PENN VIRGINIA CORPORATION
Nancy M. Snyder
February 14, 2003
Jonathan G. Katz, Secretary
RE: Proposed Rule: Standards Relating to Listed Company Audit Committees
Dear Mr. Katz:
I am writing this letter on behalf of Penn Virginia Resource Partners, L.P. (the "Partnership") to comment on the Commission's proposed rules on standards relating to listed company audit committees dated January 8, 2003 (the "Proposed Rules"). The Partnership is a master limited partnership ("MLP") whose common units are traded on the New York Stock Exchange (the "Exchange"). The Partnership, as well as other MLPs, could be dramatically impacted by the Proposed Rules.
The Partnership was formed by its sponsor, Penn Virginia Corporation (the "Sponsor"), which is also an Exchange-traded company. Penn Virginia Resource GP, LLC, the general partner of the Partnership (the "General Partner"), owns the general partner interest in the Partnership. 100% of the membership interests of the General Partner are owned by the Sponsor. The Sponsor also owns approximately 42% of the issued and outstanding common units representing limited partner interests in the Partnership.
As is the case with most MLPs, the Partnership does not have officers or directors. Instead, the General Partner has the sole responsibility for conducting the Partnership's business and for managing its operations. The rights of the Partnership's unitholders (limited partners) are defined in its partnership agreement. Under the partnership agreement, unitholders do not directly or indirectly participate in management or operations. Although the unitholders have voting rights under certain limited circumstances, they do not elect a board of directors. The partnership agreement defines "Board of Directors" to mean the board of directors of the General Partner. This board is elected by the members of the General Partner, in accordance with the terms of the General Partner's limited liability company agreement. As a result, the locus of control and governance is not actually at the Partnership, but at the General Partner, who is in turn controlled by the Sponsor.
As the General Partner's sole member, the Sponsor has elected all of the directors who serve on the General Partner's Board of Directors, including those who also serve on the Audit Committee. These Sponsor-elected directors meet the independence requirements of the Exchange with respect to both the Sponsor and the Partnership. However, we believe that the Proposed Rules potentially prohibit these, and any other directors elected by the Sponsor, from serving on the Partnership's Audit Committee, since, under the Proposed Rules, such directors may be deemed to be "designees" of the Sponsor. We do not believe that the mere fact that the Sponsor elects the members of the General Partner's Board of Directors should prevent a person who is not otherwise affiliated with the Sponsor or the Partnership from being eligible to serve on the General Partner's Audit Committee.
Effect of Proposed Rules
Due to the ownership structure of typical MLPs, and the on-going necessary involvement of sponsors in the business of their MLPs, we do not believe that MLP sponsors will be entitled to rely on the safe harbor exception from the Proposed Rules' definition of "affiliate," and may, therefore, likely be deemed "affiliates" of their Partnerships. Given the concept of "control" in the definition of "affiliate," any person elected to an MLP's general partner's board of directors by the related sponsor may likely be considered a "designee" of the sponsor and, therefore, an "affiliate" of the MLP. As such, the Proposed Rules would not allow such person to serve on the MLP's Audit Committee, even though such person is, in fact, independent and not subject to the control and direction of the sponsor.
We understand that the Proposed Rules include an exemption from the definition of "affiliated person," for an audit committee member serving on the boards of both a listed company and a majority owned publicly traded subsidiary of such listed company if that member otherwise meets the independence requirements for both entities. This exemption does not solve the problem for MLPs because (i) many sponsors of MLPs are not public entities and (ii) many MLPs, like the Partnership, are not majority-owned by their sponsors. Further, if the sponsor has any business dealings with the MLP, the listing requirements of the applicable exchange or the NASDAQ may very well prohibit the audit committee member of the sponsor from being considered independent for purposes of serving on the board of directors of the MLP. We believe the exemption introduced in the Proposed Rules for listed parent entities regarding "otherwise independent" persons should be extended to apply to persons designated by, but otherwise independent of, a sponsor, whether that sponsor is listed or not and whether or not that sponsor is the majority owner of its MLP.
Suggested Amendments to Proposed Rules
In our view, the act of designation by a sponsor should not alone render a person ineligible to serve on the audit committee of the General Partner of an MLP. To address this, we suggest the Proposed Rules be amended to:
We believe that presuming a lack of independence in audit committee members who merely have been designated by a sponsor will prevent otherwise qualified, experienced, effective, and truly independent persons from serving on audit committees. Deleting "designee" from the definition of "affiliate," defining "designee" or creating an exemption for MLP's will allow those persons to appropriately serve.
These suggestions are respectfully submitted in the hope that the Commission will take them into account in drafting the final rules. I believe they do no more than address legitimate concerns and do not impinge upon the effectiveness of the rules in ensuring the objectivity and independence of the members of the audit committee. If further information or clarification would assist the Commission in its consideration of the above matters, please do not hesitate to contact me.