Matsushita Electric Industrial Co., Ltd.
February 18, 2003
Via e-mail: email@example.com
Jonathan G. Katz
Re: Proposed Rule Relating to Listed Company Audit Committees
Dear Mr. Katz:
Matsushita Electric Industrial Co., Ltd. (the "Company") is pleased to submit this letter to respond to Release Nos. 33-8173, 34-47137, IC-25885 (the "Proposing Release"), in which the Securities and Exchange Commission (the "SEC") solicited comments on its proposed Rule 10A-3 (the "Proposed Rule") implementing Section 301 of the Sarbanes-Oxley Act of 2002 (the "Act") relating to listed company audit committees. The Company is listed on the New York Stock Exchange and the Pacific Exchange, and is subject to reporting requirements under the Securities Exchange Act of 1934.
Set forth below are aspects of the Proposed Rule that the Company believes should be modified in order for SEC-registered Japanese corporations ("SRJCs," or each, an "SRJC"), including the Company, to comply with the requirements of the Proposed Rule while adhering to the underlying statutory purposes of Section 301 of the Act. Also set forth are the Company's responses to certain of the questions the SEC specifically put forth in the Proposing Release.
I. Proposed Rule 10A-3
The Company greatly appreciates the efforts of the SEC to address in the Proposed Rule the issue of the potential application to SRJCs of requirements under Section 301 of the Act which would conflict with those applicable to SRJCs under Japanese law and practice. Specifically, the Company appreciates the SEC's proposal of paragraph (c)(2) of the Proposed Rule, which provides a general exemption from the requirements of paragraphs (b)(1) and (b)(2) in a manner that generally takes into account the approach taken by the Japanese corporate governance system under which SRJCs operate.1 The Company believes that the current level of exemption as proposed in paragraph (c)(2) is essential for SRJCs to comply with the Proposed Rule. Accordingly, the Company respectfully requests that the SEC, in finalizing this rule, at least retain the current level of exemption as proposed in paragraph (c)(2). In addition, the Company has some technical comments and observations, which are discussed below.
The Company's Understanding About Paragraph (c)(2)(i)(E)
The Company's understanding of how the SEC intends Paragraph (c)(2)(i)(E) to apply in practice, to accomplish the overall goal of paragraph (c)(2), is described below. The Company intends to apply paragraph (c)(2)(i)(E) in this manner.
Paragraph (c)(2)(i)(E) requires that the board of auditors (or similar body) or statutory auditors of a foreign private issuer be directly responsible, in accordance with standards prescribed by home country legal or listing provisions, for the oversight of the work of the external accounting auditor engaged (including resolution of disagreements between management and the external accounting auditor regarding financial reporting) for the purpose of preparing or issuing an audit report or related work or performing other audit, review or attest services for the issuer.
In Japan, such standards are principally provided by provisions of the Audit Special Exceptions Law, and the board of corporate auditors (also called statutory auditors), which is separate from the board of directors, performs audit oversight functions in accordance with such standards. The relevant provisions of the Audit Special Exceptions Law include:
In accordance with these statutory standards, the corporate auditors provide independent review and oversight of the corporation's financial reporting processes, internal controls and external accounting auditor, and facilitate resolution of disagreements, if any, between management and the external accounting auditor regarding financial reporting in a forum separate from management in which the external accounting auditor and other interested parties can candidly discuss concerns.
Strictly, these statutory standards currently apply to Japanese GAAP statutory financial statements for domestic reporting purposes. It is expected that, starting in the fiscal year ending March 31, 2005, SRJCs will be permitted to use U.S. GAAP for their statutory financial statements for domestic reporting purposes. When that happens, the statutory standards described above are expected also to apply to U.S. GAAP financial statements to be included in their Form 20-F annual reports (which will be substantively the same as the domestic statutory financial statements), and thus the requirement of paragraph (c)(2)(i)(E) will be satisfied.
Proposed Amendment to Paragraph (c)(2) Also to Cover Paragraph (b)(5)(i)
While, as stated above, the Company believes that the current language of paragraph (c)(2) generally takes into account the Japanese corporate governance system, the Company believes that an appropriate modification needs to be made with respect to the relationship between paragraphs (c)(2) and (b)(5)(i). Specifically, as currently proposed, the general exemption provided by paragraph (c)(2) covers paragraph (b)(2), which refers to compensation of an external accounting auditor by the audit committee, but not paragraph (b)(5)(i), which refers to the funding of payment of compensation to the external accounting auditor. Paragraph (b)(5)(i) assumes that the compensation is to be determined by the audit committee or, in the case of a foreign private issuer relying on the (c)(2) exemption, by the board of auditors (or similar body) or statutory auditors by virtue of paragraph (c)(2)(ii). The Company believes that the scope of the general exemption that paragraph (c)(2) provides to foreign private issuers and the application of paragraph (b)(5)(i) to such foreign private issuers are inconsistent. A foreign private issuer that satisfies the conditions set forth in paragraph (c)(2) should be exempt from paragraph (b)(5)(i) in addition to paragraphs (b)(1) and (b)(2). Accordingly, the Company respectfully requests that the language of paragraph (c)(2)(i) be modified to refer to paragraph (b)(5)(i).
Proposed Amendment to Paragraph (c)(2)(i)(B) for Accommodation of SRJCs that Adopt the Committee-based Corporate Governance System
As noted in note 88 of the Proposing Release, starting in April 2003, Japanese companies will have the option to adopt a corporate governance system based on nominating, audit and compensation committees under the board of directors. The "audit committee" under the Japanese committee-based corporate governance system, which has oversight functions that are similar to those of the corporate auditors2, may not satisfy the requirements of paragraphs (b)(1) and (b)(2) in certain aspects, including its "independence" requirement. Rather, such aspects are governed by the standards prescribed by Japanese law. SRJCs that adopt the committee-based corporate governance system would not be able to avail themselves of the general exemption under paragraph (c)(2) as currently proposed because of paragraph (c)(2)(i)(B) requires that the relevant board or body be "separate from the board of directors". SRJCs that adopt the Japanese committee-based corporate governance system need a general exemption from paragraph (b) just as, and in no way less than, SRJCs with corporate auditors. The Company believes that the (c)(2) exemption should be made available to the "audit committee" under the Japanese committee-based corporate governance system as well. Accordingly, the Company respectfully requests that paragraph (c)(2)(i)(B) be modified by replacing the words "separate from the board of directors" with "whether or not separate from the board of directors" or other similar wording.
If paragraph (c)(2)(i)(B) should remain as currently proposed, SRJCs that adopt the committee-based corporate governance system would still require modification of paragraph (b)(1)(iv). Under Japanese corporation law, the "audit committee" of a Japanese corporation is required to oversee not only the audit of financial statements but also to inspect the execution of business by management. It is thus appropriate that one or more members of the "audit committee" have some experience working for the corporation and is knowledgeable about the corporation's affairs. Thus, Japanese corporation law requires that at least a majority (but not all) of the "audit committee" members be outside directors.3 Accordingly, if paragraph (c)(2)(i)(B) should remain in its current form in the final rule, then, in order to allow the "audit committee" to function as intended by Japanese corporation law, the Company respectfully requests that paragraph (b)(1)(iv) be modified to permit the audit committee of a foreign private issuer to satisfy that standard if it is in compliance with the independence standard prescribed by home country legal or listing provisions.
II. Responses to Certain of the Questions Put Forth
1. Third bullet paragraph under "Questions regarding the proposed independence requirements" of II.A. - "Can we reliably assume that people who own less than 10% of a company and are not officers or directors are not in control of the company? Should this threshold be higher (e.g., 20%) or lower (e.g., 5%)?"
The Company agrees with the SEC's approach, described in II.A of the Proposing Release, of making the test used for determining "affiliated person" status under paragraph (e)(1) of the Proposed Rule similar to the test used for determining insider status under Section 16 of the Securities Exchange Act of 1934. Accordingly, the Company believes that the threshold should remain at 10%.
2. Fourth bullet paragraph under "Questions regarding the proposed application to issuers" of II.F.3. - "Should we provide a `sunset' date for this provision to allow the Commission to reconsider its effectiveness and to reexamine the trend towards audit committees in other jurisdictions?"
The Company is strongly opposed to the setting of a "sunset" date. Each country, including Japan, has developed its own corporate governance standards, including those regarding the oversight of the work of external accounting auditors, that best suit its unique history, culture and corporate structures. Matters relating to corporate governance should, first and foremost, be regulated by each foreign jurisdiction. Foreign jurisdictions' corporate governance standards, to which paragraph (c)(2) as currently proposed appropriately gives deference, should be allowed to develop in their own particular ways. The question of if, and to what extent, those standards should be reviewed or modified, should be left to the judgment of the lawmaking and regulatory authorities of each foreign jurisdiction. The timing of such review and modification by each foreign jurisdiction is generally unlikely to coincide the timing of any "sunset" review the SEC might undertake, and such timing difference could result in material issues and uncertainties, and additional expenses, regarding compliance with SROs rules by listed issuers from that foreign jurisdiction.
3. First bullet paragraph under "Questions regarding determining compliance with the proposed standards" of II.F.4. - "Should a listed issuer be required to notify the SRO if it has failed to comply with our proposed requirements? Is it sufficient for the notification to be made `promptly?' Should the direction to the SROs on this point be more specific (e.g., notification must occur no later than two business days after an executive officer of the issuer becomes aware of any material noncompliance)?"
The Company agrees that, if a listed issuer is required to notify the SRO in the event of noncompliance with the proposed requirements, it should be sufficient for the notification to be made "promptly". However, foreign countries have different public holidays and "business" days, and a specified number of days for the required notification could disadvantage one jurisdiction over another. For example, if notification is required within "two business days" as suggested by the Proposing Release (assuming that "business day" refers to a U.S. business day), issuers in foreign countries that have two consecutive public holidays that are business days in the United States would have great difficulty in complying with the requirement.
4. Fourth bullet paragraph under "Questions regarding the opportunity to cure defects" of II.F.5. - "Is the proposed date for when the SROs rules must be operative appropriate for companies that must comply with the new standards? If not, what date would be appropriate and what factors should we consider in setting any such date? . . . Are there special considerations that we should take into account for foreign private issuers?"
An overwhelming majority of Japanese companies have March fiscal year ends. Those Japanese companies typically hold their annual shareholders' meetings in late June, and it is at those shareholders' meetings that new directors and corporate auditors are elected. If, as currently proposed, the date for when the SROs rules must be operative is no later than the first anniversary of the publication of the SEC's final rule in the Federal Register, and assuming that such publication occurs around April 26, 2003, the date by which the final rule must become effective, and should there be requirements in the SROs rules for which SRJCs need to respond in a manner that requires shareholder action, there will be a period of time between the first anniversary date (i.e., around April 26, 2004) and late June 2004, during which these Japanese companies could be in noncompliance with the SROs rules because new directors and/or corporate auditors meeting the SROs rules would not have been elected. Accordingly, the Company respectfully requests that the proposed date for when the SROs rules must be operative be set at July 1, 2004 or later.
5. First, second and eighth bullet paragraphs under "Questions regarding the proposed disclosure changes" of II.G.3 - "Should companies be required to disclose publicly if they are taking advantage of an exemption to the proposed SRO requirements? . . . Is the disclosure of the company's assessment of whether and if so, how, such reliance would materially adversely affect the ability of the audit committee to act independently and to satisfy the other proposed requirements appropriate?", "Should foreign private issuers that avail themselves of the exemption for boards of auditors or similar structures be required to file an exhibit to their annual reports stating that they are doing so?" and "Listed issuers that are foreign private issuers are generally not subject to the proxy rules. Should we require disclosure regarding the independence of audit committee members for these issuers?"
The Company believes that it should be sufficient that a foreign private issuer availing itself of the (c)(2) exemption is required to disclose in its Form 20-F annual report that it is doing so, without making disclosure as to any assessment as to any material adverse effect of such reliance on the ability of the audit committee to satisfy the proposed requirements or as to its members' independence. Foreign private issuers should continue to be generally exempt from the U.S. proxy rules. U.S.-listed Japanese companies are generally subject to the proxy requirements under Japanese law, and disclosures concerning their corporate statutory auditors (or, in the case of Japanese companies that will adopt the committee-based corporate governance system, members of the "audit committee") should be made in the form and content prescribed by such Japanese law requirements.
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The Company appreciates the opportunity to comment to the SEC on the Proposed Rule and provide responses to certain of the questions put forth by the SEC in the Proposing Release. Representatives of the Company would be happy to discuss with the SEC staff any aspects of this letter in order to find a workable solution to the issues presented in this letter.
cc: The Honorable Roel C. Campos