NEW YORK, NY 10043
TEL 212-793-7855
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November 29, 1999

Mr. Jonathan G. Katz, Secretary
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549

Re: Audit Committee Disclosure (File No. S7-22-99)

Dear Mr. Katz:

Citigroup Inc. ("Citigroup") is submitting this letter in response to the request of the Securities and Exchange Commission (the "Commission") for comments on its proposal to improve disclosure related to the functioning of corporate audit committees and to enhance the reliability and credibility of financial statements of public companies.1

As stated in the Release, the Commission is "proposing new rules and amendments to current rules to improve disclosure relating to the functioning of corporate audit committees and to enhance the reliability and credibility of financial statements made by public companies." We support the underlying principle of enhanced reliability for financial statements as set forth in the Release and we agree that many of the proposed rule changes would further this goal. We also support many of the proposals in the Release. However, we believe that several of the proposals are problematic and would, if adopted, inappropriately expand the role of audit committee members and disproportionately expose them to potential liability for matters which should remain within the ambit of company management and external auditors. Of particular concern in this regard, is the Commissionís proposal requiring audit committee members to provide "negative assurances" with respect to the companyís financial statements which we believe would create an inappropriate burden on the audit committee and subvert its supervisory function.

With respect to the Release, we submit the following comments.

The Audit Committee Report

The Commission has proposed that an audit committee report be included in a companyís proxy statement indicating whether the audit committee has reviewed with management the audited financial statements and has discussed with auditors matters related to the conduct of the audit and has received disclosures from the auditors regarding their independence. While Citigroupís audit committee currently holds such discussions with our external auditors and management, it is not at all clear to us how disclosure of the existence of these discussions would materially benefit investors. We believe, as does the Commission, that disclosure of the content of these discussions would be completely inappropriate and would potentially chill the ongoing dialogue and interaction between the audit committee and outside auditors. Disclosure of the existence of these discussions is just an invitation for unnecessary scrutiny.

In addition, we are deeply concerned regarding the Commissionís proposal that the proxy statement disclose whether, based on the foregoing review and discussion, the audit committee has any reason to believe that the audited financial documents contain material misstatements or omissions. We believe that this proposal would place a burden on members of audit committees to make public representations about, and effectively "warrant", the financial statements through their "negative assurances" which is not, and should not be, their responsibility or function. We believe this proposal would blur the distinction between audit committee members, management and external auditors since it implies (and indeed perhaps would result in a requirement) that audit committee members make determinations regarding accounting practices, policies and other matters which are more appropriately made by internal and external accounting professionals.

We believe that a companyís financial statements are the responsibility of management and that it is the role of the companyís auditors to conduct an audit and report on their audit. The audit committee function is generally one of oversight. The proposed rules would essentially require that the audit committee undertake the responsibilities of management and the auditors and express a conclusion about the financial statements without the expertise possessed by management and the auditors.

In each of these circumstances, the Commissionís proposals are potentially creating a higher duty of care on audit committee members than that which is imposed on other directors. This not only inappropriately heightens the potential liability for audit committee members, but also creates a disincentive for directors to become members of audit committees. 2

The Commission has proposed safe harbors for audit committee members to alleviate some of the foregoing concerns. However, these safe harbors are not adequate. They do not extend to federal or state law claims based on anti-fraud provisions for proxy statement disclosure or to state law claims of a violation of a higher standard of care for audit committee members that is potentially created by the Commissionís proposals.

Audit Committee Charters

The Commission has proposed that companies disclose in their proxy statement whether or not their audit committee is governed by a charter. While Citigroupís audit committee currently operates pursuant to a written charter, we think that this requirement would not realize the Commissionís goal of having meaningful charters because of the concern that such disclosure may only serve as a legal basis for claims of violation of fiduciary duties under state law (which would be beyond the scope of the proposed safe harbors) and would therefore encourage audit committees to adopt vague boilerplate language so as to minimize potential liability.

Proposed Safe Harbors

In the Release, the Commission states that the proposed rules and amendments were not intended to, and the Commission does not believe that they do, subject companies and directors to increased exposure to liability under state corporate law or the federal securities laws. Nevertheless, the Commission has seen fit to propose "safe harbors" to cover the new disclosure which would be required if the proposals are adopted. Specifically, the Commission has proposed that such disclosures would not be considered "soliciting material," "filed" with the Commission, subject to the liabilities of Section 18 of the Securities Exchange Act of 1934, as amended.

We do not agree with the Commission's view that the new rules would not create the risk of additional liabilities, particularly at the state law level. As discussed above, we believe that certain of the proposed rules could subject the members of the audit committee to a higher standard of care than they are currently subject to and to a higher standard of care than other members of the board of directors. Moreover, audit committee members would remain subject to state and federal anti-fraud claims for proxy statement disclosure.

The net result of the proposed rules could be a substantial increase in lawsuits filed against such directors both because they are specifically highlighted in the proxy and because of the risk that the rules would create a different standard of care for such individuals. This could seriously hamper the ability of companies to attract experienced and high caliber directors.

We appreciate your consideration of these comments and would be happy to discuss these matters further.

Very truly yours,


Stephanie B. Mudick
General Counsel Ė Corporate Law


-[1]-Securities and Exchange Commission Release No. 34-41987 (October 8, 1999) (the "Release").

-[2]-We understand that the Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees is considering proposing an alternative approach to the statement of "negative assurances". Under the Blue Ribbon Committee approach the audit committee report would be identical to that proposed by the Commission except that instead of a statement of "negative assurance" the audit committee would indicate whether it had recommended to the full board of directors that the audited financial statements be included in the companyís Annual Report on Form 10-K. We do not believe that this approach would alleviate our concerns about the heightened standard of care which would be imposed on audit committee members as a result of these proposals.