California State Teachers' Retirement SystemFebruary 12, 2003 Mr. Jonathan Katz Dear Secretary Katz: RE: FILE NO. S7-02-03 This letter is sent to register the California State Teachers' Retirement System's (CalSTRS) support of the Commission's proposed rule change regarding prohibiting the listing of any security of an issuer that is not in compliance with the audit committee requirements established by the Sarbanes-Oxley Act of 2002. As you are aware, CalSTRS is a public pension fund, established for the benefit of California's public school educators over 80 years ago. CalSTRS has assets of approximately $94 billion; $37 billion of this amount is invested in the domestic equity market. These assets represent the retirement plan for approximately 687,000 participants. The long-term nature of CalSTRS' liabilities has made us keenly interested in the Commission's efforts to restore investor confidence in the capital markets. We agree that "accurate and reliable financial reporting lies at the heart" of our financial market system and that investor confidence in such information is fundamental to the health of our markets. The audit committees of the public corporations in which we invest are the first line of oversight in the financial disclosure process and must be above reproach. We appreciate the Commission's history of support for strong, independent audit committees. CalSTRS believes that the enactment of the Sarbanes-Oxley Act of 2002 was an important milestone for investors, but we also recognize that the great majority of the implementation of the legislation falls to the Commission. We support the Commission's efforts to accommodate the timelines articulated in Title II of the Sarbanes-Oxley Act regarding auditor independence. CalSTRS believes that it is not enough for audit committees to meet formulaic standards of independence, but that these committees must have real authority to protect the interest of shareholders as well. We support the Commission's proposed rules that give the audit committee real authority over the financial reporting and disclosure of corporations. We also support the Commission's proposal to implement rules regarding the listing of issuers on national exchanges, contained in the Sarbanes-Oxley Act. We believe that being denied listing on national exchanges will work as an important discipline for companies and enhance the presence and effectiveness of independent audit committees. We are concerned about the Commission's implementation of the Sarbanes-Oxley Act requirement regarding Complaint Handling. The proposed rules do not appear to give companies any guidance on this matter; we believe that guidance from the Commission or alternately, the national exchanges, is necessary and appropriate for both the corporations that will be subject to these rules and the shareholders who will rely on them. We realize that there is a line here between overly burdensome rules and the integrity of the oversight role that audit committees must provide, but we believe that leaving the Complaint Handling procedure entirely to the judgment of the issuers is contrary to the spirit and the intent of the proposed rules. Additionally, we believe that the procedures for the receipt, retention and treatment of complaints regarding accounting, internal accounting or auditing matters should be standardized and that standard should have the Commission's approval. As investors, we are not interested in stifling creative efforts of individual companies, nor are we interested in being overly prescriptive, but this is not an area in which either investors or companies are well-served by too much invention. With this important exception, we are in full support of the Commission's proposal regarding this matter. CalSTRS supports the establishment of a separate and independent audit committee, but is willing to accept that absent a designated committee, the entire board of directors of an issuer would constitute the audit committee. If the entire board were to serve as the audit committee, this would lead to the more stringent requirement that the entire board would have to be independent. However, we do urge the Commission to promulgate the rules in an efficient way in order to avoid confusing corporate governance structures that will be difficult for both investors and issuers. CalSTRS has a substantial private equity portfolio and supports the Commission's proposal regarding independent audit committees and newly public companies and would support increasing the exemption to one year. As investors, we are not interested in discouraging companies from accessing the public markets to expand their business or provide liquidity. CalSTRS supports the Commission's proposal to implement the independence criteria described in the proposed rules release. CalSTRS believes that independent audit committee members should be barred from receiving consulting, advisory or other compensatory fees from the issuer and/or its affiliates and believes that the independence requirement must include the spouses, minor children or stepchildren of the member. We believe that establishing such a clear standard is helpful to both investors and issuers. We believe that a three-year "look back" period would be appropriate for these criteria with regards to independent directors and their familial relationships. CalSTRS supports the Commission's proposals regarding the audit committee being responsible for the hiring, compensation, retention and oversight of the independent auditor. CalSTRS is in support of making appropriate exceptions in foreign jurisdictions and with foreign issuers, as custom and law dictate. Finally, CalSTRS supports, with the exceptions and comments noted above, the Commission's proposed rules on this matter, and believes that they will strengthen, in appearance and fact, auditor independence. CalSTRS also appreciates the ambitious timeline that the Commission is operating under and its willingness to move the process forward. Thank-you for the opportunity to comment on this matter. If you would like to discuss this letter, please feel free to contact me directly. We are filing this comment electronically in the interest of timeliness, but you may reach me at 916-229-3700.
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