11 Wall Street
New York, NY 10005

Darla C. Stuckey
Corporate Secretary
(212) 656-2060

New York Stock Exchange, Inc.

Via email to www.rule-comments@sec.gov

February 21, 2003

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

Re: Standards Relating to Listed Company Audit Committees
(January 8, 2003); Release No. 33-8173, 34-47137; File No. S7-02-03

Dear Mr. Katz:

The New York Stock Exchange, Inc. (the "NYSE" or the "Exchange") is pleased to take this opportunity to comment on the proposals made by the Securities and Exchange Commission (the "Commission" or the "SEC") in the above-referenced January 8 release regarding standards relating to listed company audit committees (the "Proposing Release").

I. Introduction.

The Commission's rulemaking pursuant to the Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act"or the "Act") is the beneficiary of the work of two Exchange committees over the last five years that made recommendations to revise our listing standards in this area. As noted in the Proposing Release, in 1998, the NYSE co-sponsored the Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees (the "Blue Ribbon Committee" or "BRC"). The recommendations of the Blue Ribbon Committee led the NYSE to revise its listing standards relating to independent audit committees, adding new qualifications and requirements for audit committee membership.

The Exchange appointed the second of the two committees, the Corporate Accountability and Listing Standards Committee (the "CALS Committee"), in conjunction with the February 13, 2002, request of then SEC Chairman Harvey Pitt that the NYSE review its corporate governance listing standards following the "meltdown" of several significant companies due to failures of diligence, ethics and controls. The NYSE charged the CALS Committee with reviewing the NYSE's listing standards (including audit committee standards based upon the BRC recommendations), as well as other recent proposals for reform, with the goal of enhancing the accountability, integrity and transparency of the NYSE's listed companies.

On June 6, 2002, the CALS Committee submitted its Report and initial recommendations to the NYSE Board of Directors, President Bush, Chairman Pitt, members of Congress, CEOs of listed companies, institutional investors, state pension funds, organizations such as the Business Roundtable and the Council of Institutional Investors, and leading academics and commentators expressed strong support for the CALS Committee's initiatives. The CALS Committee also received insightful and practical suggestions for the improvement of its recommendations from experts within the NYSE, listed companies, institutional investors, outside organizations and interested individuals. In addition to many face-to-face meetings and telephone calls, the Exchange received over 300 comment letters.

In its report, the CALS Committee recommended that the NYSE go beyond the BRC recommendations on audit committees and further strengthen its independence requirements for audit committee membership and increase the authority and responsibilities of the audit committee, including granting it the sole authority to hire and fire independent auditors, and to approve any significant non-audit relationship with the independent auditors. The recommendations of the CALS Committee resulted in the NYSE filing a new set of corporate governance listing standards with the SEC on August 16, 2002 (the "NYSE Proposals").

On July 30, 2002, two days before the NYSE Board of Directors met to act on the recommendations of the CALS Committee, the Sarbanes-Oxley Act was adopted. Section 301 of the Act ("Section 301") directed the SEC to require national exchanges and securities associations to adopt a listing standard prohibiting the listing of any security of an issuer that is not in compliance with several enumerated standards regarding issuer audit committees. The legislation set the stage for this third effort in five years to revise our standards relating to listed company audit committees.

In commenting on the issues raised by Section 301, this letter tries to bring to bear the work of both the Blue Ribbon Committee and the CALS Committee. As a result, our comments below strike a recurring theme: we urge the SEC to steer away from specificity when possible. This theme derives from the approach and philosophy that the CALS Committee followed, which was to charge our listed companies and their boards with responsibility for applying our corporate governance listing standards to the specific facts and circumstances that they confront. The CALS Committee believed that listed companies and their boards would apply the requirements carefully and in good faith, making reasonable interpretations as necessary and disclosing them. Accordingly, the CALS Committee's general approach to corporate governance listing standards, such as those called for by the proposed rule, is to avoid undue specificity that encourages formalistic, "check-the-box" compliance and frequent requests to the NYSE for interpretive or exemptive relief. Instead, the CALS Committee recommended that the Exchange adopt more general rules that empower listed companies and their boards to take responsibility and stand accountable through disclosure for applying the rules in good faith to their circumstances. Our comments and suggestions in this comment letter seek to carry forward the CALS Committee's approach and philosophy.

II. NYSE Comments on the SEC Proposal.

The NYSE has the following specific comments on the questions posed by the SEC in the Proposing Release. We have provided a summary of our major comments immediately below. Further in the letter, we restate the SEC's questions in italics prior to our response on each issue.

A. Summary of Comments.

In this letter, we make the following suggestions (among others):

Audit Committee Member Independence (Part B)

  • Payments from a listed company under a retirement or deferred compensation plan should not be considered prohibited compensation.

  • The proposed prohibition on outside compensation should not be extended to include ordinary course business.

  • A company's board should have discretion to determine that even a shareholder holding more than 10 percent of a company's equity securities is independent based on all the facts and circumstances; the percentage test for the proposed safe harbor from the definition of affiliated person should be 20 percent.

  • A company's board should be able to consider the totality of factors in determining whether a candidate is or is not an "affiliate" or independent.

  • A "look-back" period with respect to audit committee requirements is unnecessary, but if it were adopted, it should be phased in.

  • The proposed IPO/initial listing exemption should be available to foreign private issuers that are listed outside the U.S. at the time of their initial listing in the U.S.

  • The SROs should have the authority to accommodate foreign private issuers based on specific conflicts with local law or practice.

Responsibilities Relating to Registered Public Accounting Firms (Part C)

  • An audit committee need not be directly responsible for the appointment, compensation, retention and sole oversight of those engaged in the internal audit function.

Application and Implementation of the Proposed Standards

  • Compliance by issuers should be extended. (Part D.1)

  • The exemption for majority-owned subsidiaries that do not themselves have listed equity securities should apply to subsidiaries that are required to file their own financial statements. (Part D.2)

  • Participation of shareholder representatives of a controlling shareholder in a company's audit committee with observer status should be available to U.S. issuers, as well as non-U.S. issuers. (Part D.3(a))

  • The accommodation for issuers from jurisdictions that operate with boards of auditors or statutory auditors should be clarified. (Part D.3(a))

  • Listed foreign private issuers should comply only with requirements of Section 301 and the SEC final rule implementing Section 301, but not with any additional independence requirements provided in the NYSE rules. (Part D.3(a))

  • Debt-only issuers, asset-backed issuers, Exchange Traded Funds and issuers of Trust Issued Receipts should be excluded from the audit committee requirements. (Part D.2 and Part D.3(b) and (c))

B. Audit Committee Member Independence.

The proposed requirements would enhance audit committee independence by implementing two basic criteria for determining independence. First, audit committee members would be barred from accepting any direct or indirect consulting, advisory or other compensatory fee from the issuer or an affiliate of the issuer, other than in the member's capacity as a member of the board of directors and board committees. Second, a member of the audit committee of an issuer that is not an investment company may not be an affiliated person of the issuer or any subsidiary of the issuer apart from his or her capacity as a member of the board or board committee.


Is additional clarification necessary regarding the consulting, advisory or other compensatory fee prohibition? For example, should we clarify whether "compensatory fees" would include compensation under a retirement or similar plan in which a former officer or employee of the issuer participates?

The SEC's proposed requirements are consistent with the NYSE Proposals, which provide that director's fees are the only compensation an audit committee member may receive from the company.

In the NYSE Proposals, we state that, "If a director satisfies the definition of "independent director", . . . then his or her receipt of a pension or other form of deferred compensation from the company for prior service (provided such compensation is not contingent in any way on continued service) will not preclude him or her from satisfying the requirement that director's fees are the only form of compensation he or she receives from the company." The director is under no continuing obligation to the company in order to continue to receive such payments, so there is no reason to believe such payments would detract from the director's independence.

We believe that payments from the company under a retirement or deferred compensation plan should not be considered prohibited compensation, and we encourage the SEC to make this clear in the final rules.

Is the proposed extension of the compensatory prohibition to spouses, minor children or stepchildren or children or stepchildren sharing a home with the member appropriate? Should it be expanded or narrowed? For example, should there be an exception for non-executive family members employed by the issuer?

We believe that the scope of the family member in the Proposing Release is appropriate and consistent with the common understanding of that term in the U.S. Given that the definition is relatively narrow, excepting from that scope family member employed in non-executive position is probably unnecessary. If the concept of "family" were to be widened, however, such an exception may well become necessary.

Is the extension to payments accepted by an entity in which an audit committee member is a partner, member or principal or occupies a similar position and which provides accounting, consulting, legal, investment banking, financial or other advisory services or any similar services to the issuer appropriate? Should we extend the prohibition further, such as to ordinary course business relationships?

We agree with the SEC's approach on direct or indirect compensation for services as a consultant or a legal or financial advisor. The NYSE Proposals specify that, "Disallowed compensation for an audit committee member includes fees paid directly or indirectly for services as a consultant or a legal or financial advisor, regardless of the amount. Disallowed compensation also includes compensation paid to such a director's firm for such consulting or advisory services even if the director is not the actual service provider."

The NYSE Proposals further state, however, that, "Disallowed compensation is not intended to include ordinary compensation paid in another customer or supplier or other business relationship that the board has already determined to be immaterial for purposes of its basic director independence analysis." We urge the SEC not to extend the proposed prohibition on outside compensation to include ordinary course business. While an individual might benefit directly from consulting or advisory services provided by his or her firm to a listed company, it is unlikely that an individual's compensation would be impacted in any measurable way by ordinary course business between the listed company and the company that employs the director. As stated above, the NYSE Proposals would require that the listed company's board make a determination that the business relationship is immaterial in order for the director to be deemed independent for basic board membership as well as audit committee service.

Is the proposed definition of "affiliated person" for non-investment companies appropriate? Is the proposed safe harbor from the definition of affiliated person appropriate? Can we reliably assume that people who own less than 10% of a company and are not officers or directors are not in control of the company? Should this threshold be higher (e.g., 20%) or lower (e.g., 5%)? Should the exclusion from the definition of affiliate include an express presumption that those persons not so excluded are affiliates, unless rebutted by a majority of independent directors?

The SEC proposes to define the terms "affiliate" and "affiliated person" to mean "a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the person specified." The SEC proposes to define the term "control" as "the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise." The SEC's proposed safe harbor for non-affiliate status requires that an individual not be the direct or indirect beneficial owner of more than 10% of the voting power outstanding, and be neither an executive officer or director of the issuer.

With respect to the proposed safe harbor, we are concerned that listed companies will infer from the 10% threshold that a board cannot determine that a direct or indirect beneficial holder of more than 10% of a company's equity securities is independent for audit committee purposes. We believe that the SEC should clarify that a company's board has the discretion to determine that even a shareholder holding more than 10% of a company's equity securities is independent based on all the facts and circumstances. Without this clarification, companies may feel compelled to deem any holder of more than 10% of a company's equity securities not independent, which we do not believe is the SEC's intention.

We believe that the percentage test for the safe harbor should be 20%, rather than 10%. Under U.S. generally accepted accounting principles, there is a presumed inability to exercise significant influence at ownership levels under 20%, and this we believe is a sensible position to take in this context as well.

Note that the proposed safe harbor definition when used for the purpose of determining audit committee independence inadvertently requires that an audit committee member cannot be a director of the issuer.

Should we rely exclusively on retaining a subjective test for determining affiliate status, given the varied contractual arrangements with a control feature entered into by issuers, particularly smaller companies? Should a facts and circumstances test be retained in order to reflect the different ways a control relationship can be established with an issuer? Should the board of directors be required to determine whether an audit committee member is independent?

The NYSE Proposals rely on the board of directors to determine whether an individual is independent for purposes of board or audit committee membership based on all relevant facts and circumstances. As we stated in the NYSE Proposals with respect to board independence, "It is not possible to anticipate, or explicitly to provide for, all circumstances that might signal potential conflicts of interest, or that might bear on the materiality of a director's relationship to a listed company. Accordingly, it is best that boards making "independence" determinations broadly consider all relevant facts and circumstances. In particular, when assessing the materiality of a director's relationship with the company, the board should consider the issue not merely from the standpoint of the director, but also from that of persons or organizations with which the director has an affiliation. Material relationships can include commercial, industrial, banking, consulting, legal, accounting, charitable and familial relationships (among others). However, as the concern is independence from management, the Exchange does not view ownership of even a significant amount of stock, by itself, as a bar to an independence finding."

As the Blue Ribbon Committee noted, "one size can't fit all" when it comes to audit committees. The Blue Ribbon Committee further recommended that, "Within broad parameters, each audit committee should evolve and develop its own guidelines suited to itself and its corporation."

Thus, we would strongly urge the SEC to avoid bright line tests with respect to determination of "affiliate" status and allow the board to consider the totality of factors in determining whether a candidate is or is not an "affiliate" or independent.

The proposed independence requirements relate to current relationships with the audit committee member and related persons. Should the prohibition also extend to a "look-back" period before the appointment of the member to the audit committee? If so, what period (e.g., three years or five years) would be appropriate? Should there be different look-back periods for different relationships or different parties? If so, which ones?

The provisions of Section 301 do not contemplate that a "look-back" period would be imposed with respect to audit committee requirements. We believe that this is appropriate for several reasons, the most compelling of which is that our audit committee requirements will now apply to non-US companies listed on the NYSE.

Should the SEC adopt a "look-back" requirement, however, we believe that such a requirement should be phased in rather than be immediately effective. Companies need the opportunity to establish compliant audit committees once the Section 301-mandated NYSE's audit committee requirements become effective. Even companies currently subject to our independent audit committee requirements may need an opportunity to cure additional compensation issues that may exist with current audit committee members. While audit committee members should be expected to fully comply with the SEC's proposed audit committee independence criteria on the date the new audit committee rules become operative, such members may not have complied fully prior to such date. If a "look-back" period is imposed without a phase-in, some companies may have to replace one or more existing audit committee members, a significant burden without a correspondingly significant benefit.

The SEC took a similar approach with respect to audit partner rotation, noting that partners other than lead partners had not previously been subject to a rotation requirement and should be given additional transition time to maintain critical continuity. In addition, in its release adopting final rules on disclosure relating to audit committee financial experts, the SEC provides an interim exemption for foreign private issuers from the requirement to disclose whether audit committee financial experts are independent on the basis that there has been "no prior context in which that issuer has been required to consider our definition of the term."

Finally, should a "look-back" requirement be imposed, we do not believe it appropriate to apply it to affiliate status that results from share ownership. Once share ownership falls below a level where affiliate status exists, we do not believe there is any lingering impact from former status which time is required to dissipate.

Is the proposed exemption for new public companies appropriate? Should more than one audit committee member be exempted from the requirements? Should a specific percentage of audit committee members be exempted? Should the exemption be conditioned on there being at least a majority of independent directors on the audit committee? Should the exemption period be longer (e.g., 1 year) or shorter (e.g., 30 days)?

As proposed, the SEC rules exempt one member of a non-investment company issuer's audit committee from the independence requirements for 90 days from the effective date of an issuer's initial registration statement under Section 12 of the Exchange Act or a registration statement under the Securities Act covering an initial public offering of securities of the issuer.

We believe that this exemption does not provide an adequate timeframe for compliance by newly listed companies. The NYSE's current rules require that companies listing in conjunction with an initial public offering have two independent directors (as determined under our current definition of audit committee independence) on their audit committee within three months of listing and a third independent director within twelve months of listing. The NYSE Proposals provide that a company listing upon its initial public offering must have a fully independent audit committee (as determined under our proposed definition of audit committee independence) in place within 24 months of listing. Companies must continue to comply with our current rules during the transition period applicable to our proposed rules.

Our rules take into account that the majority of companies listing on the NYSE in conjunction with an initial public offering do not have two independent board members in place upon listing. We believe that such companies will be significantly burdened by the SEC's proposed requirements without proportionate benefit to shareholders. Companies often have access to a stronger pool of potential board members following an IPO than they have prior to the offering. For example, a successful public offering often provides an incentive for a prospective independent director to join a newly listed company. In addition, many prospective independent directors without preexisting ties to a company undertaking an IPO are hesitant to assume liability for the contents of a registration statement they have not participated in preparing.

Public investors are made aware of the composition of a company's board and audit committee at the time of listing through required disclosures in the company's registration statement. Companies also disclose the timeframe for appointment of independent directors required by the NYSE. In our experience, companies have been able to fully comply with our independence requirements within the timeframe permitted by our existing rules.

Therefore, we strongly support revisions to the SEC's proposed exemption for IPOs to replicate the historical treatment of such companies by the NYSE. By extension, the proposed exemption should also be available to foreign private issuers that are listed in their home country or elsewhere outside the U.S. at the time of their initial listing in the U.S.

Is the proposed exemption for independent board members that sit on both a parent's and consolidated majority-owned subsidiary's board of directors appropriate?

We view this exemption as appropriate and necessary, and note that it is consistent with our historical approach to this issue. We would also request that the SEC extend this exemption to cover independent directors that serve on boards of companies under common control of a parent company, if such directors would be independent other than for the fact that the two companies are affiliated through the parent company.

Should companies be allowed to request exemptive relief on a case-by-case basis? If so, what procedures should be used for submitting and evaluating applications for exemptive relief? What factors should the Commission consider in considering such requests? How would such a case-by-case process be consistent with the policy and purposes of Section 10A(m)? How would such a process be coordinated between the Commission and the SROs? Should companies be required to disclose publicly any exemption they receive? Should SROs be permitted to grant exemptions within defined parameters? What should those parameters be?

As a general matter, the Exchange does not provide exemptions to its listing standards for specific companies. When necessary, we propose amendments to our rules, but those go through the normal SEC approval process.

However, the Exchange is frequently called upon to interpret its rules - to ascertain how and whether the rules apply to a given set of facts and circumstances, and we would expect to continue to perform that important function. This process, however, does not involve determinations that clearly non-conforming practices are permitted or "exempt."

While the Exchange is reluctant to become the arbiter of exemptions to these rules, one area of particular concern to us is the impact of the rules on foreign private issuers. As noted elsewhere, the Exchange appreciates that the SEC has been very accommodative to concerns and difficulties pointed out by foreign private issuers. Nonetheless, the application of this kind of requirement to non-U.S. companies is new, and there exists a possibility that not all relevant issues have been addressed.* There also exists a continuing possibility that developments outside the U.S. may raise issues in the future between these rules and applicable local standards or practices. It may be appropriate in this area, therefore, for the SEC to state in the rule that such conflicts should be accommodated, and to provide the SROs with authority to implement additional accommodations that would be applicable to all foreign private issuers affected by the local standard or practice.

C. Responsibilities Relating to Registered Public Accounting Firms

Under the SEC's proposed rule, an audit committee would have to be directly responsible for the appointment, compensation, retention and oversight of the work of the independent auditor engaged (including resolution of disagreements between management and the auditor regarding financial reporting) for the purpose of preparing or issuing an audit report or related work or performing other audit, review or attest services for the issuer, and the independent auditor would have to report directly to the audit committee.


Should the audit committee also be directly responsible for the appointment, compensation, retention and oversight of an issuer's internal auditor? Should other responsibilities be under the supervision of the audit committee?

The NYSE's Proposals relating to the increased authority and responsibility of the audit committee require that the audit committee must have a written charter that addresses the committee's purpose, which must be, at a minimum, to assist board oversight of the performance of the company's internal audit function and independent auditors. The NYSE Proposals would also require that the audit committee meet on a periodic basis with the internal auditor or other personnel responsible for the internal audit function. While all NYSE listed companies would be required to have an internal audit function, we do not specify that that function be carried out by a specified internal auditor.

While it is important that an audit committee meet separately with those responsible for a company's internal audit function, be accessible by those engaged in the function and play a role in the annual evaluation of the effectiveness of the function, we do not believe that it is necessary or appropriate to require that an audit committee be directly responsible for the appointment, compensation, retention and sole oversight of those engaged in the internal audit function. Those administrative tasks are properly performed by company management.

Does the proposed instruction that the requirement does not conflict with, and is not affected by, any requirement that requires shareholders to ultimately elect, approve or ratify the selection of the issuer's auditor adequately address the concerns of issuers whose governing law or documents requires shareholder selection of the auditor? Are additional accommodations necessary? Please explain how any accommodation would be consistent with the Sarbanes-Oxley Act.

The NYSE strongly supports the accommodations proposed by the SEC in response to concerns expressed by foreign private issuers regarding local law requirements that shareholders elect, approve or ratify the appointment a company's outside auditors.

D. Application and Implementation of the Proposed Standards

1. SROs Affected

Under the SEC's proposals, the new requirements would need to be operative by the NYSE and other SROs no later than the first anniversary of the publication of the SEC's final rule in the Federal Register. To facilitate timely implementation of the proposals, the SEC proposes that each SRO must provide to the Commission, no later than 60 days after publication of the SEC's final rule in the Federal Register, proposed rules or rule amendments that comply with the SEC's final rule. Further, each SRO would need to have final rule or rule amendments that comply with the SEC's final rule approved by the Commission no later than 270 days after publication of the SEC's final rule in the Federal Register.


Do the proposed implementation dates provide sufficient time for SROs to propose and obtain Commission approval for new or amended rules to meet the requirements of the proposals? Is the date by when the standards would need to be operative appropriate? If not, what other dates would be appropriate? What factors should the Commission consider in determining these dates?

Under the SEC's proposed timeframe, and assuming an effective date of the SEC's final rules in April 2003, the NYSE would be required to file proposed rule amendments with the SEC no later than June 2003, to have final rule amendments approved by the SEC no later than January 2004 and to have those final rules operative no later than April 2004. The NYSE believes that some adjustment to this schedule may be necessary.

The NYSE will submit the proposed rule amendments to its Board of Directors for approval prior to filing with the SEC. Should the SEC's final rules become effective in March or early April, we will not have an opportunity to present the proposed NYSE rules to our Board prior to the SEC's proposed filing deadline since the Board's next bimonthly meeting is in June. Therefore, we would like to have at least until the end of June to file our proposed rule amendments with the SEC.

The other issue that must be addressed is the timeframe for application of the new rules to listed companies. We believe that a date for compliance by issuers should be extended. Companies will need the opportunity to review the final rule requirements in order to adjust their board and committee composition as necessary at their next annual meeting of shareholders.

Given the lead time needed to obtain suitable directors and the requirements' applicability to non-US listed companies, it would appear appropriate to require compliance from companies no later than 18 months following SEC approval of the Exchange rules applicable to the audit committee. If, for example, the final NYSE rules are approved by the SEC on October 31, 2003, the practical effect would be that companies desiring to deal with this matter at their annual shareholder meeting will have until their first annual meeting held after April 30, 2004 to come into compliance. It may also be appropriate to give companies with classified boards some additional time to comply if a change would be required for a director who would not normally stand for election in the first annual meeting after April 30, 2004. In such cases we would suggest that the company have another year to effect the change in that director position.

2. Securities Affected

In enacting Section 10A(m) of the Exchange Act, Congress made no distinction regarding the type of securities to be covered. Section 10A(m)(1)(A) of the Exchange Act prohibits the listing of "any security" of an issuer that does not meet the new standards for audit committees. Accordingly, the SEC's proposed audit committee requirements would apply not just to voting equity securities, but to any listed security, regardless of its type, including debt securities, derivative securities and other types of listed securities.


Although we do not propose to exempt other types of securities from coverage of the proposed rule, we request comment on the propriety of either a complete or partial exemption from the requirements for other types of securities. For example, should the rule apply only to classes of voting common equity of an issuer? What would be the basis for such an exclusion, and how would it be consistent with the purposes of the Sarbanes-Oxley Act? In responding to this request, commenters should specifically address how such an exemption would be consistent with investor protection.

Later in this letter, under the question related to asset-backed securities, we discuss our views on the appropriate treatment of passive entities that do not customarily have an audit committee. Here, we wish to discuss the appropriate treatment of issuers that are in ordinary corporate form, but list securities that we do not ordinarily consider subject to our corporate governance standards. These are issuers listing only debt or preferred stock.

The rules as proposed by the SEC appropriately exempt majority-owned subsidiaries of listed parents where the subsidiaries separately list debt or non-convertible preferred stock.* There are, however, other issuers of publicly-traded debt that would not be covered by the proposed exemptions. In the absence of an exemption, we believe that such issuers would avoid exchange-listing of their debt to the detriment of investors.**

In contrast to over-the-counter bond trading, the NYSE's Automated Bond System (ABS) has long disseminated both last sale prices as they occur exclusive of any mark-ups, markdowns, or other charges, as well as bid and ask quotations. This transparency is lost when a debt security is not listed. Also lost is an efficient trading mechanism for a significant sector of publicly issued securities.

Accordingly, we suggest that the SEC utilize its exemptive powers to insure that an audit committee requirement does not deter debt-only issuers from listing their public debt securities.

Similarly, is the proposed exemption of listings of non-equity securities by consolidated majority-owned subsidiaries appropriate? Instead, should all issuers of securities be required to maintain an audit committee meeting the proposed standards? What would be the burden on companies from mandating such a requirement? Should the exemption be limited to wholly owned subsidiaries or some other specified level of ownership? Is limiting the exemption to non-equity securities (other than non-convertible, non-participating preferred securities) of the subsidiary appropriate?

The NYSE supports the SEC's proposed exemption for majority-owned subsidiaries that do not themselves have listed equity securities. We would request clarification, however, that the exemption applies even to subsidiaries that are required to file their own financial statements, despite also reporting on a consolidated basis with their parent company.

We would also add that in the case of an issuer that is exempt (whether under the exemption referred to in this set of questions or any other which permits an issuer not to have an audit committee), such issuer as a logical matter should also be exempt from the audit committee pre-approval requirements of Section 10A(h) and Section 10A(i) of the Exchange Act and related rules. We hope that the final release is explicit on this point.

3. Issuers Affected

(a) Foreign Issuers

Section 10A(m) of the Exchange Act makes no distinction between domestic and foreign issuers, and the proposed rule regarding audit committee requirements is applicable to foreign private issuers as well as domestic issuers. The SEC, however, indicates that it is aware that the proposed requirements may conflict with legal requirements, corporate governance standards and the methods for providing auditor oversight in the home jurisdictions of some foreign issuers. In its proposal, the SEC attempts to address these concerns in specific areas in which foreign corporate governance arrangements differ significantly from general practices among U.S. corporations.


Although we do not propose a complete exemption for foreign issuers from coverage of the proposed rule, and question whether such an exemption would be consistent with the policies underlying the Sarbanes-Oxley Act, we solicit comment on the propriety of either a complete or broader exemption from the requirements for foreign issuers. Given the exemptions that are proposed, would the proposals conflict with local law or local stock exchange requirements? If so, how? Are the problems that the proposals are intended to address dealt with in alternative ways in other jurisdictions? Would any foreign issuers not consider a listing solely because of these requirements? Would any foreign issuers that currently maintain a U.S. listing seek to delist their securities because of these requirements?

The NYSE believes that the SEC's proposed accommodations for foreign private issuers are consistent with the SEC's historical and ongoing commitment to attracting non-U.S. listings in order to provide opportunities for investment diversity in the U.S. markets. The proposed accommodations convey to foreign private issuers a commitment that responds to the significant potential conflicts that exist between a blanket requirement that every listed company have an independent audit committee and the requirements of local law and practice in a number of foreign jurisdictions. However, it continues to be the case that foreign private issuers, particularly those listed on a U.S. exchange or Nasdaq and thus subject to the proposed audit committee requirements, are taking a very close look at the costs and burdens associated with the requirements of the Sarbanes-Oxley Act as they evaluate the benefits of a U.S. listing. We are aware of a number of companies that are considering either delisting (to avoid compliance with the audit committee requirements) or delisting and deregistration (to avoid compliance with these and certain other provisions of the Sarbanes-Oxley Act). The cost/benefit analysis becomes particularly close for non-U.S. listed companies that have not yet achieved a significant U.S. shareholder base.

With respect to prospective non-U.S. listings, the Sarbanes-Oxley Act has influenced several companies to postpone or cancel altogether their proposed U.S. listings and registrations. We note that, for example, the Benfield Group cited the burden of complying with the Act as the primary factor leading it to choose a listing in London rather than on the NYSE. The London Stock Exchange has been quite openly using the regulatory hurdles associated with the Sarbanes-Oxley Act as a marketing wedge against U.S. registration and listing.

Non-U.S. listed companies acknowledge that the SEC has made a number of efforts to minimize the impact of the Sarbanes-Oxley Act. Examples include the safe harbor for non-GAAP financial information distributed by certain foreign companies, the limitation of the pension fund blackout rules to foreign companies with a large U.S. employee base, and the exception for certain foreign lawyers from the attorney conduct rules. In addition, the proposed accommodations relating to the audit committee requirements have been extremely well received by a number of non-U.S. listed and prospect companies.

Despite these efforts, the application of U.S. corporate governance requirements to non-U.S. listed companies in contrast to the historical reliance on home-country law and practice in this area has resulted in foreign regulators, companies and media questioning the right of Congress to change the rules for non-U.S. listed companies "in the middle of the game." To the extent these companies conclude that it is not worth the cost and trouble to maintain a listing in the U.S., we believe that the result will be to disadvantage U.S. investors and the U.S. markets.

Is the proposed special accommodation to the independence requirements adequate for issuers in countries with a dual board structure where employee representatives sit on the supervisory board or are required to be on the audit committee? If not, how should we accommodate these issuers, if at all?

We believe that the proposed accommodation for employee representatives is extremely important. A number of non-U.S. listed companies, particularly in Germany, are required to include employee representatives on the supervisory board or audit committee. As the Proposing Release notes, the employee is independent from management and provides an independent check on the activities of the management board.

Are the proposed special accommodations for foreign issuers with controlling shareholder or shareholder groups or foreign government representation appropriate? Do the proposed exemptions provide appropriate accommodations for foreign private issuer practices, consistent with the purposes of Section 10A(m) of the Exchange Act and the protection of investors? Are there alternative approaches that would be preferable to address the issue? Should any of the conditions of the proposed exemption be changed? For example, for controlling shareholders, should the level of shareholder ownership proposed be higher (e.g., 80%) or lower (e.g., 10%)? Is the limitation for controlling shareholders to observer status and not being a voting member or chair of the audit committee appropriate?

We support the SEC's proposed accommodations to enable a representative of a foreign government or a controlling shareholder to participate on a company's audit committee. With respect to the controlling shareholder accommodation, we believe that the proposed 50% threshold is the correct one. We believe, however, that such an accommodation is also appropriate for U.S. listed companies. In fact, our CALS Committee was sympathetic to the argument that a significant shareholder not also a member of management could be an interested and valuable participant in the audit committee discussions.

The SEC's proposed accommodation would require that the director representing the controlling shareholder receive no compensation other than normal director compensation from the listed company, not be an executive officer of the listed company and not be a voting member of or chair the committee. These requirements should be an efficient deterrent against potential abuse for both U.S. and non-U.S. companies alike.

Is the proposed special accommodation for issuers from jurisdictions that operate with boards of auditors or similar bodies appropriate? Does the proposed exemption provide appropriate accommodation for these issuers, consistent with the purposes of Section 10A(m) of the Exchange Act and the protection of investors? Are there alternative approaches that would be preferable to address the issue? Should we provide a "sunset" date for this provision to allow the Commission to reconsider its effectiveness and to reexamine the trend towards audit committees in other jurisdictions? If so, what date should we use (e.g., December 31, 2005)?

The Proposing Release notes that several foreign jurisdictions, including Japan and Italy, require or provide for auditor oversight through a board of auditors or similar body, or groups of statutory auditors, that are separate from the board of directors. The SEC's proposed accommodation would enable such statutory boards in lieu of a separate audit committee "if those boards operate under legal or listing provisions that are intended to provide oversight of outside auditors that is independent of management, membership on the board excludes executive officers of the issuer and certain other requirements are met." Specifically, foreign private issuers with boards of auditors or similar bodies or statutory auditors meeting these requirements would be exempt from the requirements regarding the independence of audit committee members and the audit committee's responsibility to oversee the work of the outside auditor.

This is an important and welcome accommodation, but there is one respect in which it may not provide sufficient flexibility for non-U.S. listed companies. In order to make use of the accommodation, the SEC proposes that a company would be required to be listed or quoted on a securities exchange or inter-dealer quotation system outside the U.S. As proposed, this accommodation would be unavailable to a non-U.S. listed company that was only listed on the NYSE but that was required to have a board of auditors or a statutory auditor pursuant to home-country legal requirements. We believe that what is relevant is that the company is acting under home-country requirements, but whether it is also listed on an organized market in the home-country may not be so relevant. We suggest that the home-country listing requirement be removed.

We also note that, due to specific footnote language in the Proposing Release, there appears to be some confusion amongst non-U.S. listed companies as to whether or not this exemption applies to boards of auditors or statutory auditors in countries other than Japan. We suggest that the SEC clarify that this accommodation is not so limited.

We would also strongly urge the SEC not to include a sunset provision for this accommodation. If the board of auditors or the statutory auditor is independent and functions in lieu of an audit committee as required by home-country law or non-U.S. listing standards, U.S. investors would not gain a significant benefit from having that company implement a U.S. style audit committee in conflict with a home-country requirement.

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We wish to comment on an additional matter relative to foreign private issuers listed on the NYSE. It is our intention not to apply to listed foreign private issuers additional independence requirements (those that are not directly prescribed by the Sarbanes-Oxley Act or the related SEC's final rules) that would be applicable to our U.S. issuers.

The NYSE Proposals noted that, "Both SEC rules and NYSE policies have long recognized that foreign private issuers differ from domestic companies in the regulatory and disclosure regimes and customs they follow, and that it is appropriate to accommodate those differences." For this reason, the CALS Committee proposed to continue to permit listed foreign private issuers to follow home-country practices with respect to a number of corporate governance matters, while requiring that they disclose the significant ways in which their home-country practices differ from those followed by domestic companies under NYSE listing standards.

Consistent with this approach, we believe that listed foreign private issuers should comply only with requirements of Section 301 and the SEC final rule implementing Section 301, but not with any additional independence requirements provided in the NYSE rules. As a result, we can expect that there will be modest differences between the audit committee requirements applicable to U.S. and non-U.S. listed issuers. Of course, we would expect that any such differences be disclosed to the public in the manner described in the NYSE Proposals.

(b) Issuers of Asset-Backed Securities


Is the exclusion of asset-backed issuers appropriate? If not, how should these issuers be handled? Are there other types of issuers that should be handled differently?

The term "asset-backed security" is defined in Rule 13a-14(g) of the Exchange Act of 1934 as "any issuer whose reporting obligation results from the registration of securities it issued that are primarily serviced by the cash flows of a discrete pool of receivables or other financial assets, either fixed or revolving, that by their terms convert into cash within a finite time period plus any rights or other assets designed to assure the servicing or timely distribution of proceeds to security holders." In the Proposing Release, the SEC notes the special nature of asset-backed issuers, stating that such issuers are subject to substantially different reporting requirements, most significantly, they are generally not required to file the financial statements that other companies must file. Also, such entities typically are passive pools of assets, without an audit committee or board of directors or persons acting in a similar capacity. Accordingly, the SEC proposes to exclude asset-backed issuers from the proposed requirements.

We believe that it is appropriate to treat these types of entities differently due to the nature of their operations. We also believe that it would be appropriate to extend this exclusion to other types of passive entities. The NYSE current and proposed corporate governance standards specifically do not apply to passive business organizations in the form of trusts (such as royalty trusts), and issuers listing only special purpose securities such as those described in Sections 703.16, 703.19, 703.20 and 703.21 of our Listed Company Manual. We suggest that the SEC parallel this approach in these proposed audit committee rules.

The SEC has recognized and dealt appropriately with this issue in other rulemaking under the Sarbanes-Oxley Act. In the SEC's proposing release relating to financial expert disclosure, for example, the SEC recognizes that certain entities do not normally have an audit committee. In that release, the SEC states that, "Some companies do not have boards of directors and therefore do not have board audit committees. For example, some limited liability companies and limited partnerships that do not have a corporate general partner may not have an oversight body that is the equivalent of an audit committee. It may be important to investors to be aware that such entities do not have such oversight bodies. Therefore, we do not propose to exempt these entities from the proposed financial expert disclosure requirements. If a limited liability company or limited partnership does not have a similar oversight body, it must explain that its organizational structure does not provide for such a body and that it therefore does not have an audit committee."

Section 407 of the Sarbanes-Oxley Act does not require a financial expert, but simply disclosure of whether there is one on the committee or not. An analogous approach under Section 301 seems appropriate. An entity that is not governed by a board, and indeed does not conduct an active business, should not be subject to the requirement of Section 301. An explanation in the issuer's disclosure documents that it does not have an audit committee, and why, would appear unobjectionable and something with which such issuers could comply with minimal difficulty.

(c) Investment Companies

The SEC's Proposing Release covers closed-end investment companies and exchange-traded open-end investment companies, but excludes exchange-traded UITs.


Is the exclusion for ETFs that are structured as unit investment trusts appropriate? If not, how should these ETF UITs be handled? Exchange-traded UITs typically provide audited financial information in shareholder reports although these reports are not required by Commission rules. How should this affect whether exchange-traded UITs are covered by the proposed requirements? Should the sponsor, depositor, or trustee of the UIT be required to comply with the proposed rule? Are there other types of investment companies that should be excluded from the proposed rule? If so, why?

Neither ETFs in the form of UITs, nor the issuers of the kind of security known as a Trust Issued Receipt, have a board of directors or an audit committee. Consistent with our views expressed above, we view both types of issuers as appropriate candidates for exemption from the audit committee requirements.

4. Determining Compliance with Proposed Standards

Section 10A(m) of the Exchange Act does not establish specific mechanisms for a national securities exchange or a national securities association to ensure that listed companies comply with the proposed standards on an ongoing basis. SROs are required to comply with Commission rules pertaining to SROs and to enforce their own rules, including rules that govern listing requirements and affect their listed issuers. To further the purposes of Section 10A(m), the SEC proposes to direct the SROs to require a listed issuer to notify the applicable SRO promptly after an executive officer of an issuer becomes aware of any material noncompliance by the listed issuer with the proposed requirements.


Should a listed issuer be required to notify the SRO if it has failed to comply with our proposed requirements? Is it sufficient for the notification to be made "promptly"? Should the direction to the SROs on this point be more specific (e.g., notification must occur no later than two business days after an executive officer of the issuer becomes aware of any material noncompliance)?

NYSE already has an oversight regimen that we use to monitor listed company compliance with audit committee requirements. The NYSE requires that listed companies file a written affirmation with the NYSE on an annual basis stating that the company is in compliance with our audit committee requirements and notify the NYSE of any changes. The written affirmation must also be updated when composition of the audit committee changes.

Should our final rule include specific provisions that set maximum time limits for an opportunity to cure defects? If so, what time limits would be appropriate?

We believe that the SEC should not mandate maximum time limits for an opportunity to cure defects. Based on our experience, companies cure their defects as quickly as possible. Due to facts and circumstances often outside the control of listed companies, curing a deficiency may take longer for one company than for another. This is particularly true in the difficult task of finding a qualified and interested person to take on the challenges of serving on the audit committee of the board.

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Thank you for your consideration of these comments. We would be pleased to answer any questions or provide further information that you may find helpful.



Darla C. Stuckey
Corporate Secretary

* By way of example, there is one issue that we understand was brought to the SEC's attention only after the Proposed Release was published. It involves a few public issuers known as "dual holding companies" or "dual parent companies" which have separate legal entities and separate stock exchange listings for their shares, but operate as a single entity. One result is that they have an audit committee comprised of independent directors from each of the separate companies. We view this as completely consistent with the proposed audit committee requirements, but one can understand the desire of the companies for interpretative guidance on which they can rely.
* We believe this will cover the preferred-only issuers listed on the Exchange.
** We have already received delisting applications from debt-only listed companies that cite as the basis for delisting the companies' unwillingness to comply with the proposed provisions of the Sarbanes-Oxley Act.