Curtis Thaxter Stevens Broder & Micoleau LLC

Attorneys at Law
(207) 774-9000, ex. 211

Fax: (207) 775-0612


February 17, 2003

Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549-0609

Re: File No. S7-02-03
Release Nos. 33-8173; 34-47137; IC-25885
Standards Relating to Listed Company Audit Committees (the "Release")

Dear Mr. Katz:

We are submitting this letter in response to the request for comments of the Securities and Exchange Commission ("SEC") in the above described proceeding regarding implementation of Section 301 of the Sarbanes-Oxley Act of 2002 (the "Act").

In particular, we believe that the proposed rule would have the effect of unnecessarily excluding qualified directors from audit committees if such directors are principals or executive officers of vendors to the company in question. We believe that such persons may be among the best available candidates, as long as certain safeguards are in place.

The question arises as follows in the Release:

"Is additional clarification necessary regarding the consulting, advisory or other compensatory fee prohibition?"

The Proposed Rule does not give a definition of "compensatory fee." The closest it comes is in Section 240.10A-3 (e)(6), where it refers to fees for

"accounting, consulting, legal, investment banking, financial or other advisory services or any similar services to the issuer."

But this does not address the question of whether "compensatory fees" include payment for ordinary course goods and services that are not "similar services." For example, is a director not independent because he or she is a principal in a company that supplies goods or services to the issuer on an arms' length basis? Most sales of goods now also involve related services.

By not defining the term, the Commission makes the only safe course for issuers to eliminate from audit committees all directors who are principals or executive officers in suppliers. This can create a hardship in at least one category of situation with which we are familiar from experience. For issuers located in sparsely populated rural areas, some of the most sophisticated business people within a reasonable distance are those who sell to the issuer certain goods and/or services it needs. In the cases with which we are familiar, such arrangements resulted from the vendors offering the lowest prices for goods and services meeting or exceeding specifications. It can be difficult to find other qualified people, who are not directly or indirectly connected to vendors, and who are willing to travel to board meetings.

Query whether a similar issue presents itself to issuers in specialized industries, such as high-tech - are not some of the best candidates for audit committees those who may be principals or executive officers of vendors of ordinary course goods and services to such issuers? Often there are limited numbers of vendors of a particular component or service. Yet executive officers of such vendors may be some of the most knowledgeable people about the industry, including on issues related to audits.

An indication that Congress may not have intended to legislate so broadly is the comparison between Section 301 of the Act and the definitions of independence for directors in the current rules of the stock exchanges. These rules set limits on dollar volumes on both vendors and customers of the issuer, beyond which directors who are principals in such businesses will not be deemed independent. By dealing only with "compensatory fees" either (a) Congress neglected customers, who are the flip side of economic relations which can affect independence, or (b) Congress had a narrower intent.

An indication that Congress had a narrower intent comes from a minority report on a preliminary version of the Act which lacked anything comparable to Section 301:

"Independent directors serving as consultants. The bill reported out of the Committee does not include provisions to ensure that independent directors are truly independent. The bill should have included a provision that would prevent the practice of paying independent directors as `consultants' while they serve on the board. Lynn Turner, former Chief Accountant of the SEC, among others, have argued that paying directors as consultants is back door compensation that fundamentally undermines their independence. The critical question is whether `independent' directors who are receiving significant consulting compensation would challenge the same management that is paying them to serve as consultants. Such a provision is a simple step in ensuring that directors act in the best interests of shareholders." Minority Views of Congs. John J. Lafalce, Paul E. Kanjorski, Bernard Sanders, Luis V. Gutierrez and Janice D. Schakowsky from House Rpt.107-414.

Thus, we propose that the Commission exempt ordinary course vendors whose volume of business is less than a set level. The existing level is provided in stock exchange rules on independence, which were approved by the Commission and are similar to the disclosure thresholds under Item 404 of Rule S-K. This would be subject to two conditions -- (a) all contracts with such vendors are entered into on arms' length terms and reviewed periodically to make sure that the terms continue to be arms' length, and (b) such contracts are not for accounting, consulting, legal, investment banking, financial or other advisory services or any similar services to the issuer, with a clarification that similar services do not include services provided in the ordinary course of business, such as the services that are provided ancillary to the sale of goods in the ordinary course.

Respectfully submitted,

Michael B. Peisner

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