Kevin M. Bronner, Ph.D.
4 Georgian Terrace
Loudonville, NY 12211
November 22, 2002
Mr. Jonathan G. Katz, Secretary
U.S. Securities and Exchange Commission
450 Fifth Street, NW
Washington DC 20549-0609
Re: File No. S7-40-02
Dear Secretary Katz,
I wish to support the proposed rules regarding the disclosure of the names of persons on the board of directors who are serving as "financial experts" as members of the audit committee. These rules, which are directed under Sections 404, 406 and 407 of the Sarbanes-Oxley Act of 2002, are necessary to provide full disclosure to investors. My comments are organized around certain of the discussion comments included in the draft rules.
Section 407 Comments: The rules being considered are summarized as follows. Section 407 of the Sarbanes-Oxley bill require the Securities and Exchange Commission to adopt disclosure rules that require companies to disclose whether its audit committee includes one member who is a "financial expert." The term "financial expert" is also defined in the rules. The rules discuss disclosure as well as the code of ethics for companies. I wish to comment on the 13 discussion questions outlined below.
Comment #1 Question: Would investors benefit from disclosure of the number of the financial experts serving on the companies audit committee? Or would it suffice to require disclosure only of whether at least one financial expert serves on the audit committee?
Comment #1 Response: The companies should be required to list all members of the audit committee and to provide notation of all members who are designated as "financial experts." Due to the large amount of complex financial transactions that many companies face such as the use of derivatives, special purpose entities, and the need for improved internal control reporting, investors would be better off if they knew exactly who was acting as the "financial expert."
Comment #2 Question: Do investors need to know the names of the financial experts on the audit committee? Would disclosure of the names discourage people from serving as financial experts on an audit committee?
Comment #2 Response: During 2002 the Securities and Exchange Commission increased the accountability of Chief Executive Officers (CEO) and Chief Financial Officers (CFO) by having them sign off on the financial statements. This process directly involved those individuals in the issues concerning transparency of financial statements. The same process should be used for the audit committee members of the board of directors. The names of all audit committee members should be provided to investors. The companies will be required to find dedicated individuals to serve in this capacity. Some individuals may refrain from acting on the audit committee of the board of directors because of this disclosure. It will be a positive development, however, to avoid having such persons "serve" on such committees since they will not even put their name on the line as to the correctness of the financial affairs of the company.
Comment #3 Question: Should the Commission specifically address the issue of the degree of individual responsibility, obligation or liability under state or federal law of a person designated as a financial expert as a result of the designation? If the Commission should address this issue, how should it do so?
Comment #3 Response: The Commission should develop rules for the "financial experts" on the audit committee similar to those used for the sign off of the CEO and the CFO of the overall financial statements that was implemented by the SEC during 2002.
Comment #4 Question: Should we use a term other than "financial expert"? For example, would the term "audit committee financial expert" be a more appropriate title?
Comment #4 Response: The Commission should use the term "financial expert." There is no need to modify the title by associating it only with the audit committee. The financial expert should work with the entire board of directors on financial issues. The financial expert (s) on the audit committee will have a special role as both member of the board of directors, and as a member of the audit committee. There is no need to differentiate the title as suggested in the question.
Comment #5 Question: Is there other relevant information about the financial expert or experts that a company should have to disclose? For example, should we expand the disclosure required under Item 401 (e) of Regulations S-K and S-B, as it relates to directors that the company has determined to be financial experts? If so, how?
Comment #5 Response: More emphasis must be given to ensuring that the financial expert has the requisite financial skills to understand the accounting and the financial control system. While it would be desirable that the financial expert have an accounting degree or hold a CPA certificate, this may not be able to be achieved in all cases. Those companies who have financial experts without accounting degrees or a CPA certificate and the other relevant experience, should be required to outline the search they conducted to find a financial expert, and why the firm could not attract the desired individual(s). Also, if the individual does not have the requisite accounting training, the company should appoint only those persons with proper quantitative training. This could include degrees in finance, economics, quantitative methods, or research degrees that include a rigorous quantitative training.
Comment Question #6: Should we require disclosure of whether the financial experts are independent, as proposed? If so, should we define "independent" in the same manner as the term used in Section 10A(m)(3) of the Exchange Act?
Question #6 Response: Other than the fee provided as a member of the board of directors and/or the audit committee, the financial expert should have no current or past (within 10 years) relationship with the company, its consultants, and its auditor. To ensure independence, the resume of the audit committee financial expert should be disclosed to investors, as well as the salary or other payments provided by the company. This information should disclose any other organizations that the financial expert current has any type of professional working relationship with. This would include being an employee or consultant, a member of the board of directors, or the audit committee of another company.
Comment Question #7: Should we incorporate an independence requirement into the definition of "financial expert" so that any designated financial expert must be independent to qualify under the definition?
Question #7 Response: Yes. The type of criteria included in the response to question #6 discussed above should be included in the definition of a financial expert as it applies to the independence factor.
Comment Question #8: Should we also require the proposed financial expert disclosure to appear in the company's proxy of information statement? Is this information relevant to a security holder's decision to vote for a particular director or to elect, approve or ratify the choice of an independent public accountant.
Question #8 Response: The credentials and reasons why one is designated as a financial expert should be included in the proxy statement. This information is relevant to all investors who choose to supply capital to the firm.
Comment Question #9: Should we require the company to also disclose this information [See Question #8] in its quarterly reports?
Question #9 Response: Yes, see the response to Question #8.
Comment Question #10: Should we require the company to also disclose this information [See Question #8] in its registration statements under the Securities Act?
Question #10 Response: Yes, see the response to Question #8.
Comment Question #11: Should the company have to disclose specifically the arrival or departure of a financial expert promptly after the occurrence of the event.
Question #11 Response: Yes, a change in the status of the financial expert (s) is a material change in the board of director's oversight of a corporation. It should be reported immediately and included in subsequent SEC filings until the position is filled.
Comment Question #12: A company currently many not have an audit committee member who qualifies as a financial expert under the proposed definition but may intend to seek one. In such a case, the proposed rules would require a company to disclose that it does not have a financial expert on its audit committee. However the company could explain that it is searching for a qualified individual to serve on its audit committee. Should we provide companies with a transition period to find such a person? If so, what would be an appropriate transition period?
Question #12 Response: All companies that do not have a financial expert should be required to disclose that fact. It may explain that a search is underway to fill the position (s). A transition period of no longer than six (6) months may be granted to fulfill the requirement.
Comment Question #13: Should the rules address whether a company has a code of ethics that applies to its principal executive officer, as proposed, or should the rules track the language of Section 406 of the Sarbanes-Oxley Act and require that a company only to disclose whether it has a code of ethics that applies to its senior financial officers?
Question #13 Response: A one page summary of the code of ethics, with reference to the longer full code of ethics, should be attached to the annual report, and to all quarterly reports. The American Society of Public Administration published such a document on the back cover of its Pubic Administration Review journal that is sent to all members six times yearly. The corporate code of ethics should apply to all managerial employees (senior and mid-management) as well as all board of director's members.
Thank you for the opportunity to comment on these important rules.
Kevin M. Bronner, Ph.D.