Shearman & Sterling
February 26, 2003
Jonathan G. Katz
Release Nos. 33-8173; 34-47137; File No. S7-02-03
Dear Mr. Katz:
We welcome the opportunity to comment on certain issues raised for Japanese companies listed on U.S. national securities exchanges and national securities associations ("Japanese Listed Companies") in the captioned release (the "Release") and the rules proposed thereby (the "Proposed Rule"). This letter is addressed to you on behalf of Toyota Motor Corporation, Advantest Corporation and Pioneer Corporation. We appreciate the efforts of the Securities and Exchange Commission (the "Commission") to accommodate the concerns of foreign issuers regarding the application of the audit committee requirements set forth in Section 301 of the Sarbanes-Oxley Act of 2002 (the "Act"). We are, however, in support of the Japan Business Federation's comment letter dated February 18, 2003 submitted to the Commission and urge the Commission to clarify that Japanese Listed Companies who maintain a statutory board of corporate auditors ("Board of Auditors") in accordance with the Japanese Commercial Code may rely upon the exemption set forth in Proposed Rule 10A-3(c)(2).
As demonstrated through numerous comment letters submitted to the Commission to date by and on behalf of Japanese Listed Companies, Japanese Listed Companies currently employ a system of Board of Auditors as part of their corporate governance systems. Through the comment letters, Japanese Listed Companies have voiced deep concerns about the applicability of the audit committee requirements to Japanese governance arrangements that differ significantly from the general practices of U.S. corporations. We believe that the Commission, consistent with its long-standing deference to home country corporate governance standards and practices for foreign issuers, intended to make the exemption under Proposed Rule 10A-3(c)(2) available to Japanese Listed Companies that have a Board of Auditors, and that footnote 88 in the Release is a reflection of such intention. We further believe the Commission has designed the exemption under Proposed Rule 10A-3(c)(2) successfully to address many of the concerns of Japanese Listed Companies, but clarifications are necessary to fully accomplish the purpose of the exemption as they apply to Japanese Listed Companies.
We believe that substantially all1 of the Japanese Listed Companies that maintain a Board of Auditors in accordance with Japanese corporate law satisfy the requirements set forth in paragraphs (A) - (F) of Proposed Rule 10A-3(c)(2). However, given that paragraph (E) imposes a requirement that the home country law or listing standard require direct responsibility for the oversight of the work of a registered public accounting firm without specifying definite standards of what constitutes direct responsibility, it is critically important that the Commission specifically confirm that the Board of Auditors established and functioning pursuant to the Japanese Commercial Code meets the standard of paragraph (E).
We believe that under Japanese corporate law, the Board of Auditors does possess the power to be "directly responsible" for the oversight of the work of the registered public accounting firm, as required under paragraph (E). We base this belief on the following principal powers and duties granted to the Board of Auditors, or each statutory auditor comprising the Board of Auditors, under Japanese law with respect to registered public accountants and their work:
As a result of the foregoing duties and authorities granted to the Board of Auditors and its members under Japanese corporate law, shareholders are provided an effective opportunity to receive the views of the Board of Auditors with respect to the audit by public registered accountants regardless of the support of the management regarding the same. Accordingly, even in the event of disagreements between management and the Board of Auditors regarding the audited financial statements, the Board of Auditors must, under Japanese corporate law, submit their views to the shareholders' meeting, and the shareholders will have a meaningful opportunity to make inquiries of the Board of Auditors.
For these reasons and those set forth in the comment letter of the Japanese Business Federation, we believe the Commission should be prepared to confirm that the applicable Japanese law meets the standard of paragraph (E) and that Boards of Auditors established and conducted pursuant to the Japanese Commercial Code are eligible for the general exemption under Proposed Rule 10A-3(c)(2).
We also urge the Commission to extend its recognition of the special circumstance of the Board of Auditors to the audit committee financial expert disclosure requirements adopted pursuant to Section 407 of the Act. We refer you to our comment letter submitted to the Commission as of even date herewith in response to the solicitation of comments set forth in the release adopting the Section 407 rules.
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We appreciate the opportunity to comment on the Proposed Rule. If the Commission or its staff have any questions concerning the foregoing, please call Masahisa Ikeda at (011-813) 5251-1601 or Linda C. Quinn at (212) 848-8747.