Regions Financial Corp.
SAMUEL E. UPCHURCH, JR.
February 18, 2003
Mr. Jonathan G. Katz
Re: File No. S7-02-03, Standards Relating to Listed Company Audit Committees
Dear Mr. Katz:
We are pleased to respond to the request for comments by the Securities and Exchange Commission (the "Commission") relating to the proposed adoption of rules under Section 301 of the Sarbanes-Oxley Act of 2002 (the "Act").
Generally, we support the Commission's proposed definition of the audit committee's role and what constitutes "independence" for audit committee purposes. However, we are concerned that the proposed rules would prohibit well-qualified and otherwise independent directors from serving on the audit committee due to their affiliation with a law firm, investment banking firm, consulting firm or other firm providing services to the issuer in circumstances which the fees paid for the services do not result in a material direct benefit to the director and are not material to the firm providing the service.
As the parent corporation of a banking subsidiary with a community focus, we pride ourselves on our relationships with the communities in which we operate. We make use of local firms to provide various services, including accounting, consulting, legal, investment banking and other advisory services. We believe that precluding a director who is affiliated with an entity which receives any fees from an issuer would prevent otherwise independent and well-qualified directors from serving on audit committees. We believe that where the payment of fees is indirect (i.e. the law firm of which the director is a partner) and where the payment of the fees themselves are not material to the service provider and do not result in a material direct benefit to the director, a director's independence would not be compromised by the payment of such fees, and that as such the reach of the rules as proposed is too broad.1 We would clearly agree that if the director received a material direct benefit from the fees paid by the issuer to an entity affiliated with the director that such a benefit would compromise that director's independence for purposes of serving on the issuer's audit committee. We therefore feel that the proper test would consider whether the amount of the fees is material to the firm providing the service to the issuer or whether the director's compensation from the firm is directly and materially impacted by such fees. We would also suggest that the standard of materiality be determined by the board of directors on a case-by-case basis and that such determination be disclosed annually.
We are also concerned with the lack of guidance with respect to credit and other banking transactions made pursuant to existing bank regulations. Although the proposing release states that the rules would not preclude independence on the basis of ordinary course commercial business relationships between an issuer and an entity with which a director had a relationship, the proposed rule does not address whether loans made pursuant to Section 22(h) of the Federal Reserve Act and Regulation O of the Board of Governors of the Federal Reserve System would be deemed ordinary course commercial business relationships. We note that Section 402 of the Act specifically exempts loans made pursuant to Section 22(h) from those prohibited personal loans which would create a conflict of interest. We would urge the Commission to clarify that these loans are deemed to be ordinary course commercial business relationships or to adopt an exemption to its independence requirements analogous to that found in Section 402. Either would permit holding company directors to maintain banking relationships that are established and maintained at arms length and on market terms.
Thank you for consideration of our comments.