November 29, 1999
Mr. Jonathan G. Katz, Secretary
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609
Re: File Nos. S7-22-99 (SEC);
Audit Committee Disclosure
Dear Mr. Katz:
On behalf of our clients, the independent directors of the Morgan Stanley Dean Witter family of funds, we are pleased to comment on the audit committee proposals of the SEC, NYSE, Amex and NASD. We understand that the proposals, in their current form, would apply to closed-end funds that are subject to listing standards of an exchange or a national securities association. The Commission specifically asked whether any or all of its audit committee proposals should apply to all registered investment companies. We believe that none of the proposals of the SEC or the self-regulatory organizations should apply to open or closed-end registered investment companies.
The proposals are intended to improve disclosure related to the functioning of corporate audit committees and to enhance reliability of financial statements of public companies. The proposals were initiated after a series of enforcement cases involving the use of deceptive accounting techniques to manipulate earnings led to the issuance of a Blue Ribbon Committee Report and recommendations.
The abuses designed to be addressed by the audit committee proposals are not present in the case of investment companies. The sources of an investment company's earnings, investment income and capital gains, are transparent and not subject to "earnings management" or other artificial devices designed to distort earnings. The opportunity for financial reporting abuse is also limited by the nature of the assets of investment companies. Their assets consist of securities and other financial instruments which are valued at market prices or, under the auspices of the fund's Board of Directors, at fair value. These values are reviewed by the fund's independent accountants in the course of their audit of the fund's financial statements. Further protection against abuse is afforded by the fact that the fund's independent accountants are selected by the independent directors of the fund, pursuant to Section 32(a) of the Investment Company Act, and are subject to the fund board's oversight. Given the inherent limitations on the ability of investment companies to falsify financial statements, and the stringent regulatory requirements of the Investment Company Act, it is not surprising that there have been no cases or reports of financial reporting abuses involving investment companies. Nor do the releases proposing the new audit committee rules or the Blue Ribbon Report suggest otherwise.
In view of the foregoing, we see no benefits to the investing public that would be derived from extending the audit committee proposals to investment companies. To the contrary, the only effect of the proposal could be to cause qualified independent directors to be less likely to serve on audit committees because of liability concerns arising from the proposals. For example, as has been noted by a number of other commentators on the proposals, the requirement that an audit committee state in a proxy whether anything came to its attention to cause it to believe that the issuer's audited financial statements were misleading, could expose audit committee members to a heightened risk of being named by plaintiffs in class actions.
We appreciate the opportunity to provide comments on the audit proposals of the Commission and the SROs. Please call David M. Butowsky at 506-2580, Stuart A. Strauss at 506-2695, or Robert A. Robertson at 506-2538, should you have any questions or need additional information.
Very truly yours,
Stuart M. Strauss