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Telephone (612) 330-9283

November 22, 2002

Jonathan G. Katz, Secretary
U.S. Securities and Exchange Commission
450 Fifth Street, NW
Washington, D.C. 20549-0609

RE: S7-40-02

Dear Mr. Katz:

The purpose of this letter is to address three proposals sent out for comment by the Securities and Exchange Commission (SEC) in its release 33-8138. The proposals are: (1) to require disclosure of the name of persons who have been determined to be "financial experts" serving on the audit committee of an investment company (a fund); (2) to mandate that the fund adopt a code of ethics for its principal executive and financial officers; and (3) to modify recently adopted rules pertaining to how often the management of the fund would have to conduct an evaluation of its disclosure controls and procedures. The comments below reflect the structure of the American Express (AXP) funds and are based on my experience working with the independent directors of these funds.

Financial Experts

In its release, the SEC states, "without some level of financial competence, members of an audit committee may be unable to adequately perform their vital corporate duties." The question presented is what financial competency best serves the interest of shareholders of a fund that, unlike the operating companies, must close its books daily. The release observes that the Sarbanes-Oxley Act directs the SEC to adopt rules defining the term "financial expert" and specifies several attributes that the SEC must consider in crafting the definition. However, these attributes are not the significant attributes needed by members of the audit committee of a fund nor does a term like "financial expert" explain to shareholders what is being monitored by their board. The provisions of the Sarbanes-Oxley Act were not designed to address any failures on the part of audit committees of funds and rules adopted under its provisions should reflect the differences between an operating company and a fund.

All members of the AXP funds' joint audit committee are independent from the investment manager and the independent public accounting firm selected by the independent directors is a firm different from the firm used by the investment manager to conduct its audit. Since the accounting model for investment companies is straight forward, the range of issues that have given rise to problems in operating companies, such as capitalization of expenses and off-balance sheet financing do not exist. What is significant to the independent directors of the funds is valuing assets and knowing whether the investment manager has processes in place needed to operate the funds, including those to monitor risk, safeguard assets, and comply with regulatory requirements. Problems that occur within financial presentations of a fund have much less to do with generally accepted accounting principles and much more to do with breakdowns in operational tasks. Accordingly, what a fund needs on its audit committee are members who understand operations and legal requirements. No one member carries the load and the collective wisdom of all the members of the committee is what is required. The names of the directors who serve on the joint audit committee and provide this collective wisdom already are disclosed in the registration statements and to single out the name of one or a few members misrepresents the importance of the combined judgment.

The release states that the "mere designation of the financial expert should not impose a higher degree of individual responsibility or obligation on a member of the audit committee. Nor do we (SEC) intend for the financial expert designation to decrease the duties and obligations of other audit committee members...." While "mere" (whatever that means) designation may not be intended to single out one or a few of the members of the audit committee, it certainly will do so.

Since this is a disclosure rule and not a rule that requires the designation of a financial expert, the best course of action for a fund seems to be to not designate a financial expert. Sarbanes-Oxley Act does not require such a person or persons be named but does require that if such person or persons are not named, the disclosure documents explain why not. Such an explanation for a fund might read something like the following:

"The fund has not designated a "financial expert" because the tasks performed by an audit committee for a fund are significantly different from those performed by an audit committee for an operating company. These tasks undertaken by the fund's audit committee require persons who are knowledgeable about a range of operating issues based on valuing all assets and closing the books on a daily bases. Operating companies close their books quarterly and their audit committees deal with technical accounting concepts such as estimates, accruals and reserves. Further, the fund's independent public accountant is not the auditor of the investment manager and does not provide any other services to it unless approved by the audit committee in advance."

Another reason a fund's board might decide not to include a "financial expert" among its members is that as presently drafted the only persons who can be "financial experts" are persons who have been public accountants and audited a fund or who have been financial officers of a fund. While these individuals are undoubtedly capable people, there are only a limited number of them. In addition, there are many qualities that go into being a good director besides specific knowledge of accounting practices and experience with internal accounting controls.

Nevertheless, a fund would have to seek out a person meeting the technical requirements of a "financial expert" if the SEC would not accept the concise type of disclosure described above. Other circumstances, such as comments by regulators or the media that could be interpreted to impinge the ability of an audit committee of a fund that did not have a financial expert, might compel a fund to seek out a person who meets the technical requirements of such expert.

Code of Ethics

According to the release, a "code of ethics" means a codification of standards that is reasonably designed to deter wrongdoing and to promote: honest and ethical conduct; avoidance of conflicts of interest; full, fair, accurate, timely and understandable disclosure in reports; compliance with applicable laws; prompt internal reports to appropriate persons; and accountability for adherence to the code. Under the proposal a fund, its investment manager, and its principal underwriter would have to have codes of ethics that apply to the principal executive, financial, and accounting officers. Reports would be required describing any amendments to and waivers granted from the code. The dilemma here for the AXP funds' boards results from the fact that the persons who serve in these capacities for the fund are employees of the investment manager and/or the underwriter. What role is the fund's board expected to perform? Further these employees of the investment manager and/or underwriter already are covered by a code of ethics imposed by their employer, American Express Financial Corporation (AEFC) and by a code of ethics required by AEFC's parent, American Express Company.

It is understood that many different organizational and operational structures exist among the companies that are subject to the provisions of the Investment Company Act. For those with a board of directors and no employees there are three primary questions: (1) can the same code of ethics be used for the fund, (2) the investment manager and the underwriter; if changes are made or waivers granted must the fund's board take action concurrent to the action taken by the other two; and (3) are the procedures designed to ensure compliance with the code more relevant than the code, therefore, more likely to be the focus of future SEC inspections?

The more detailed the code is, the more need to grant waivers and file reports. If procedures designed to ensure compliance with the codification of the standards as set out as the code are made part of the code, the administration of the code becomes more complicated. Again unlike an operating company where there appears to be no requirement to involve the board, a fund's board cannot avoid being part of the administrative process. Guidance by the SEC would be helpful but, absence that guidance, it might be useful to ponder responses to the three questions stated in the paragraph above.

Seemingly, an officer can sign one code of ethics that covers all of his or her duties, regardless of the entity to which the duties are owed. The entity providing the administration of the code should be the officer's primary employer, which for the American Express funds would be AEFC. In a manner consistent with that currently employed for administering the code of conduct with respect to trading securities, once the fund adopts the investment manager's code as the funds' code, the investment manager would make the funds' boards aware of changes to the code and, on an annual basis, list the waivers granted and actions taken for violations. Of course, if the rule is adopted as proposed in the release, it will require that within two days of changes being made in the code or waivers being granted, a report must be filed with the SEC, and the funds' boards would receive copies of the filings. The boards should not be the entity granting waivers but the officer's employer should be prepared to justify the waivers at the next meetings of the boards.

All this seems straight forward, but unlike an operating company, a fund is a regulated entity and is inspected periodically by the SEC. The release states the SEC "believes that ethics codes do, and should, vary from company to company and that decisions as to the specific provisions of the code, compliance procedures and disciplinary measures for ethical breaches are best left to the company." This is all well and good for companies that are not regulated but experience would indicate the SEC might take a different course over time for funds through the disclosure and inspections processes. As a result, directors of funds can be subsumed into operational tasks and legal exposure for the conduct of the tasks. While the AXP funds' boards appreciate the complexity of writing rules dealing with many different organizational structures, it is important for the SEC to be sensitive to unintended consequences of trying to write a rule that fits all such structures.

For a fund that hires outside management, the best approach would be for its board to consider a service provider's code of ethics and the reports it has filed pertaining to that code during the course of approving or renewing the contract with that service provider. If the service provider's code would not cover those persons who are the principal executive and financial officers of the fund under the proposed rule because they are lower level employees, then the rule as it pertains to the investment manager and principal underwriter should be modified to require that all of their employees who serve as a principal executive or financial officer of a fund be subject to the code.

Management's Internal Controls and Procedures for Financial Reporting

Most of the proposed rules in this section of the release do not apply to funds, however, a rule has been proposed that relates to how often a fund's management must evaluate the effectiveness of its disclosure controls and procedures in connection with certifying semi-annual filings. As currently required the certifying officers will certify that they designed disclosure controls and procedures to ensure that material information related to the fund is communicated to them and included in reports filed with the SEC and that they have conducted an evaluation of the effectiveness of the design and operation of the disclosure controls and procedures within 90 days of the date the report is filed. This is an evaluation that is required by Section 303 of the Sarbanes-Oxley Act. Since one or more of the AXP funds have a fiscal year ending each month, American Express Financial Corporation must conduct four such examinations a year. As proposed, the revised rule will require monthly examinations since the examination for a fund would have to be as of the end of the period covered by the semi-annual report.

By way of a comparison, both internal auditors and independent public accountants focus on tasks that are required to operate the funds in evaluating internal controls. These tasks apply across the operations of all funds so the test work on a selected task is done at one time during the year for all funds. Tasks do not change month-to-month and a complex of funds would not benefit by having the internal auditors or independent public accountants do the test work necessary to evaluate internal controls on a fund-by-fund basis. If they were required to do so, it would add significantly to the expenses of each fund. The problem the SEC faces is trying to shoe horn a complex with over 100 funds into a provision of a legislative act applicable to single entities. Since one fund's filing does not relate to the filing of another fund, the question is how to report work done that relates to a service provider's operations.

The primary question should be what is to be gained with monthly evaluations of disclosure controls. The answer is nothing. In fact, it may produce negative results since excessive repetitions can cause the lack of proper attention being given to the work, not to mention the added costs, time and effort that will be incurred. Based on the usual practices of reviewing operations, the quality of the evaluation of disclosure controls and procedures would be greatly enhanced and receive appropriate attention if done annually. The fact that the funds close their books daily provides a constant test of internal controls and reporting procedures. While it would be sufficient to report the date of the annual review once each year, so long as the funds continue to file semi-annual reports, then each filing could state the date of this annual review.

We greatly appreciate the opportunity to comment on the proposals.

Very truly yours,

Leslie L. Ogg