February 18, 2003
Mr. Jonathan G. Katz
We are responding to Release Nos. 33-8173; 34-47137 (the "Proposing Release") in which the Commission solicited comments on its proposed rules for standards relating to listed company audit committees issued pursuant to Section 10A(m)(1) of the Securities Exchange Act of 1934, as amended, as added by Section 301 of the Sarbanes-Oxley Act of 2002 (the "Act").
We wish to comment on: (1) the exemption provided for foreign private issuers in proposed Rule 10A-3(c)(2); and (2) the funding provision in Rule 10A-3(b)(5) (read in the context of proposed Rule 10A-3(c)(2)(ii)) as they relate to foreign private issuers in Ukraine.
Proposed Rule 10A-3(c)(2)
Proposed Rule 10A-3(c)(2) provides an exemption from the requirements of Rule 10A-3(b)(1) and (b)(2) for foreign private issuers that have a board of auditors (or similar body) or statutory auditors and that satisfy certain other requirements of the rule. In accordance with the Law of Ukraine "On Companies" (the "Company Law"), all Ukrainian open joint stock companies are required to establish and maintain an auditing commission.1 We equate this body with the "board of auditors (or similar body)" referred to in the Proposing Release and the rules proposed therein. The auditing commission established in a Ukrainian open joint stock company is a body elected by the shareholders from their representatives and is responsible for "controlling the financial and business activities of management".2 The members of the auditing commission may not simultaneously serve as members of the board of directors3 or in the management of a Ukrainian issuer.4
We believe that Ukrainian issuers may not be able to claim the exemption afforded by proposed Rule 10A-3(c)(2)(i) because they will be unable to satisfy the requirements of paragraphs (D) and (E) of that rule.
Paragraph (D) of proposed Rule 10A-3(c)(2)(i) provides that:
We believe that Ukrainian law and listing provisions do not clearly prescribe standards for the independence of the auditing commission. The Company Law contains a number of provisions that relate to matters of independence.5 However, we believe that it is unclear whether these provisions may be interpreted as setting forth clearly identifiable standards for the independence of the auditing commission as required by paragraph (D). The Ukrainian listing provisions do not set forth any relevant independence standards or provide any direct guidance on the independence of the auditing commission of a Ukrainian issuer.
In our view, the provisions of the Company Law referred to above adequately address the concepts that underlie the independence requirements contained in proposed Rule 10A-3(b)(1)(ii) that would otherwise be applicable in the case of a US listed issuer with a separately established audit committee. To remove any doubt as to the eligibility of Ukrainian issuers to rely on proposed Rule 10A-3(c)(2)(i), we suggest that paragraph (D) should be rephrased to the effect that:
Paragraph (E) of proposed Rule 10A-3(c)(2)(i) provides that:
The Company Law describes the powers and duties of the auditing commission.6 Among other things, the auditing commission is empowered at any time to initiate a review or audit of the financial and business activities of management, prepare a report on the reviewed activities of management and verify the accuracy of the data included in the issuer's annual financial statements. The general shareholders meeting of the issuer is not allowed to approve the annual financial statements without having received the conclusions of the auditing commission. However, neither the Company Law nor the Ukrainian listing provisions provide that the auditing commission or, indeed, any other body within a Ukrainian issuer is directly responsible for the oversight of the work of any public accounting firm performing an audit for the issuer. Furthermore, and as a consequence of this silence, there are no prescribed standards in the Company Law or in the Ukrainian listing provisions for any oversight responsibility generally, much less in connection with the resolution of disagreements between management and the issuer's auditor regarding financial reporting.
Under the Company Law, the authority of the auditing commission is limited to "exercising control over the financial and business activities of management" and, therefore, the auditing commission is only allowed to perform functions within the scope of the authority established by the Company Law. We believe that the authority of the auditing commission may not be extended (e.g., pursuant to the issuer's charter) to include any activities which go beyond the scope of the aforementioned controlling function, and that any attempt to do so will not be enforceable under Ukrainian law.
Accordingly, as a result of the direct conflict between the proposed rules and Ukrainian law, we request that Ukrainian issuers should be given an exemption from this requirement. Without such an exemption, a Ukrainian issuer will not be able to obtain or maintain a listing in the United States.
Proposed Rule 10A-3(b)(5)
The relevant portion of proposed Rule 10A-3(b)(5) provides that:
Proposed Rule 10A-3(c)(2)(ii) provides that, for foreign private issuers relying on the exemption in proposed Rule 10A-3(c)(2)(i), the term "audit committee" in proposed Rule 10A-3(b)(5) refers to the foreign private issuer's board of auditors or similar body, or to its statutory auditors. Consequently, in the case of a Ukrainian issuer relying on the exemption afforded by proposed Rule 10A-3(c)(2)(i), the proposed rules require the auditing commission to determine the appropriate funding for the payment of compensation to, among others, the Ukrainian issuer's external auditors.
While the Company Law does not contain any provisions as to which body of corporate governance should determine the amount of compensation to be paid to any external auditor, such a determination clearly cannot be made by the auditing commission, due to the limitation of its authority to exercising control over the issuer's management. In contrast, the amount of compensation payable to the external auditor may be determined by the Ukrainian issuer's management or supervisory board, or even by the general shareholders meeting.
Accordingly, as under paragraph (E) of proposed rule 10A-3(c)(2)(i), we request that Ukrainian issuers be given an exemption from this requirement due to the conflict between the proposed rules and Ukrainian law. Without such an exemption, a Ukrainian issuer will not be able to obtain or maintain a listing in the United States.
We are grateful to have the opportunity to provide comments to the Commission on the proposed rules, and would be happy to discuss any questions that the Commission may have with respect to this comment letter. Any questions concerning this letter may be directed to Mitchell M. Gitin at +44 7771 541502 or +7 (095) 410 1184.
cc: Giovanni Prezioso
Alan L. Beller
Paul M. Dudek
Annette L. Nazareth