THE INDEPENDENT TRUSTEES AND DIRECTORS OF
THE GCG TRUST AND THE ING FUNDS
November 27, 2002
Mr. Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609
Re: Proposed Rule: Requirements Relating to the Definition of "Financial Expert" in Section 407 of the Sarbanes-Oxley Act of 2002; File No. S7-40-02
Dear Mr. Katz:
This is a comment letter regarding a proposal by the Securities and Exchange Commission ("SEC") relating to Sections 404, 406 and 407 of the Sarbanes-Oxley Act of 2002 (the "Act") as set forth in Securities Act Release No. 8138 (October 22, 2002) (the "Release").
This letter is being submitted by the nine members of the Boards of Trustees and Directors of The GCG Trust and the ING Funds (the "Funds") who are not "interested persons" of the Funds as that term is defined in the Investment Company Act of 1940, as amended. These funds offer a total of 96 separate series and have total assets as of October 31, 2002, of approximately $26 billion.
At the outset, we wish to emphasize our support of the efforts by Congress, the Securities and Exchange Commission ("SEC") and the self-regulatory organizations to enhance the corporate and financial disclosure of companies and to strengthen investor confidence in our securities markets. We believe that fair and accurate corporate and financial disclosure is of paramount importance to investors.
Our comment letter focuses on the Release's definition of "financial expert" as proposed in the Instruction to Item 309 of Regulations S-K and S-B under the Securities Act of 1933, and Sub-Item 102P3 of Form N-SAR and proposed Item 4 to Form N-CSR for registered management investment companies. Section 407 of the Act requires the SEC to adopt rules requiring a company to disclose whether its audit committee includes at least one member who is a "financial expert" and to define the term "financial expert," taking into consideration certain specified factors.
We question the wisdom of applying the financial expert requirement to registered investment companies in the first place. We note that the concerns that led Congress to adopt this requirement relate to other types of issuers and simply do not apply in the context of registered investment companies. Unlike most other public issuers, the primary accounting principles that apply to investment companies are fairly simple and do not involve potentially complex matters such as revenue recognition issues and off-balance sheet transactions.
The primary accounting issues that do confront registered investment companies relate to valuation practices. These practices already are subject to extensive regulation by the SEC and oversight by an investment company's entire board of directors or trustees. We know of no evidence that having a single designated financial expert as an audit committee member would add meaningful new safeguards to this valuation process. In addition, we note that, whereas the typical audit committee focuses on semi-annual financial statements, the valuation process must occur on every business day on which an open-end investment company sells or redeems its shares. In addition, unlike most other public issuers, the SEC staff regularly conducts on-site examinations of registered investment companies, including their valuation processes.
If the SEC determines that, notwithstanding the foregoing, the financial expert requirement should apply to registered investment companies, we believe that the proposed "financial expert" definition is unduly restrictive and would exclude otherwise qualified individuals. As such, companies will have difficulty finding financial experts who meet the strict qualifications of the proposed rule and would then need to provide disclosure as to why a financial expert does not serve on the audit committee.
As an example, the Funds' audit committee consists of five independent Board members. These committee members collectively have extensive financial and accounting experience, and have served as chairman, chief executive officer, president or officers responsible for financial matters with banks and public companies. The members of our audit committee are knowledgeable in financial and accounting matters and operate independently from management and in the best interests of investors. However, as proposed, the Board does not have a current audit committee member who satisfies all five required criteria of the SEC's proposed definition of "financial expert." In particular, no member satisfies the proposed requirement that such person must have "experience preparing or auditing statements that present accounting issues that are generally comparable to those raised by [investment company] financial statements."
We believe that the definition of "financial expert" should be modified so as to include a broader pool of qualified individuals. For example, the definition could be modified so that a "financial expert" need not be required to satisfy all five of the attributes cited in the Release. Rather, we believe that a Board should be required to consider each of these factors in determining whether any of its audit committee members is a financial expert. In this connection, we believe that a Board also should be permitted to consider the totality of qualifications and expertise of audit committee members, rather than the attributes of only one or a few members.
Finally, we note that the great difficulty in identifying audit committee candidates who satisfy all five attributes cited by the SEC could result in the need for substantial expenditures to retain such persons. Such expenditures could be particularly burdensome for smaller investment company complexes and would make them more likely to opt not to retain such an expert.
In our view, the interests of promoting full and fair corporate and financial disclosure will be best served by exempting registered investment companies from the financial expert requirement, or by modifying the proposed definition of "financial expert" as set forth above.
Paul Doherty, Esq.
J. Michael Earley
Dr. R. Barbara Gitenstein
Walter H. May
David W.C. Putnam
Blaine E. Rieke
Roger B. Vincent
Richard A. Wedemeyer
Independent Trustees and Directors of
The GCG Trust and the ING Funds
/s/ Walter H. May
Walter H. May, Co-Lead Trustee/Director
/s/ Jock Patton
Jock Patton, Co-Lead Trustee/Director