Massachusetts Financial Services Company
500 Boylston Street - Boston MA 02115
November 22, 1999
Jonathan G. Katz, Secretary
U.S. Securities and Exchange Commission
450 Fifth Street N.W.
Washington D.C. 20459-0609
RE: Release No 34-41987; File No. S7-22-99
Dear Mr. Katz:
We appreciate the opportunity to comment on the Securities and Exchange Commission's ("SEC") proposed rule relating to improved disclosure to the functioning of corporate audit committees and to enhance the reliability and credibility of financial statements of public companies. This response is being submitted on behalf of the Audit Committees of four Boards of Trustees to funds advised by Massachusetts Financial Services Company ("MFS" or "Audit Committees") and MFS. The four Boards cover 144 fund portfolios and audit committees. MFS serves as investment adviser to more than 170 separate mutual fund portfolios with net assets in excess of $100 billion, including 6 closed-end funds listed on the New York Stock Exchange.
We have monitored the recommendations of the Blue Ribbon Committee ("Committee") to improve the Effectiveness of Corporate Audit Committees. In general, we support efforts to improve the work of our audit committees. We agree with many of the observations of the Committee:
Our audit committees have been responsible in carrying out audit committee responsibilities and, while generally supporting many of the Committee's recommendations, we believe that we presently fulfill the spirit of the proposals. .
General Comments. In revising the requirements to assure accurate and reliable financial reporting, we must keep in mind the reason for a change - is it a perceived failure of the present system or a way to stem future abuse? If changes that will affect all companies are a reaction to a limited number of "cases" of abuse, it may not be effective to implement sweeping changes to correct those cases. It does indicate that the current system is working as intended and there are no widespread abuses that need to be addressed. There has been a lot of discussion about the effectiveness of boards and audit committees. Many accounting firms and others have produced "best practice" brochures for boards and audit committees. In addition, as mentioned in the SEC's current proposal, there have been a number of rules and studies of accounting practices that have led to a change in the role of audit committees. We have established our audit committee duties recognizing those guidelines. Historically, when there has been a study, the conclusion has been that "more is better"; we do not necessarily agree with that conclusion.
We have followed the recommendation of the Blue Ribbon Committee with interest. We offer comments on many of the recommendations but we have serious concerns about two specific recommendations in the Committee's report:
We point out that open-end funds, it they were included in the rule, generally do not have annual proxies (though closed-end funds do). Both closed-end and open-end funds should be excluded from the requirement. However, if open-end funds were included in the rule, the rule must clarify that a fund would not be required to prepare a proxy solely for the purpose of making the required disclosures.
We support requirements to provide shareholders with information about the general responsibility and oversight by an audit committee, but we oppose any requirement that discusses specific deliberations, activities, processes, discussions or beliefs in carrying out its responsibilities. For this purpose paragraphs (a)(1) - (a)(3) provide adequate information to shareholders about an audit committee's activities.
3. Audit Committee Charters. We support disclosure that we have adopted a written charter; we do not believe that it is appropriate to require that it be published in the proxy or in SEC filings. Our audit committees have had written charters for many years. The charter has been modified to reflect "best practices", additional responsibilities or changes that have taken place in our business. The audit committee should not be required to state that it has satisfied its responsibilities during a particular year under its charter. The charter is a statement of duties, some annual and some oversight in nature, each of which is not necessarily reviewed within a 12-month period.
4. Independence. We do not object to disclosing that each audit committee member is independent. We require that audit committee members be independent of management according to existing rules and best practices. Further, management representatives are present at audit committee meetings at the invitation of the audit committee. There are discussions between the audit committee and the auditors; the audit committee and management; and between the audit committee and others when management or the auditors are not present. We support the recommendation to require that each audit committee member be independent.
5. Composition / Expertise of Audit Committee Members. We object to any requirement which dictates who may be a member of an audit committee although we agree that the audit committee should be comprised of independent directors. Most Boards (and committees) are made up of individuals from diverse backgrounds who each bring expertise and perspective that makes the Board effective. The Board should have complete discretion to determine who will be a member of the Board and the various committees of the Board. The strength of a Board is often its diversity - representatives of corporate America, educators, lawyers, accountants, activists and others who bring opinions and experience relevant to protecting shareholder interests. By dictating that members of the audit committee must be "financially literate", must have "accounting or accounting related financial management experience", must be "able to read and understand fundamental financial statements", or have "employment experience in finance or accounting, professional certification in accounting" (any of which are subjective in nature) dictates to a large extent who may become a member of a Board. It could change the diversity of a Board or it could have an affect on the size of a board; it could eliminate the possibility of rotating membership on committees or other restrictive or adverse consequences. Boards are expected to protect shareholder interests first and foremost. The proposed rules by the NYSE, AMEX and NASD undermine a Board's responsibility to shareholders. We strongly object to this proposed rule change and hope that the SEC will oppose any change that affects a Board's ability to act independently and in the best interest of shareholders
6. Safe Harbors. We are concerned that requiring the audit committee to disclose its charter; to make assurances about carrying out its duties and to provide "negative assurances" about the financial statements will confuse shareholders. Management is responsible for a company's financial statements. Increased disclosure about an audit committee's specific responsibilities for the financials may confuse shareholders and change the perception about where the responsibility for the financial statements resides. We believe that safe harbors are necessary to protect the audit committee from frivolous litigation. However, we believe that the type of assurance recommended by this proposal will subject audit committees to the likelihood of litigation that does not exist today. Even if they are subsequently found innocent of any claim, the cost of defense will be substantial.
7. Mutual fund requirements. We do not think that closed-end or open-end mutual funds should be subject to the proposed rules. Fund values, trading practices and earnings (which are exempt for purposes of Form 10Q are not as sensitive and volatile as corporations and are not subject to the same earnings scrutiny as corporate America. Most funds distribute substantially all of their earnings each year to avoid taxation at the fund level. Funds do not generally project and publish quarterly earnings estimates. And, in the case of open-end funds, they generally do not have a proxy each year.
We appreciate the opportunity to comment on the proposed rule. We support well-reasoned rules that enhance the reliability and credibility of financial statements. We will consider adopting best practices that add value to the working of and enhance the effectiveness of our audit committees.
Very truly yours,
William T. Poorvu, Chairman of Audit Committees for 38 fund portfolios
Walter E. Robb III, Chairman of Audit Committees for 44 fund portfolios
Nelson J. Darling, Jr., Chairman of Audit Committees for 29 fund portfolios
Derwyn F. Phillips, representing the Audit Committees for 33 fund portfolios
W. Thomas London, Treasurer or Authorized Person for each of the portfolios