Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609
19 August 2002
Re: File No. S7-21-02 - Certification of Disclosure in Companies'
Quarterly and Annual Reports
Dear Mr. Katz
We are submitting this letter in response to the request of the Securities and Exchange Commission (the "Commission" or "SEC") for comments regarding the Commission's proposal (the "Proposal") to require certification of disclosure by issuers in quarterly and annual reports filed with the SEC in accordance with Section 302 of the Sarbanes-Oxley Act (the "Act").
As a major investor we support the initiatives behind the legislation, however we understand from your Release No. 34-46300 that you intend to adopt final rules that would apply the certification requirements to foreign private issuers filing annual reports on Form 20-F.
We would respectfully urge that additional consultation occur between the Commission and regulators in the United Kingdom and the European Union before regulations concerning the Section 302 certification requirements are imposed on foreign private issuers.
For the reasons set forth below, we believe the Commission's traditional policy of comity that underlies its practice of deferring to foreign laws and regulations in the area of internal domestic corporate law and governance continues to be appropriate in the context of the Proposal. This is especially the case given that many foreign jurisdictions, including the United Kingdom, already have corporate governance and control structures in place which address many of the concerns that prompted the Sarbanes-Oxley legislation and your original certification proposal. We believe the way forward with foreign private issuers lies in the development of a substantial equivalence test. In our view, if a finding can be made that a foreign private issuer's home jurisdiction has safeguards that are sufficiently similar from a public policy perspective to those advanced under Section 302, the home country safeguards should be considered sufficient for purposes of Section 302. We believe the U.S. Congress should act to afford similar relief under Section 906 of the Act, if it is beyond the power of the Commission and the U.S. Department of Justice to provide it.
We do not think a useful purpose would be served by compelling U.S.-listed U.K. issuers to satisfy differently worded but overlapping tests on what is essentially the same point. Based on our experience in other contexts, we do know that similarly but not identically phrased tests do generate confusion and additional burdens for issuers.
With respect to the United Kingdom, we provide below a brief introductory description of relevant corporate governance safeguards, together with a discussion of the public policy underlying their adoption and the resulting practical effects they have on the operations and public disclosure of U.K. companies such as ourselves and the many companies we invest in. In view of these safeguards, we do not believe that investors would be significantly benefited by subjecting foreign private issuers such as Prudential plc, a public limited company organised under the laws of England and Wales, to the proposed certification rules.
I. English Law, Rules and Practice.
A. Companies Act Requirements with Respect to Annual Accounts and Director's Reports.
(i) Obligations imposed on companies: the Companies Act 1985 (the "Companies Act") applies to all companies incorporated in England and Wales, whether listed on the London Stock Exchange or not. It requires that a company's annual accounts give a true and fair view of the state of affairs at that the end of the financial year, and the profit or loss for the financial year, of the undertakings included in the consolidation as a whole, as far as concerns members of the company and that the accounts be approved by the board of directors and signed on behalf of the board by a director, stating the name of the person signing the accounts. If the board approves annual accounts that do not comply with the requirements of the Companies Act, every director of the company who is party to their approval and who knows that they do not comply or is reckless as to whether they comply is guilty of a criminal offence under the Companies Act. The Companies Act provides that every director of the company at the time the accounts are approved is taken to be a party to their approval unless he shows that he took all reasonable steps to prevent their being approved.
The Companies Act also requires, subject to certain exceptions, the directors of a company to prepare a directors' report (the "Directors' Report") annually containing, among other things, a fair review of the development of the business. The directors' report must also be approved by the board of directors and signed on its behalf by a director or the secretary of the company, stating the name of the person signing the accounts. Publication of such a report without the report having been signed or the signatory being named, as required by the Companies Act, constitutes a criminal offence by the company and every officer of it who is in default.
In practice, although the Companies Act does not require it, interim reports are also typically approved by the board of directors of English companies.
(ii) Obligations imposed on auditors: The Companies Act also requires auditors to state in their report on a company's annual accounts whether in the auditor's opinion the annual accounts have been properly prepared in accordance with the Companies Act, and in particular whether a true and fair view is given, in the case of group accounts, of the state of affairs at the end of the financial year, and the profit or loss for the financial year, of the undertakings included in the consolidation as a whole, so far as concerns members of the company. This requirement provides another layer of protection.
B. United Kingdom Listing Authority ("UKLA") Listing Rules ("Listing Rules") Requirements with Respect to Annual and Interim Accounts.
Companies with primary listings on the London Stock Exchange, and their directors, are subject to rigorous obligations under the Listing Rules. Under the Listing Rules, annual and interim reports must be published by notification to a Regulatory Information Service, and a company must take all reasonable care to ensure that any information it so notifies is not misleading, false or deceptive and does not omit anything likely to affect the import of such information. Under Listing Rule 16.2, a listed company must ensure that its directors accept full responsibility, collectively and individually, for the Company's compliance with the listing rules. In addition, the UKLA has powers under the Financial Services and Markets Act 2000 to fine or publicly censure any director who was knowingly concerned in any breach by a listed company's breach of a Listing Rule.
Companies that do not comply with this regime, which requires listed companies to disclose material information on an on-going basis, are subject to potential fines, public censure or suspension or cancellation of their listing.
C. The Combined Code - Principles of Good Governance and Code of Best Practice (the "Code").
The Code, which sets out best practice for corporate governance of public companies, provides that directors should explain their responsibility for preparing their Company's accounts. Annual and interim reports typically include a statement to this effect. The Code states, as an overriding principle, that the board of directors should maintain a sound system of internal control to safeguard shareholders' investment and the company's assets. Accordingly, the Code states that the directors should, at least annually, conduct a review of the effectiveness of the group's system of internal control and should report to shareholders that they have done so. The Code states that the review should cover all controls, including financial, operational and compliance controls and risk management.
Although compliance is not mandatory, companies incorporated in the United Kingdom with primary London listings are required to state whether they have complied throughout the accounting period with the relevant parts of the Code. The Listing Rules require a company that has not complied with the Code provisions, or complied with only some of the Code provisions, must specify the Code provisions with which it has not complied, and (where relevant) for what part of the period such non-compliance continued, and give reasons for any non-compliance. As a result, and with a view to compliance with best practice, UK companies with primary listings on the London Stock Exchange customarily comply with the Code.
D. Directors' Responsibilities.
The basic legal duties of directors are to act in good faith in the interests of the company and for a proper purpose and to exercise care and skill. These are derived from common law and govern the behaviour of all directors, not just principal executive and financial officers. This point was stressed by the Report on Financial Aspects of Corporate Governance of December 1, 1992, or the Cadbury Report, from which much of the Code is derived. It stated that "all directors are equally responsible in law for the board's actions and decisions." It went on to state that certain directors may have particular responsibilities, as executive and non-executive directors, for which they are accountable to the board, but regardless of specific duties undertaken by individual directors, it is for the board collectively to ensure that it is meeting its obligations. We believe this approach underpins a general policy of English company law and practice for equal responsibility of directors for the actions of the board.
The existing UK regime already requires UK public companies to maintain many of the internal controls which are the objective of the proposed rules. Where this overlap exists we believe there is no significant benefit to either individual investors or major institutional investors, such as ourselves, in imposing additional burdens on companies to comply with different technical requirements that have the same effect and objective as those already in place.
I would be grateful if you would arrange for those mentioned below to receive a copy of this letter.
Please do not hesitate to contact the undersigned if you have any questions concerning this letter.
Group Legal Services Director
cc: The Honorable Harvey L. Pitt, Chairman
The Honorable Cynthia A. Glassman, Commissioner
The Honorable Paul S. Atkins, Commissioner
The Honorable Harvey J. Goldschmid, Commissioner
The Honorable Roel C. Campos, Commissioner
Alan L. Beller, Director, Division of Corporation Finance
Giovanni Prezioso, General Counsel