employees in the financial reporting area.217 The proposal may have the effect of elevating every employment dispute, including from disgruntled employees, into an audit committee matter. Customers, vendors and others should not be permitted to submit complaints because to do so could overwhelm the committee. Similarly, audit committees should be permitted to receive a report that provides a summary of complaints received, instead of actual complaints. In the alternative, clarify that the committee may utilize one or more administrative officers of the issuer for receiving complaints. Requiring third party systems will increase costs.

  • Two commenters believed that any third party organization used for complaints should forward them directly to a member of the audit committee upon receipt.218

  • One commenter believed audit committees should be required to communicate information received regarding questionable accounting, internal accounting controls or auditing matters to the outside auditor.219 An additional commenter believed the outside auditor should have unfettered access to complaints, providing anonymity is protected.220

  • Seven commenters recommended disclosure of the complaint reporting procedures.221 One recommended website or Commission disclosure similar to codes of conduct.222

  • Four commenters recommended against requiring disclosure of procedures.223 One said that if any disclosure is required, it should be part of the Section 302 certification.224

  • Two commenters did not support disclosure of the procedures in Commission filings, but believed the procedures should and would be published within the issuer.225

  • One commenter believed the Commission should require and compile data from issuers concerning the effectiveness of their procedures, with an eye to public disclosure.226

  • One commenter recommended an explicit statement that complaints about potential violations of applicable laws and regulations are included by the requirement.227

  • One commenter believed the phrase "internal accounting controls" in the rule should be interpreted consistent with the COSO report "Internal Control - Integrated Framework." This should include compliance with laws and regulations, unless the issuer has established a qualified legal compliance committee under the attorney conduct rules.228

  • One commenter believed a similar complaint procedures requirement should be mandated for accounting firms regarding their audit clients.229

VII. Authority to Engage Advisors

  • Eight commenters expressed specific support for the requirement as proposed, believing no additional specificity is needed.230

  • Two commenters suggested defining the term "independent" counsel or providing guidance that it is meant to be independent from the issuer.231

  • One commenter supported the Commission's statement that the requirement does not preclude access to a company's regular counsel if the committee so chooses.232

  • One commenter believed the release discussion is pejorative toward outside auditors.233

VIII. Funding

  • Seven commenters expressed specific support for the requirement, believing no additional specificity is needed.234 One advocated re-examining the issue in three years.235

  • Six commenters did not support compensation limits, arguing there would be natural oversight by the full board.236 To do otherwise would subvert the Act's intent. One advocated that if there are such limits, they should be set by the board.237

  • One commenter recommended allowing the board to set reasonable funding limits.238 Fiduciary obligations do not allow the board to completely relinquish oversight.

  • Two commenters recommended adding that compensation be "reasonable," with the full board determining reasonableness.239

  • One commenter believed the full board should be required to ratify compensation.240

  • One commenter believed the rule should also include a requirement that the issuer provide appropriate funding, as determined by the audit committee, for ordinary administrative expenses necessary for the audit committee to carry out its duties.241

  • One commenter focused on the extension to also include compensation for "other audit, review or attest services."242 For the same reasons regarding this extension of oversight responsibility, the audit committee should not be responsible for determining compensation for services by the principal auditor or other accounting firms other than those required under the securities laws (i.e., should not have compensation authority for tax services).243 Also, while the committee is responsible for determining funding, the Commission should clarify that actual payment could continue to be made by an authorized corporate officer.

  • One commenter noted that under Chilean law, the budget of the audit committee and its advisors is set by shareholders and not by the audit committee.244 The audit committee is allowed to recruit advisors within those limits. However, this does not hinder the committee's ability to engage independent counsel since compensation does not rely on management, but on shareholders.

  • One commenter recommended conforming the language which uses "rendering or issuing an audit report" with the oversight language which uses "preparing or issuing an audit report," preferring the latter.245 The requirement should also be limited to the firm auditing the issuer's financial statements and not other firms.

IX. Implementation

  • Five commenters believed the proposed implementation dates are adequate for issuers to make necessary changes to their audit committees.246 Timely implementation is key to restoring investor confidence and public trust.

  • One national securities exchange requested additional time to submit proposals to the Commission because it does not have a regularly scheduled board meeting until June.247

  • One commenter requested allowing "smaller exchanges" an extra 30 days to submit proposed changes after publication of the Commission's final rule.248 Another commenter believed the proposed deadlines for SROs are sufficient.249

  • Ten commenters recommended additional time for issuers to comply specifically because the proposed requirements would become operative before or during the 2004 annual meeting period.250 Some requested until late June251 or July, 2004.252 Others suggested no later than an issuer's first annual meeting after adoption.253 Two were concerned that issuers will not know the full scope of independence requirements until additional SRO listing requirements are approved, and requested a coordinated implementation date.254 One recommended keeping the one year timeframe if SROs adopt their rules by November 1, 2003, but an additional year delay if they do not.255 Another recommended a delay until 15 months after the adoption of the additional standards (or, if the operative date needs to be linked to the Commission's rule, 15 months after its publication).256 Another recommended compliance by a company's first annual meeting occurring after January 1, 2004.

  • One commenter recommended delaying application until a company's first annual meeting of shareholder or other shareholder meeting at which directors are elected following the first anniversary of the approval of applicable securities exchange or association rules, plus 30 days.257

  • Two commenters requested a significant implementation period to allow companies to locate and recruit new audit committee members meeting the independence standards.258 One recommended 18 months after Commission approval of the SRO rules, possibly including an additional year for companies with classified boards.259

  • Six commenters recommended delaying implementation for foreign issuers.260 Three recommended two years.261 One also supported extending the comment period for foreign issuers.262

  • Two commenters recommended delaying implementation for small issuers,263 with one commenter advocating an additional year from that proposed.264

  • One commenter believed companies should be given at least 90 extra days in addition to the proposed year to comply, as this would provide at least 180 days from the proposed date the SROs must have final rules in place.265

  • One commenter believed the rules should give greater flexibility to SROs during their drafting period to come up with either (1) a more thoroughly vetted "one-size-fits-all" framework for foreign exemptions, or (2) a framework that includes case-by-case exemptions if examination of home country procedures determines they accomplish similar protections.266

  • One commenter believed issuers not in compliance with the rules as of the implementation date not be subject to delisting but instead required to disclose the extent to which they are not in compliance and what steps they are taking to come into compliance.267

X. Securities Affected

A. Multiple Listings and Non-Equity Listings by Subsidiaries

  • Fifteen commenters expressed specific support for the exemption.268 One requested clarification that it applies to subsidiaries that file their own financial statements, despite also reporting on a consolidated basis with their parent.269

  • Seven commenters recommended an extension for unconsolidated joint ventures with only listed debt securities (such as 50-50 joint ventures), so long as one or more parents are subject to the rule.270 Consolidation should not be a requirement for a subsidiary or joint venture with only non-equity listings where one or more parents have a complying audit committee. Not doing so would discourage listings by joint ventures. Among other factors, the interest of the parents, through their audit committees, in having accurate financial statements that will be included in their equity accounting should provide sufficient protection. One went as far to say that a joint venture partner should not be considered an affiliate.271

  • Two commenters recommended expanding the exemption to apply regardless of majority-ownership or consolidation, so long as one or more parents are subject to the rule.272 One recommended using the definition of "subsidiary" in Exchange Act Rule 12b-2 that defines subsidiary of a specified person as "an affiliate controlled by such person directly, or indirectly through one or more intermediaries."273 Alternatively, replace "consolidated, majority-owned subsidiary" with "controlled subsidiary." Also, an entity whose outstanding securities are fully and unconditionally guaranteed by a parent should also be covered by the exemption, regardless of ownership or consolidation, as investors will be looking to the parent because of the guarantee.

  • Three commenters argued that the exemption should at least be extended to consolidated subsidiaries even if the consolidating parent is not a majority owner.274 One commenter believed the proposed exemption would not cover trust preferred securities because the issuer is consolidated but not majority owned.275

  • Three commenters did not think the exemption needed to be keyed to a parent equity listing.276

  • One commenter believed the exemption should also extend to equity listings by a subsidiary.277

  • One commenter suggested clarifying that if a foreign issuer is relying on one of the foreign exemptions, U.S. subsidiaries can still rely on the multiple listing exemption.278

  • One commenter supported either a full or partial exemption for any listing by a company that has a shareholder owning more than 50% of the voting control of the issuer where the controlling shareholder is itself subject to Commission reporting requirements.279 Minority shareholders have full awareness of the degree of control exercised by the controlling shareholder. Failure to provide such an accommodation could result in difficulties in the ability of the parent company to exercise control or prepare its own consolidated financial statements if there are disagreements with the controlled subsidiary's independent audit committee. [Note: The Commission's proposing release includes an exemption for non-equity listings by direct or indirect consolidated majority-owned subsidiaries where the parent company is subject to the proposed requirements]

B. Security Futures Products and Standardized Options

  • Two commenters expressed support for the exemption as proposed.280

  • One commenter believed these securities should be treated like any other security.281

C. Requests for Other Exemptions

  • Three commenters did not believe that other securities should be exempted.282

  • Four commenters believed that despite the statutory reference to "any security of an issuer," debt securities and non-convertible preferred securities should be exempted because they have historically not been subject to corporate governance listing standards and issuers have different fiduciary duties to these securityholders than to equity holders.283 The Sarbanes-Oxley Act was directed at equity securities. The compliance burden outweighs the benefits. Application to these securities furthers the regulatory disparity between over-the-counter trading and exchange trading. One national securities exchange mentioned it has received delisting applications from debt-only issuers citing unwillingness to comply with the proposed provisions of the Sarbanes-Oxley Act.284

  • Four commenters recommended exempting debt securities of issuers registered under Schedule B or that file on Form18-K.285

XI. Issuers Affected

A. Foreign Issuers

1. General Comments

  • Four commenters appreciated that certain exemptions may be necessary to accommodate foreign conflicts, although several did not believe a complete exemption for foreign issuers would be consistent with the letter and spirit of Section 10A(m).286 Two urged monitoring of the exemptions, including when foreign laws change, to ensure that investors continue to be adequately protected and new conflicts are resolved.287 One in general did not support foreign exemptions unless absolutely necessary.288

  • Seven additional commenters expressed general support for appropriate exemptions for foreign issuers,289 although one would have preferred a general exemption.290 Others expressing support for particular exemptions are described below.

  • Three commenters recommended complete exemptions for foreign issuers.291

  • One commenter believed foreign issuers should comply with Rule 10A-3 but not with any additional SRO audit committee requirements.292 The commenter did support SRO-required disclosure when home-country practices differ.

2. Two-Tier Boards of Directors

  • Six commenters expressed support for the Commission's handling of this issue.293 However, one asked modifying the reference to "two-tier boards of directors" because these companies have a two-tier board system, not a two-tier board of directors.

  • One commenter urged clarifying that the designation of the supervisory board as the board of directors applies only for Rule 10A-3 (as well as similar changes to auditor independence and audit committee financial expert rules), and not to other securities law or disclosure references.294

3. Employee Exemption

  • Seven commenters expressed specific support for the exemption.295 Three particularly made reference to German employees that are "leitende Angestellte," which are mid-level managers or "superior employees."296 These employees should not be disqualified and this should be clarified. One suggested clarifying that the term "executive officer" has the same meaning as in Exchange Act Rule 3b-7.297 [Note: the proposals already define the term "executive officer" by reference to Exchange Act Rule 3b-7]

  • One commenter recommended not limiting the exemption to employee directors elected or appointed pursuant to legal or listing requirements.298 In some countries, such directors are not required by any legal or listing requirements, but rather have evolved as common practice or may be required by governing documents or labor agreements.

4. Controlling Shareholder Exemption

  • One commenter expressed specific support for the 50% threshold, observer status, non-executive requirement and non-chair requirement.299

  • One commenter believed the exemption should allow more than one observer (but no more than one observer per shareholder), without regard to shareholder ownership level.300 Any significant shareholder with less than 50% ownership should have the right to monitor its investment. Each observer would need to satisfy the independence requirements, and the voting members must have the right to meet in private.

  • Five commenters believed the shareholder representative should be allowed to be a voting member (and, according to some, even chair), not just an observer.301 These shareholders make a substantial contribution to the committee's work and have a compelling interest to exercise oversight. Not doing so limits the pool of qualified candidates. One of the commenters would allow more than one representative as long as they did not constitute a majority.302 One supported the no chair, no executive and no compensation requirements.303

  • Another commenter recommended an exception to the observer requirement.304 Some countries have requirements prohibiting a controlling shareholder from putting their interests above subsidiaries, making the lack of a vote as a condition unnecessary. Accordingly, the representative should have a vote where it is prohibited by local legal or listing standards from putting its interests above the issuer's interests.

  • One commenter requested extending the exemption to the "no compensation" prong in addition to the "no affiliate" prong.305 Without an exemption, the shareholder designee would not be allowed to receive compensation paid by the issuer or an issuer affiliate, which would presumably include the controlling shareholder itself.

  • Seven commenters recommended lowering the ownership threshold.306 Two recommended reducing the 50% threshold to 10%.307 Two recommended making the exemption available to any affiliate.308 One thought consolidation should be the test.309 One thought there was no investor protection reason to impose any minimum shareholding to qualify.310 One would apply it to any shareholder.311

  • Two commenters, while not advocating reducing the percentage threshold, recommended making the test 50% of the number of shares represented at the last shareholders meeting, which is needed to more accurately reflect European practices.312

  • Three commenters recommended extending the exemption to U.S. issuers, arguing that the same rationale applies.313 One would extend it to anyone above the ownership threshold in the affiliate safe harbor.314 If the exemption is not extended, clarify that granting observer status is permissible even without an exemption.

  • One commenter believed the language referring to an "owner of more than 50% of the voting common equity" should be revised to "owner of securities carrying more than 50% of the voting rights attaching to all of the outstanding voting securities."315 Some issuers have multiple voting shares in addition to common equity. The multiple voting shares, often held by founders as a means to retain control, grant multiple votes per share. Founders may possess more than 50% of the voting rights of all outstanding equity securities, but do not own more than 50% of the number of voting equity securities.

5. Foreign Government Representative Exemption

  • One commenter expressed general support for the exemption.316

  • One commenter recommended a complete exemption for issuers directly controlled by a foreign government.317 In the alternative, exempt members that work for the government when the issuer is controlled by the government.

  • Three commenters recommended extending the exemption to more than one member.318

  • Three commenters requested clarity that the exemption applies not only to governments that hold stakes directly, but to entities administering a state holding, regardless of form.319

6. Board of Auditors Exemption

  • Three U.S. commenters expressed specific support for the exemption.320 One requested clarification that the exemption is not limited to Japanese issuers given that it is the only country referenced in a footnote regarding the exemption.321

  • Eleven commenters representing Japanese issuers supported the board of auditors exemption.322 They and two additional commenters323 did not support a sunset date. Many outlined the Japanese system of corporate statutory auditors to demonstrate that the system complies with the exemption, and requested clarification if it did not. Eight of the commenters and two additional commenters also recommended extending the exemption to Japanese companies that elect to have an audit committee of its board of directors under Japanese corporate law.324 To do otherwise may discourage companies from choosing that option. In the alternative, at least provide a three year phase-in325 or exempt the audit committee from the independence requirements since in Japan only a majority of audit committee members must be independent.326 This is appropriate since it is difficult in Japan to recruit outside directors and one of the functions of the Japanese audit committee is also to inspect the execution of business by management.

  • One of the commenters representing Japanese issuers that supported the exemption believed several changes were necessary to reflect actual practices.327 In particular:

    • The commenter questioned whether the Commission agreed that the Japanese board of statutory auditors has the direct responsibility for auditor oversight contemplated by the Commission. The commenter suggested a less precise standard than "directly responsible" or state that the Japanese system complies.

    • The commenter was concerned that statutory auditors do not have specific authority to resolve disagreements between management and auditors as contemplated by Section 10A(m). The rule should omit this reference.

    • The statutory auditors may not be involved with the U.S. GAAP financial statements that are audited by a registered public accounting firm (as opposed to Japanese GAAP financial statements), nor may they be involved with other audit, review or attest services. The rule should limit oversight by statutory auditors to work on audit reports required by local law. Alternatively, the rule should provide that the "directly responsible" standard is satisfied if the board of directors agreed to consult with the statutory auditors on matters relating to oversight of registered public accounting firms.

    • The commenter requested clarity on the meaning of the phrase "in accordance with standards prescribed by home country legal or listing provisions" as to whether it means to the extent provided by law or that the home country legal or listing provisions must impose such oversight responsibility on statutory auditors.

    • The rule should clarify that independence standards imposed by other countries need not necessarily coincide with those imposed by U.S. requirements.

    • The rule should clarify what the phrase "to the extent permitted by law" means with respect to the appointment and retention of the outside auditor. Does this mean the maximum degree of responsibility possible? There may be legal problem with delegating from the board of directors to statutory auditors.

    • The rule should clarify that a director-supplied nomination for a statutory auditor that is submitted for shareholder approval does not mean the statutory auditor is "elected by management."

  • Four commenters recommended revising the requirement that the board of auditors be directly responsible, in accordance with home country standards, for the oversight of the outside auditor.328 Particularly, in Italy and China, the board of auditors does not have direct responsibility for auditor oversight and the resolution of disagreements between management and the auditors as contemplated by Section 10A(m). One believed the Commission should clarify that it is to the extent permitted by law, or specify the particular national law or listing standards that comply.329 One suggested that this portion of the exemption be simplified to a requirement that home country legal or listing provisions require that the statutory auditors provide independent oversight or evaluation (to the benefit of the issuer's corporate board entrusted of power to propose or to approve annual financial statements) of the work of the outside auditor.330 One believed the language should be revised to say that the board of auditors, or the issuer's shareholders, board of directors or other independent body not including management or any executive officer of the issuer, is directly responsible for such oversight.331

  • Two commenters believed that Russian and Ukranian issuers, which are required to maintain an "auditing commission" under Russian law, would not be able to satisfy the requirements in paragraphs (D) (home country standards for independence) and (E) (auditor oversight responsibility to the extent permitted by law) as well as the requirement that the auditing commission act as the audit committee for determining the outside auditor's compensation in accordance with proposed Rule 10A-3(b)(5).332

    • For paragraph (D), the commenters requested that the language be modified to "home country legal or listing provisions provide for the independence of such board or body" (Emphasis added). Local law and listing provisions do not clearly prescribe specific standards for the independence of the auditing commission, although they do provide provisions for the auditing commission to act independently. Also, local law provides that members of the auditing commission may not simultaneously be members of the company's board of directors or hold other positions in the issuer's governing bodies.

    • For paragraph (E), neither local law nor listing provisions provide that the auditing commission or any other body within the issuer shall be directly responsible for the oversight of the work of the outside auditor. In Russia, these responsibilities could be set forth in the issuer's charter, but in Ukraine, they cannot. Accordingly, the Russian commenter requested revisions to allow oversight responsibility to vested either by either by home country legal or listing provisions or in the charter or other organizational documents of the issuer. The Ukranian commenter requested an exemption from this requirement.

    • For proposed Rule 10A-3(b)(5), local law provides that the amount of compensation to be paid to the external auditor must be determined by the issuer's board or supervisory board and the auditing commission has limited authority. As a result of this conflict, the commenter requested that Russian and Ukranian issuers be given an exemption from this requirement.

  • Thirteen commenters recommended removing the requirement that the issuer must be listed on a market outside of the U.S.333 Such a requirement would make it impossible for issuers that decide to list exclusively in the U.S. to comply. In particular, the board of auditor requirement is a home country legal requirement, not a listing requirement.

  • Six commenters noted that the board of auditor exemption in proposed Rule 10A-3(c)(2) exempts the board of auditors from proposed Rule 10A-3(b)(2), which relates in part to the compensation as well as oversight of the outside auditor.334 As a result, the board of auditors should also be exempt from proposed Rule 10A-3(b)(5)(i) regarding funding for auditor compensation. The commenters provided suggested language. However, one commenter and an additional commenter believed Japanese companies will be able to fulfill Rule 10A-3(b)(5)(i)'s requirement.335

  • Two commenters believed the requirement that the board of auditors be responsible, to the extent permitted by law, for appointment and retention of the auditor might conflict with many issuers, such as in Brazil, where the board of auditors has only an advisory role and certain decisions cannot be delegated from the board.336 The exemption and the instruction concerning conflicts with local law should be expanded to address these concerns.

  • One commenter believed the requirement that the procedures for handling complaints, independent advisors and authority over funding will cause conflicts for boards of auditors.337 For example, in Brazil, boards of auditors do not have authority to establish procedures for complaints. The requirements over independent advisors and funding are less critical for already independent bodies like boards of auditors. These requirements should apply to the board of auditors, separate audit committee or entire board (as appropriate for the particular issuer), rather than specifically to the board of auditors.

  • One commenter suggested issuers be given flexibility to divide responsibilities between an audit committee composed of independent directors and the board of auditors.338

  • One commenter believed the applicability of the exemption should be recognized en masse for each country.339

  • Two commenters supported a sunset provision and then a subsequent evaluation.340

7. Requests for Other Foreign Exemptions

  • Two commenters believed the final rule should provide a general exemption based on conflicts with home country legal or listing provisions.341 The Commission and the short comment process may not have identified all conflicts, and a static approach would stultify the evolution of corporate governance. Under one approach, SROs could exempt a foreign issuer to the extent necessary, while preserving to the maximum extent practicable the principles of Rule 10A-3, upon a showing by the issuer that compliance would conflict with or violate local law.342

  • Four commenters requested special accommodations for an arrangement where two separate listed issuers collectively operate a group of companies.343 One noted that its parents' boards are identical344 and another noted they are substantially identical.345 In both cases, the dual holding companies may be considered affiliates because they are under common control. Accordingly, a person serving on one board would be disqualified form sitting on the other board. Also, the holding company exemption will not be available because neither holding company may have majority ownership. Another explained that its dual holding companies had formed a joint audit committee consisting of non-management directors from each parent.346 For all such dual holding companies, independence should not be impaired because the dual companies have unity of economic interests and aligned shareholder interests. Two requested the following:347

    • Where an issuer is one of two dual holding companies, those companies may designate one audit committee for both companies so long as each audit committee member is a member of the board of at least one of the dual holding companies.

    • Dual holding companies will not be deemed affiliates of each other by virtue of their dual holding company arrangements, including where directors of one are also directors of the other (and receive only ordinary-course board compensation).

    • Dual holding companies means two companies that (1) are organized in different jurisdictions, (2) collectively own one or more businesses under contractually agreed arrangements providing for shared economic entitlements, (3) collectively supervise management of such businesses, and (4) do not conduct any business other than collectively owning and supervising such businesses and activities reasonably incidental thereto.

  • One commenter requested that the rule allow "supervisors" of certain foreign issuers to serve on an issuer's audit committees along with board members.348 Some jurisdictions, like Taiwan, have a different structure which include "supervisors" that function as individuals (not as a board), alongside a board of directors. The supervisors are required to supervise the issuer's finances and business, including a review of financial statements. The supervisors are separate from the board, and must not be officers, directors or staff and must satisfy statutory independence requirements. Appointment of one or more supervisors to the audit committee, in addition to one or more independent members of the issuer's board, should be fully consistent with Section 10A(m). Rule 10A-3(e)(2) should also allow foreign issuers which have non-director supervisors that are subject to statutory independence requirements to deem references to the term "board of directors" to include both the board of directors and supervisors.

  • Similarly, one commenter believed there is a conflict with Indonesian law and listing standards.349 Indonesian companies are required to have both a board of directors that performs management functions and a board of commissioners designed to oversee and advise the board of directors. Members of each board must be separate and are elected by shareholders (with the Indonesian government having a special share with veto rights in the commenter's case). Local listing rules require an audit committee of at least three members, one of which is an independent member of the board of commissioners and the others must be external independent parties (not a member of either board) appointed by the board of commissioners. Local listing rules have independence standards for all committee members. The system is similar to the board of auditors exemption, except the committee is not separate from the board of commissioners in that one member is a commissioner and two are external members appointed by the board of commissioners. The commenter requested that as long as it complies with local listing standards it be deemed in compliance with Rule 10A-3. If a general exemption like the board of auditors exemption is not granted, the commenter highlighted other ways in which Section 10A(m)'s requirements differ from Indonesian requirements (including that some Indonesian audit committee members are not board members) and requested accommodations or clarifications.

  • One commenter noted that several large Netherlands-based issuers have particular anti-takeover arrangements that should be accommodated.350 In the commenter's case, it has a "Priority Foundation" that is the sole owner of special priority shares that have the right to approve major corporate actions, such as issuing shares, amending governing documents, liquidation, etc. A majority of the board of the Priority Foundation are members of the company's supervisory board, and coincidently they are also the members of the company's audit committee. In addition, the company has a "Preference Foundation" that has the option to dilute the voting power of the company's ordinary shareholders in half to prevent an anti-takeover attempt. The chairman of the company's supervisory board is a member of the board of the Preference Foundation. Membership on the boards of each Foundation would disqualify the supervisory board members that serve on such boards from being on the company's audit committee if the Foundations are deemed affiliates of the company, which the Preference Foundation most likely is and the Priority Foundation could be. The commenter believed the control structure between the company and the Priority Foundation is analogous to the holding company exemption. Moreover, independence requirements of local listing standards should provide sufficient protection from abuse. An exemption should be provided from the affiliate definition for director participation in ordinary course governance and protective measures, especially where approved by foreign listing standards.

  • One commenter believed foreign issuers with a two-tier system be exempt from the requirement that all audit committee members are independent. Because the supervisory board is separate from the management board, it should suffice if two-thirds are independent.351

  • One commenter suggested considering compliance with foreign regulations in lieu of compliance with the proposed rule, similar to the MJDS system.352

  • One commenter recommended relief from the indirect compensation requirement for lawyers or advisors of foreign issuers due to the scarcity of foreign audit committee members.353

B. Small Businesses

  • Five commenters did not support lesser standards for small issuers.354 The issues impact small as well as large issuers and the rule should equally to all. Financial reporting anomalies have arisen in small companies as well as large. The requirements will not impose a disproportionate burden on small issuers. In fact, the reporting issues may be less complex and will require less time and effort by the audit committee.

  • One commenter did not support providing relief to issuers based on market capitalization, because its experience as an SRO in enforcing listing standards suggests it is difficult to apply such a test.355

  • One commenter requested accommodations for smaller issuers, including a longer implementation period and/or less restrictive independence standards.356 For example, such issuers should be permitted to appoint an audit committee member who receives de minimis consulting fees. SROs should be given authority to grant exemptions on a case-by-case basis for small issuers, subject to disclosure. Failure to provide appropriate accommodations will cause a disproportionate compliance burden, may discourage the listing of small issuer securities, and impede small issuer access to the markets.

  • Two commenters supported an exceptional and limited circumstances exception for small issuers.357

  • One commenter believed the most reasonable way to minimize any burden on small companies is to delay implementation for an extra year (two years total) for companies with a public float of less than $75 million.358 The Commission should also clarify that the Commission is not specifying the required number of members for an audit committee.

  • One commenter cautioned that creating independence criteria that are too narrow or strict could immeasurably burden the attraction and selection of qualified directors, particularly for smaller issuers.359

C. Issuers of Asset-Backed Securities

  • Five commenters expressed specific support for this aspect of the proposal.360

  • Three commenters requested similar treatment for other passive business organizations in the form of trusts (such as royalty trusts or litigation tracking warrants).361 One of these commenters would apply to any comparable entity that passively holds pools of assets and does not have a board of directors or persons acting in a similar capacity.362

D. Investment Companies

  • Two commenters did not support application to ETF open-end investment companies.363

  • Six commenters supported excluding exchange-traded UITs and did not believe disclosure of that exemption was necessary.364 An additional commenter believed UITs should disclose their use of the exemption.365

  • One commenter supported an exception for Trust Issuer Receipts.366

  • One commenter agreed that the rule should not apply to non-listed investment companies.367

  • One commenter supported an exception when listed closed-end investment companies and ETFs are governed by a common board of directors/trustees in an investment company complex but individual funds are listed on different exchanges.368

  • One commenter did not support a new issuer exemption for investment companies.369

  • Three commenters expressed support for use of the "interested person" definition.370

  • One commenter did not believe there should be an exemption for non-independent board members to serve on investment company audit committees.371

  • One commenter requested an exemption to permit a director on an investment company's audit committee to (1) provide legal services to an investment company's independent directors; and/or (2) be a partner of a law firm that provides legal services to an investment company's independent directors.372

  • Regarding auditor selection, three commenters believed Section 32(a) should be retained and is sufficient.373 However, several of these commenters noted that the exemption in Rule 10A-3(b)(i)(iv)(F)(2)(ii) should be conformed to Rule 10A-3(b)(i)(iv)(F)(2)(i)'s terminology of "appointment" and "retention."

  • One commenter suggested clarifying "employee" for the complaint procedures requirement, as investment companies rarely have direct employees.374 It should include employees of entities engaged to prepare or assist in preparing the financial statements.

E. Comments Regarding Other Issuers

  • Two commenters requested exemptions for other issuers not historically covered by SRO listing rules.375 For example, one requested an exemption for cooperative entities, such as agricultural cooperatives.376 One requested special treatment for issuers listing only special purpose securities, such as those described in Sections 703.16, 703.19, 703.20 and 703.21 of the NYSE Listed Company Manual.377 Disclosure of such an exception would be acceptable.

  • One commenter believed greater flexibility should be given to Nasdaq issuers given that they are less mature, less sophisticated and may require a longer transition.378

XII. Determining Compliance with Proposed Standards

  • Eight commenters believed issuers should be required to provide prompt notification to SROs of failure to comply with the requirements and any other corporate governance listing standards.379 Two supported a two business day deadline.380 Another believed no specific deadline should be required.381 One believed specifying a particular time period would disadvantage foreign issuers that may be subject to different business days and holidays.382

  • Two commenters believed audit committees and other directors should also be subject to the reporting requirement in addition to executive officers.383

  • One commenter believed it should be left to the SROs to decide if they want to require prompt notification of non-compliance.384

  • Five commenters supported periodic confirmation of compliance to SROs.385 Two additional national securities exchanges indicated they already require or intend to require such confirmations.386

  • Two commenters did not support periodic confirmations of compliance in addition to prompt notifications of actual breaches.387

  • One commenter generally advocated linking the requirements and responsibilities to Commission disclosure requirements so that SROs will be more able to monitor and enforce compliance.388

XIII. Opportunity to Cure Defects

  • Four commenters agreed that existing continued listing or maintenance standards and delisting procedures should suffice for an opportunity to cure defects.389 One commenter in particular did not support the use of reprimand letters, believing such a lesser penalty for non-compliance may encourage issuers to view such a letter as a cost of doing business.390

  • Four commenters supported mandating specific time periods to cure defects.391 One suggested a 30-day time limit.392 Two believed the period should not exceed 90 days.393 One suggested 180 days.394

  • Two commenters did not support specific time periods, preferring SRO discretion.395

XIV. Disclosure Changes Regarding Audit Committees

A. Disclosure Regarding Exemptions

  • Eleven commenters expressed support for the disclosure, including the assessment disclosure, arguing it would provide meaningful disclosure to investors.396 One advocated setting the disclosure date as the annual report date, even if incorporated from a proxy statement.397 One also advocated website disclosure.398

  • Two commenters believed disclosure of exemptions would not result in meaningful disclosure to investors, is beyond Section 10A(m), and should not be required.399 One did see merit to disclosure of the new issuers exemption.400 The other believed that, at a minimum, foreign issuers should be exempted and the Commission should clarify that reliance on instructions is not reliance on an exemption.401

  • Seven commenters did not support the assessment disclosure, claiming it implies a "one size fits all" model and would result in boilerplate disclosure.402 Several did not support independence disclosure by foreign issuers.

  • Four commenters did not support an exhibit for the board of auditor exemption.403 An additional commenter believed disclosure in the report is more prominent than an exhibit.404

  • Two commenters encouraged expanded disclosure by foreign issuers relying on an exemption regarding home country corporate governance systems generally and governance practices adopted by the issuer specifically.405

  • One commenter did not believe the disclosure would be feasible for issuers with statutory auditors since those issuers do not have audit committees.406

  • Five commenters supported exempting disclosure of the multiple listing exemption.407

  • One commenter believed the multiple listing exemption should be disclosed.408

  • One commenter recommended exempting disclosure for the holding company exemption; security futures and standardized options exemption, and asset-backed issuer exemption.409

B. Identification of the Audit Committee in Annual Reports

  • Five commenters expressed specific support for this aspect of the proposal.410 One also advocated website disclosure.411

  • Three commenters believed that subsidiaries relying on the multiple listing exemption should be exempt from this disclosure.412 Such subsidiaries would be exempt from the disclosure of their use of the exemption, so it would be anomalous to require these same subsidiaries to disclose whether or not they have an audit committee.

C. Updates to Existing Audit Committee Disclosure

  • Four commenters expressed specific support for this aspect of the proposal.413

  • One commenter believed that non-listed issuers should be permitted to change the definition they can use if subsequently an SRO materially changes its definition.414

  • One commenter supported independence disclosure by foreign issuers in Commission filings and on the issuer's website.415 An additional commenter favored disclosure in Form 20-F but not Form 40-F.416

D. Audit Committee Financial Expert Disclosure for Foreign Private Issuers

  • Two commenters believed companies that rely on the board of auditor exception should be exempt from the financial expert disclosure.417 One argued that if it does apply, it should relate to home country GAAP, even if the issuer files U.S. GAAP financials with the Commission.418

  • Two commenters believed that boards of auditors should still be subject to the disclosure.419 One believed the disclosure should appear in Item 15(f) of Form 20-F (regarding Rule 10A-3 exemption reliance) instead of Item 16A of Form 20-F (audit committee financial expert disclosure),420 and the other believed it should appear in both places.421 An additional commenter noted that if the disclosure does apply, it should apply to the board of auditors with that body making any required determinations.422

  • Three commenters believed any independence disclosure should be made in accordance with home country legal or listing independence standards.423

E. Other Disclosure Comments

  • One commenter did not believe any additional disclosure is necessary.424

  • Ten commenters recommended expanded disclosure on the determination of an audit committee member's independence.425 One suggested requiring companies to disclose the procedure and rationale by which audit committee members were chosen and approved in annual reports.426 Two thought it would be useful for issuers to disclose the considerations used by the board in determining independence.427 One suggested providing a non-exhaustive list of factors the board should consider.428

  • Two commenters objected to disclosure about the determination of an audit committee member's independence as proxy rules already require independence disclosure.429

  • Three commenters urged expanded disclosure of all familial, financial and professional relationships with directors, issuers and executives, pointing to earlier rulemaking petitions.430

  • One commenter thought it would be appropriate for SROs to require issuers to disclose when they are not in compliance with the listing standards and the steps they are taking to cure violations.431

  • One commenter urged website disclosure of the audit committee charter and actions.432

XV. Cost-Benefit Analysis

  • One commenter believed the Commission's cost benefit analysis as a whole is enhanced by the multiple listing exemption since the burdens of the rule on all public companies, taken as a whole, will be decreased by the exemption.433

  • Two commenters expressed general concern that the overall burdens imposed by the Sarbanes-Oxley Act may discourage U.S. listings by foreign issuers.434 One of the commenters recommended that upon completion of the rulemaking required by the Act, the Commission undertake a consideration of the fundamental issues involved with foreign application of the Act.435

  • One commenter referred to the estimate of $99,600, which is the Commission's estimate for Paperwork Reduction Act purposes of the cost of internal staff to comply with the proposed disclosure changes.436 The commenter appeared to believe this was the Commission's cost estimate for the entire proposal and thought it was too low.

XVI. Miscellaneous Comments

  • Twelve commenters requested harmonization with other audit committee rules, such as:437

    • The multiple listing exception should allow parents to provide compliance with audit committee responsibilities for subsidiaries, including audit committee pre-approval requirements of non-audit services.438

    • The board of auditors should be recognized as the audit committee for all Commission rules, including the auditor independence rules.439

    • Clarification of the application of Sarbanes-Oxley Act Sections 306 (pension fund blackouts) and 402 (loans) and other Commission rules to two-tier boards.440

    • An "independent" director in Regulation S-X Rule 2-01(c)(7) should be defined in the same way as proposed Item 7(d)(3)(iv) of Schedule 14A.

    • The identical definition of audit committee in Regulation S-X Rule 2-01 and the Exchange Act should be construed in the same way.

  • Two commenters urged the Commission to approve the NYSE's proposed listing standards.441

  • One commenter urged the Commission to harmonize SRO independence standards.442

  • Three commenters advocated rules to address foreign concerns with Section 402 of the Sarbanes-Oxley Act.443

  • Three commenters recommended that the Commission recognize equivalence of particular foreign corporate governance systems and fully exempt those companies, lawyers and/or auditors from the Sarbanes-Oxley Act's requirements.444

  • One commenter urged the Commission to change the holding of In re Lernout & Hauspie Sec. Lit., 2002 U.S. Dist. LEXIS 22708 (Nov. 18, 2002) and, if necessary, establish a safe harbor for control person liability for independent directors.445 The commenter believed the decision increases liability, which would dampen the desire to serve.

  • One commenter expressed general concerns about the Commission.446

XVII. Pre-Proposal Comments

A. Independence

1. Consulting, Advisory or Other Compensatory Fee Prohibition

  • One commenter believed that Section 10A(m) does not, and any implementing rule should not, limit loans to directors that are otherwise permissible under Section 402 of the Sarbanes-Oxley Act.447 Loans to related companies should not be prohibited.

  • One commenter made the following points:448

    • Compensation should not be interpreted to prohibit arm's length transactions conducted on a non-preferential basis, particularly extensions of credit subject to §22(h) of the Federal Reserve Act.

    • Compensation should include all types of case and non-cash compensation, including stock options, reimbursement of expenses, indemnification advances, retirement payments, insurance and other deferred compensation programs.

    • Compensation should not include payments to an organization of which the director is a partner, controlling shareholder or executive officer, unless the organization was created to evade this test.

2. Affiliated Person Prohibition

  • Two commenters supported using a definition similar to other Commission definitions of this term, such as Securities Act Rule 144.449

  • One commenter suggested defining affiliate so as not to disqualify those who are otherwise unaffiliated with an issuer but who are representatives of entities that beneficially do not own a majority of the voting power and do not have the power to designate and do not in fact constitute a board majority.450 This will allow representation by significant shareholders, which is beneficial to the issuer and shareholders.

3. Exemptions

  • One commenter requested a specific exemption from the independence requirements relating to fees paid to the accounting firm of which the commenter is a member so the commenter could remain on a company's audit committee.451

  • Two commenters supported an exemption similar to the holding company exemption.452

B. Procedures for Handling Complaints

  • Three commenters asked questions on this topic.453 Two encouraged the use of outsourced reporting mechanisms. Another asked questions such as what information would need to be collected, if complaints would be protected from government subpoena, retention periods and whether a responses to complaints would be required.

C. Application to Foreign Issuers

  • Twelve commenters were concerned that auditor selection requirement conflicts with local requirements that shareholders elect, approve or ratify auditors.454

  • Eight commenters requested an exemption from the requirement that the entire audit committee be independent.455 Several noted that under home country requirements, not all members must be independent. Some mentioned that persons capable as acting as independent directors are few in number.

  • Five commenters requested special accommodations for issuers in jurisdictions (such as Japan and Italy) that provide for boards of auditors, or statutory auditors.456

  • Five commenters requested accommodations for issuers from jurisdictions that prohibit the delegation of certain responsibilities regarding auditors to board committees.457

  • Four commenters requested accommodations for issuers from countries that require that non-management employees serve on the board or an audit committee.458

  • Four commenters expressed concern over application to issuers with two-tier boards.459

  • Four commenters requested a general exemption for foreign issuers, believing it was inappropriate to define corporate governance arrangements for foreign companies.460

  • One commenter explained the general corporate governance structure in Chile.461

  • One commenter believed that the independence requirements conflicts with Russian law because members of a company's auditing commission may not simultaneously be members of the board of directors or supervisory board or hold other issuer positions.462 Auditing commissions also are elected by shareholders and are not board committees.

  • One commenter did not think Section 10A(m)'s independence criteria went far enough.463

D. Transition Period

  • One commenter recommended a three year implementation.464 Another recommended a three-year period for foreign issuers, with appropriate grandfather exemptions.465

E. Costs and Benefits

  • If final independence standards are more stringent than Section 10A(m), the pool of qualified directors will be narrowed and result in upward pressure on board fees.466

  • One commenter believed the cost of outsourcing the complaint requirement typically would cost less than $500 per month and could be set up within hours.467

F. Miscellaneous Pre-Proposal Comments

  • One commenter recommended rules requiring audit committees to take an active role in scrutinizing financial and economic aspects of mergers and acquisitions.468

2 CalPERS; Nasdaq.
3 AFL-CIO; CalSTRS; Teamsters.
4 FEE.
5 S&C.
6 ABA.
7 AFL-CIO; CalPERS; CII; Elliott; Moore; Nasdaq; NY Comptroller; SWIB; Teamsters; TI-USA.
8 AFL-CIO; CII; SWIB; Teamsters.
9 CalPERS; Elliott; Nasdaq; NY Controller.
10 Moore; Teamsters.
11 ABA; ACB; AICPA; Am. Bankers; CCU; CSC; Deloitte; German CFOs; NYSE; PSEG; PWC; Saul; Southern.
12 AFL-CIO; AICPA; Am. Bankers; Amex; CCU; CSC; Cravath; Deloitte; Ericsson; KPMG; Nasdaq; NYSBA; NYSE; PWC; S&C; Southern; TI-USA.
13 Deloitte; NYSE.
14 CalPERS.
15 ABA.
17 Avellanet.
19 CalPERS; Elliott; Nasdaq.
20 CalPERS; State Street.
21 CalPERS.
22 State Street.
24 Am. Bankers; CSC; German CFOs; NY Comptroller; Nasdaq; NYCBA; Teamsters.
25 CalPERS; Teamsters.
26 NYSE.
27 ABA; AICPA; Am. Bankers; CBA; CCU; CenturyTel; CSC; Deloitte; German CFOs; Moore; NYCBA; NYSE; PWC; Siemens.
28 AICPA (suggested language); Deloitte.
29 CCU; Moore; PWC.
30 NYSE.
32 AFL-CIO; CalPERS; CalSTRS; CBA; CII; Fanto; Nasdaq; Teamsters; TI-USA.
33 CBA.
34 AFL-CIO; CalPERS (at least 3 years, but believed a grandfather clause may be appropriate); Nasdaq; TI-USA.
35 CalSTRS; CII; Teamsters (for former audit partners).
36 Fanto.
37 Nasdaq; NYSE.
38 Swalwell.
39 Christenson.
40 ABA; AFEP-AGREF; AICPA; Am. Bankers; Aventis; BASF; CenturyTel; Deloitte; German CFOs; Nasdaq; NYCBA; NYSBA; NYSE; PWC; Siemens; S&C.
41 Cleary.
42 AICPA (suggested language); PWC (suggested language).
43 DII; Nasdaq.
44 CII.
45 ACB.
46 Cravath; S&C.
47 Cravath.
48 S&C.
49 Cravath; Ford; German CFOs; Linklaters.
50 Cravath; Ford.
51 German CFOs.
52 Linklaters.
53 Deloitte.
54 Am. Bankers.
55 AABD; ACB; Am. Bankers.
56 Am. Bankers; Curtis; NAREIT; NYCBA; PWC; Swalwell.
58 Am. Bankers.
59 Swalwell (suggested language).
61 AABD; AXA; Cleary; FNB; German CFOs; Linklaters; Regions.
62 FNB; Regions.
63 FNB.
64 AXA; Cleary; German CFOs; Linklaters.
65 German CFOs.
66 ABA; Curtis; DII; Linklaters.
67 ABA.
68 DII.
70 Miller.
71 Cravath.
72 Jones.
73 CCU; CSC; FEE; PT Telkom.
74 Swalwell.
75 ABA; Cleary; CSC; JBF; Matsushita; PWC; Saul; Swalwell.
76 JBF; Matsushita.
77 CalPERS.
78 Nasdaq.
80 Aventis.
81 ABA.
82 Cravath; Ericsson.
83 Ericsson.
84 Cravath.
86 NVCA.
87 KHH.
89 News.
90 PWC.
91 S&C.
92 ABA.
93 ABA; Cravath; German CFOs.
94 German CFOs.
95 Cravath.
96 Equity Office.
97 AABD; ABA; Am. Bankers; AFEP-AGREF; Cleary; Cravath; DII; JBF; Lipman; Nasdaq; NYSBA; NYSE; Plains; Robinson; S&C.
98 ABA; AFEP-AGREF; Cleary; Cravath; DII; JBF; Nasdaq; S&C.
99 S&C.
100 NYSBA; S&C.
101 PWC.
102 ABA; AICPA; Amex; Cleary; Cravath; NYSE.
103 Amex.
104 Piper.
105 PT Telkom.
106 AICPA.
107 SWIB.
108 PWC.
109 CalPERS.
110 Deloitte.
112 AICPA.
113 ABA.
114 CalSTRS; CCU; Cleary; CSC; Deloitte; NVCA; NYCBA; NYSBA.
115 CCU.
116 NYSBA.
117 NYSE; S&C; V&E.
118 Nasdaq.
119 Amex.
122 SWIB.
123 ACB; Am. Bankers; CalPERS; CCU; CSC; Deloitte; Nasdaq; NYSE; PWC; Southern; Swalwell.
124 AXA; Kinder Morgan; NYSBA; S&C.
125 S&C.
126 Kinder Morgan (suggested language).
127 S&C.
128 Dow Corning (suggested language).
129 AICPA.
130 Cravath; NYSE; Pacific Energy; Swalwell.
131 Swalwell.
132 Swalwell.
133 NYSBA.
134 Cravath.
135 Groll.
136 AABD; Am. Bankers.
137 CalPERS; CII; CSC; Deloitte; PWC; SWIB.
138 AICPA; Amex; CCU; Nasdaq; NVCA; NYSE.
139 NVCA.
140 AICPA.
141 Nasdaq.
142 Amex; Nasdaq.
143 CalPERS.
144 ACB; AICPA; Am. Bankers; Amex; AXA; Cleary; Cravath; Emerson; Ford; Fulton; German CFOs; Nasdaq; NYCBA; NYSBA; PWC; Regions; S&C.
145 Cleary.
146 Emerson; German CFOs; PWC.
147 ACB.
148 AICPA.
149 Ford; Nasdaq; NYCBA; NYSBA.
150 Am. Bankers; Cravath; German CFOs.
151 Amex.
152 Regions.
153 ABA.
154 NYCBA.
155 AICPA; CalPERS; CII; CSC; NVCA; NY Comptroller; PWC; SWIB.
156 PWC.
157 Amex; Cleary; Deloitte; Dow Corning; Enbridge; Nasdaq; Saul; S&C.
158 Amex; Nasdaq.
159 Enbridge.
160 ABA; AFEP-AGREF; Assonime; NYSBA; NYSE; Davis Polk; Orix.
161 ABA.
162 NYCBA.
163 Buckeye; Enbridge; Enterprise; Ferrellgas; Inergy; Kinder Morgan (suggested language); Northern; NRP; Pacific Energy; Penn Virginia; Plains (suggested language); Sunoco Logistics; Teppco; Williams; V&E.
164 Kinder Morgan; Piper; PT Telkom; S&C; SEK.
165 Enbridge; Kinder Morgan (suggested language).
166 NVCA.
167 Harleysville.
168 AICPA; CalSTRS; EEI; FEI; Saul.
169 PWC.
170 State Street.
171 EY.
172 ABA.
173 EY.
174 CSC; Deloitte; Emerson.
175 Emerson.
176 CSC.
177 Deloitte.
178 State Street.
179 State Street.
180 CalPERS.
181 CII.
182 Moore.
183 CSC.
184 ABA; AICPA; Australian Treasury; CalPERS; CCU; CSC; Deloitte; German CFOs; Japan-FSA; NYSE; PWC; Saul; Schaub; Telekom Austria.
185 Assonime; CBA; Canada; Cleary; Ericsson; PT Telkom; PWC; S&C.
186 Ericsson (suggested language).
187 AFEP-AGREF; Cleary; Ericsson; FEE; FT.
188 FEE.
189 Aventis; Canada; Cleary (suggested language); CVM; FT; PT Telkom; S&C; Telefonica.
190 Aventis.
191 S&C.
192 Cleary.
193 Aventis; Deloitte; FT.
194 FT.
196 Deloitte.
197 FEI.
198 Barragan; Boehl; Elliott; IIA (suggested language); NACD; Shook.
199 EEI.
200 ABA; CBA; CCU; CSC; Deloitte; FEI; Moore; Nasdaq; NYSBA; NYSE.
201 AICPA; CalPERS; Morton; PWC.
202 ABA; AICPA; Am. Bankers; CCU; Cleary; CSC; Deloitte; EEI; EY; FEI; ICI; Nasdaq; Network; NYCBA; PSEG; PWC; Saul; State Street.
204 PWC.
205 Nasdaq.
206 Network.
207 AuditConcerns (suggested language); CalPERS; CalSTRS; Chenkin/Warren; Fischer; Gold; HR; KPMG; SWIB; Teamsters.
208 AuditConcerns; Chenkin/Warren; Gold; Teamsters.
209 AuditConcerns; CalPERS; Chenkin/Warren.
210 SWIB.
211 AuditConcerns (suggested language); Fischer.
212 HR.
213 Chenkin/Warren (suggested language).
214 CalSTRS.
215 CCS.
216 AuditConcerns (July, 2003); CCS (6 months).
217 S&C.
218 HR; Network.
219 PWC.
220 EY.
221 AICPA (suggested language); CalPERS; CCS; Deloitte; HR; Network; SWIB.
222 Deloitte.
223 CCU; Cleary; EEI; State Street.
224 EEI.
225 FEI; PWC.
226 CalPERS.
227 TI-USA.
228 EY.
229 Chenkin/Warren.
230 AICPA; CSC; Deloitte; FEE; FEI; ICI; Nasdaq; PWC.
231 CalPERS; CCU.
232 ABA.
233 CSC.
234 AICPA; CalPERS; Deloitte; FEI; ICI; Nasdaq; PWC.
235 CalPERS.
236 ABA; AICPA; Deloitte; EY; FEI; PWC.
237 AICPA.
238 Southern.
239 CalPERS; German CFOs.
240 CSC.
241 ABA.
242 EY.
243 EY.
244 CCU.
245 State Street.
247 NYSE.
248 ABA.
249 NYSBA.
250 ABA; AFEP-AGREF; AXA; Cleary; German CFOs; Japanese Cos.; JBF; JPMorgan; Matsushita; Nasdaq.
251 JBF.
252 German CFOs; Japanese Cos.; Matsushita.
253 AFEP-AGREF; AXA; Cleary.
254 ABA; JPMorgan.
255 ABA.
256 JPMorgan.
257 NYSBA.
258 Emerson; NYSE.
259 NYSE.
260 Cleary; Davis Polk; Deloitte; FEE; PWC; Telekom Austria.
261 Davis Polk; PWC; Telekom Austria.
262 Cleary.
263 ABA; Amex.
264 ABA.
265 NYCBA.
266 Hazen.
267 ABA.
268 ABA; CalPERS; CCU; CSC; Edison; Ford; GE; GM; GMAC; NYSE; PSEG; PWC; Southern; Telefonica; TFC.
269 NYSE.
270 ABA; Cingular; Corning; Dow Corning (suggested language); FEI; PWC; TFC.
271 FEI.
272 S&C; TFC.
273 S&C.
275 ABA.
277 Telefonica.
278 TFC.
279 News.
280 ABA; PWC.
281 CalPERS.
282 CalPERS; CSC; PWC.
283 ABA; FSA Holdings; NYSE; S&C.
284 NYSE.
285 Cleary; Cravath; Davis Polk; S&C.
286 CalPERS; CalSTRS; CII; Deloitte.
287 CII; Deloitte.
288 CalPERS.
289 ABA; EFFEI; FEE; JPMorgan; KPMG; Nasdaq; NYSE.
290 Schaub.
291 Consob; Ericsson; Telefonica.
292 NYSE.
293 AFL-CIO; CalPERS; DAI; FEE; German CFOs; PT Telkom.
294 Linklaters.
295 Allianz; DAI; German CFOs; NYSE; Schaub; Siemens; Telekom Austria.
296 Allianz; BASF; DAI.
297 Allianz.
298 Cleary.
299 NYSE.
301 ABA; CCU; NYSBA; S&C; Telefonica.
302 NYSBA.
303 ABA.
304 Linklaters.
305 Osler.
306 ABA; Cleary; Ericsson; NYSBA; PWC; S&C; Telefonica.
307 Cleary; PWC.
308 Ericsson; S&C.
309 Telefonica.
310 ABA.
311 NYSBA.
312 Davis Polk (suggested language); Telekom Austria (suggested language).
313 Cleary; DII; NYSE.
314 DII.
315 Osler.
316 CCU.
317 PWC.
318 ABA; FT; SEK (suggested language).
319 ABA; Davis Polk (suggested language); Telekom Austria (suggested language).
321 NYSE.
322 Canon; Japanese Cos.; Japan-FSA; Japan-METI; JBF; JCAA; Matsushita; Nomura; NTT; Orix.
323 ABA; NYSE.
324 Canon; Japanese Cos.; Japan-FSA; Japan-METI; JBF; Matsushita; Nomura; PWC; Orix; S&C; Toyota.
325 Orix.
326 Matsushita.
327 Orix.
328 ABA; Assonime; Chinese Cos.; Cleary.
329 ABA.
330 Assonime.
331 Cleary.
332 BM - Russia; BM-Ukraine.
333 ABA; Cleary; FT; IIJ (suggested language); Japanese Cos.; Japan-FSA; Japan-METI; JBF; Linklaters; Nasdaq; NYSE; S&C (suggested language); Toyota.
334 Chinese Cos.; Japan-FSA; JBF; Matsushita; NTT; S&C.
335 Japan-FSA; Nomura.
336 Cleary; CVM.
337 Cleary.
338 Davis Polk.
339 JBF.
340 CalPERS; PWC (two years).
341 Cleary; PT Telkom.
342 Clearly (suggested language).
343 Reed Elsevier; Royal Dutch/Shell; NYSE; Unilever.
344 Unilever.
345 Reed Elsevier.
346 Royal Dutch/Shell.
347 Royal Dutch/Shell; Unilever.
348 S&C.
349 PT Telkom.
350 ASML.
351 Aventis.
352 KPMG.
353 PWC.
354 CalPERS; CBA; CSC; Deloitte; PWC.
355 Nasdaq.
356 Amex.
357 Amex; Nasdaq.
358 ABA.
359 NYCBA.
360 CSC; Deloitte; German CFOs; Nasdaq; NYSE.
361 ABA; Nasdaq; NYSE.
362 ABA.
363 Amex; Barclays.
364 ABA; Amex; ICI; S&C; Nasdaq; NYSE.
365 CalPERS.
366 NYSE.
367 S&C.
368 PWC.
369 CalPERS.
370 ABA; Deloitte; ICI.
371 PWC.
372 ICI.
373 ABA; ICI; PWC.
374 PWC.
375 Nasdaq; NYSE.
376 Nasdaq.
377 NYSE.
378 CSC.
379 Amex; CalPERS (to SROs and the Commission); CII; CSC; Matsushita; Nasdaq; PWC; TI-USA.
380 CalPERS; PWC.
381 Nasdaq.
382 Matsushita.
383CII; PWC.
384 ABA.
385 ABA (annual); CalPERS (annual to SROs and the Commission); CII (annual); PWC (annual); TI-USA (quarterly).
386 Amex; NYSE.
387 CSC; Nasdaq.
388 Nasdaq.
389 ACB; Amex; Deloitte; Nasdaq.
390 Nasdaq.
391 CalPERS; CSC; Nasdaq; PWC.
392 PWC.
393 CalPERS; CSC.
394 Nasdaq.
395 ABA; NYSE.
396 CalPERS; CCU; CII; CSC; Deloitte; EY; Nasdaq; PT Telkom; PWC; TIAA-CREF; TI-USA.
397 EY.
398 CalPERS.
399 ABA; S&C.
400 ABA.
401 S&C.
402 ABA; Cravath; German CFOs; JBF; Matsushita; NTT; S&C.
403 ABA; Cleary; NTT; Orix.
404 Nasdaq.
405 Cravath; Orix.
406 Orix.
408 CalPERS.
409 ABA.
411 CalPERS.
412 Edison; GE; TFC.
414 Lipman.
415 CalPERS.
416 PWC.
417 ABA; Japanese Cos.
418 ABA.
419 Cleary; Deloitte.
420 Cleary.
421 Deloitte.
422 S&C.
423 Cleary; Deloitte; S&C.
424 CSC.
425 AFL-CIO; AICPA; Am. Bankers; Amex; Deloitte; Ericsson; Nasdaq; NY Comptroller; PWC; TI-USA.
426 NY Comptroller.
427 PWC; TI-USA.
428 Amex.
429 ABA; Southern.
431 ABA.
432 CalPERS.
433 Edison.
434 ABA; NYSE.
435 ABA.
436 CSC.
437 ABA; Assonime; Canon; GE; JBF; NTT; NYSE; PSEG; PT Telkom; S&C; State Street; TFC.
439 Canon; JBF; NTT; PT Telkom.
440 PT Telkom.
441 IIA; NY Comptroller.
442 Deloitte.
443 Australian Treasury; Aventis; Canada.
444 Consob; FEE; Schaub.
445 Lipman.
446 Christenson.
447 ACB.
448 Am. Bankers.
449 ACB; Am. Bankers.
450 News.
451 Sliter.
452 ACB; Locke.
453 CCS; E-cerv; Gold.
454 German CFOs; Japanese Cos.; AFEP-AGREF; Assonime; Bolkestein; Munoz; Nomura; OFII; Orix; S&C; Syz; VEUO.
455 Japanese Cos.; AFEP-AGREF; Assonime; Cemex; Japan-FSA; Nomura; Orix; S&C.
456 Japanese Cos.; Assonime; Japan-FSA; Normua; Orix.
457 AFEP-AGREF; Japan-FSA; Nomura; S&C; VEUO.
458 German CFOs; Bolkestein; FBE; S&C.
459 Bolkestein; FBE; OFII; VEUO.
460 BBA; IBF; OFII; Orix.
461 SVS.
462 Gitin.
463 Shaub.
464 Am. Bankers.
465 S&C.
466 ACB.
467 E-cerv.
468 Thompson.



Modified: 04/02/2003