DIME BANCORP, INC.
November 30, 1999
VIA E-MAIL AND FEDERAL EXPRESS
Mr. Jonathan G. Katz
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.,
Washington, DC 20549-0609
Re: File No. S7-22-99 - Proposed Rule
Audit Committee Disclosure (October 14, 1999)
Dear Mr. Katz:
Dime Bancorp, Inc. ("Dime") wishes to offer the following comments on the above-captioned Proposed Rule which, if adopted, would amend the regulations of the Securities and Exchange Commission (the "Commission") relating to the functioning of corporate audit committees.
By way of background, Dime is a publicly traded company listed on the New York Stock Exchange ("NYSE") and the parent holding company of The Dime Savings Bank of New York, FSB, a $22 billion federal savings bank that serves consumers and businesses through its 127 branches in the greater New York City metropolitan area. Directly and through its mortgage banking subsidiary, North American Mortgage Company, Dime also provides consumer loans, insurance products and mortgage banking services throughout the United States.
Dime understands that the Proposed Rule is intended to implement the proposals of the Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees (the "Blue Ribbon Committee"). While Dime believes that the purposes behind the proposals of the Blue Ribbon Committee are very worthwhile, Dime believes that implementation of the proposed requirements as set forth in the Proposed Rule raises certain concerns and would therefore like to offer the following comments.
1. Proposal requiring independent auditors to review interim financial statements before a company files its Form 10-Q.
Dime endorses this proposal and notes that it is consistent with Dime's current practice. Further, we concur with the decision of the Commission not to take this a step further and require independent auditors to issue a review report or include such a report in Quarterly Reports on Form 10-Q or Form 10-QSB. We believe that the current disclosure requirements of Rule 10-01(d) of Regulation S-X, which provides that a copy of the review report must be filed only when a company discloses in its filings that an independent accountant has performed a review of interim financial statements, are appropriate and sufficient and that additional disclosure requirements will not enhance the accuracy or reliability of the financial reporting in those reports.
2. Proposal requiring proxy statement disclosure of whether the audit committee has adopted a written charter, and if so, to include a copy of the charter as an appendix to the company's proxy statement at least once every three years.
Dime believes that good governance demands that companies establish guidelines for audit committees. At the same time, Dime is concerned that making it a requirement that an audit committee establish and disclose a formal charter could, at the extremes, either (i) create liability issues if a charter was adopted that provided too much regulation and the members of the committee were seen as having not rigorously adhered to the provisions of the charter or (ii) become a relatively meaningless document if a "boiler plate" charter was adopted that provided too much interpretive room and too little guidance for the members of the committee in an effort to curb potential exposure to liability (which would nevertheless continue to exist). Moreover, Dime respectfully suggests that the purpose of this proposal -- to assist shareholders in assessing the role and responsibilities of the audit committee and help focus committee members on their responsibilities -- is already exemplified in paragraph (e)(1) under Item 7 of Schedule 14A. This item requires companies to state whether they have an audit committee, the identity of each of the members and "describe briefly the functions performed" by the audit committee. We believe that any additional information that might be provided by attaching a copy of a formal audit committee charter will not advance the Proposed Rule's purposes.
3. Proposal requiring the proxy statement to include a report from the audit committee (the "Audit Committee Report") and further requiring that the Audit Committee Report state whether:
(a) the audit committee reviewed and discussed the audited financial statements with management;
(b) the audit committee discussed with the independent auditors the matters required to be discussed by Statement on Audit Standards No. 61;
(c) the audit committee received written disclosures and the letter from the independent auditors regarding the auditors' independence as required by Independence Standards Board Standard No. 1, and discussed with the independent auditors the independent auditors' independence; and
(d) based on the review in the foregoing paragraphs, anything has come to the attention of the members of the audit committee that caused the audit committee to believe that the audited financial statements included in the company's Annual Report on Form 10-K or Form 10-KSB for the year ended contain an untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which they were made, not misleading.
Dime clearly recognizes and concurs with the Commission's belief that the audit committee plays a critical role in the financial reporting process by overseeing and monitoring management's and the independent auditors' participation in the process. However, Dime respectfully suggests that the proposal is partially duplicative and otherwise requires the audit committee to assume a role in excess of the oversight role envisioned by the Commission.
As noted above, the current proxy rules require disclosure of the functions of the audit committee. Clearly, if the functions of the audit committee include review and discussion of the audited financial statements with management or discussion with the independent auditors of the matters required to be discussed by SAS 61, that would be disclosed. If the audit committee does not perform these functions, the proposal will not ensure that they begin to do so now. Furthermore, Dime respectfully suggests that the language of proposed Item 306(a)(1) of Regulation S-K, requiring the audit committee to state whether it "has reviewed and discussed the audited financial statements with management" (emphasis supplied) be revisited, as it may have an unintended result. Dime's particular concern is related to the use of the word "reviewed" and the potential ambiguity created thereby. For example, questions will inevitably arise as to precisely what level of "review" is required. Is the audit committee to perform the same level of review as are the independent auditors as outlined under the proposed amendment to Rule 10-01(d) of Regulation S-X? Therefore, Dime respectfully suggests that word "reviewed" be deleted from the final rules or its intended meaning clarified.
In addition, Dime respectfully suggests that proposed Item 306(a)(2) of Regulation S-K is unnecessary duplication. The independent auditors are currently required to conduct their audit in accordance with generally accepted auditing standards, including SAS 61. They attest to this fact in their report regarding the financial statements to the entire board of directors andshareholders, which is filed with the company's Annual Report on Form 10-K or Form 10-KSB. To place an obligation on the shoulders of the audit committee to discuss with the auditors the subject of this attestation does not significantly further the oversight function of the committee and could subject its members to a higher standard of care than other directors.
Further, Dime respectfully submits that Item 306(a)(4) of Regulation S-K as set forth in the Proposed Rule places an inappropriate burden on the audit committee -- one that exceeds the direction and oversight role of directors generally under accepted notions of corporate governance. Further, as the Commission acknowledges in its background discussion to the Proposed Rule, the role of the audit committee is to oversee and monitor management and the independent auditors in the financial reporting process. The oversight role of the board of directors is embodied in the laws of many states (including the case law interpreting those laws) and forms the cornerstone of the "Business Judgment Rule" - the liability standard against which the activities of boards are typically measured. Although the exact formulation of the Business Judgment Rule may vary from state to state, directors are generally permitted to rely on the reports of the company's officers (such as those members of management responsible for financial statement preparation), counsel and third party experts (such as the independent auditors). As noted in testimony before the Blue Ribbon Committee by the Business Roundtable's Corporate Governance Task Force:
The Business Roundtable believes that a good director is one who possesses good judgment and is willing to take on the role of general oversight of the company. To do this well, a director cannot become enmeshed in detailed financial analysis. From our various experiences, we know that an audit committee member's time is better spent ensuring that the internal processes which produce and review financial reports are adequate - rather than trying to conduct a detailed review of these documents themselves.
The audit committee should focus on how a company controls its operations and reports its results - not specific financial statement review.
(Testimony of Curtis H. Barnette, Chairman and CEO Bethlehem Steel Corporation, December 9, 1998)
As currently drafted, Item 306(a)(4) could be construed to impose a higher standard of care upon audit committee members than would otherwise be applied under applicable state law and the Business Judgment Rule. While surely not an intended result of the Proposed Rule, it could, nonetheless, result in increased and unwarranted director liability and may dissuade qualified individuals from serving on audit committees. It may also enmesh thecommittee members in the kind of detailed financial analysis that is currently and appropriately conducted by management.
Lastly, we note that the Securities Act of 1933 (Sections 11 and 12) and the Securities Exchange Act of 1934 (Section 18) currently impose a duty on directors of a company to make sure that the Annual Report on Form 10-K or Form 10-KSB not contain an untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which they were made, not misleading. Imposition of this duty separately on the members of the audit committee is unnecessarily duplicative and excessive. In addition, requiring the committee members to state whether anything has come to their attention that would cause them to believe that the financial statements contain an untrue statement or omit to state a material fact is overbroad. For example, it is unclear whether this requirement could apply to all matters discussed with the committee over the course of a year.
In the alternative, we suggest that the Commission consider adopting a proposal similar to that which was made by Ernst & Young in its November 16, 1999 letter to Jonathan G. Katz, Secretary, that "the audit committee be required to state their recommendation of approval to the board of directors of the filing of the financial statements in the Form 10-K [or Form 10-KSB]." An appropriate statement to be made just prior to, or after, the Report of Independent Auditors in the Annual Report on Form 10-K or Form 10-KSB would be:
The audit committee of [company], after discussions with the independent auditor and management, recommended to the Board of Directors that the audited financial statements for the year ended [date] be included with the Annual Report on Form 10-K [or Form 10-KSB] for filing with the Commission.
Dime believes that this type of statement is more in keeping with the oversight role of audit committees that is demanded by the principles of good governance.
4. Proposal requiring a company to disclose in its proxy statement information regarding any audit committee member who is not "independent" as defined by the relevant securities exchange.
As Dime noted in its letter to Jonathan G. Katz, Secretary, dated November 3, 1999, on the related NYSE proposal (SR-NYSE 99-39), Dime supports a strong standard for independence of audit committee members. Dime has, in fact, adopted an independence standard with respect to its audit committee which requires all members of the committee to conform with this standard. However, Dime notes its concern that the proposed language in the NYSE proposal regarding the definition of independence for members of an audit committee, coupled with the provisions of the Proposed Rule may, in some instances,discourage qualified candidates, such as partners and officers of independent auditing firms, investment banks and law firms, from choosing to serve on audit committees.
5. Proposal providing for a "Safe Harbor" for the information required to be disclosed under the Proposed Rules in order to protect the company and its directors from certain liabilities under the federal securities law.
Dime respectfully concurs with the concerns raised by many in the legal community that the Safe Harbor provisions are not broad enough to appropriately protect audit committee members for the potential increased liability associated with the Proposed Rule and that this may, in turn, work to deter directors from sitting on audit committees of the boards on which they serve. For example, concerns have been raised that the Safe Harbor provisions are not sufficient to protect the statements made within the Audit Committee Report from resulting in state law claims and that such statements would also be subject to the anti-fraud provision of the federal securities laws.
Moreover, while the Commission notes that the Safe Harbor for the contemplated Audit Committee Report mirrors that afforded compensation committee members with respect to the compensation committee report included within the proxy statement, Dime respectfully submits that the comparison fails to adequately distinguish between the materially different nature of the subject matter of those reports or recognize the greater likelihood of litigation arising out of statements regarding financial information. For example, the compensation committee report is required to discuss that committee's own function -- the policies it sets regarding executive compensation and the application of those policies, specifically with regard to the company's chief executive officer. As discussed above, we believe that the proposed audit committee report requires the committee to go beyond its current oversight role and become unnecessarily involved in the details of financial reporting that have traditionally and appropriately been the responsibility of management.
Therefore, Dime respectfully submits that the Safe Harbor provisions do not adequately address the potential increased liability placed on audit committee members (in excess of that of non-audit committee members of the board) as a result of the Proposed Rule.
Dime respectfully requests that the Commission take into consideration the concerns addressed above when establishing any final rules with respect to the audit committee requirements of public companies. If you have any questions regarding this comment letter, please contact me at (212) 326-6104.
Very truly yours,
DIME BANCORP, INC.
By: /s/ James E. Kelly
James E. Kelly