R. Edwin Selover
Senior Vice President and General Counsel
Public Service Enterprise Group Incorporated
80 Park Plaza, T5A, Newark, NJ 07102-4194
Mailing address:
    P.O. Box 1171, Newark, NJ 07102-1171
Tel: 973.430.6450 fax: 973.639-0741
e-mail: edwin.selover@pseg

November 27, 2002

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

    Re: File No. 7-40-02

Dear Mr. Katz:

Public Service Enterprise Group Incorporated (PSEG), a New York Stock Exchange (NYSE) listed company registered under the Securities Exchange Act of 1934, with approximately 225 million shares of common stock outstanding, submits the following comments on the rule regarding audit committee financial experts proposed by the Securities and Exchange Commission (Commission or SEC) under Section 407 of the Sarbanes-Oxley Act (Act).

For many years, PSEG has had an audit committee consisting of independent directors, as required by current rules of the NYSE. Also as required by the current NYSE rules, all members of the audit committee are "financially literate" and, at least one member has "financial expertise" as defined pursuant to the NYSE rules.

PSEG agrees with the Commission that a well functioning audit committee with a financial expert or experts, as contemplated by Section 407 of Sarbanes-Oxley, is an extremely important governance element in assuring that an issuer's financial statements are not misleading and fairly present its financial condition. Obviously, the individual audit committee members are the key ingredients to a successful audit committee. In carrying out the requirements of Section 407, PSEG asks the Commission to carefully consider the impact of its rule on the pool of talent available for this important duty. PSEG's comments below are premised upon an interest to assure that the best quality individuals are available to serve in the important role of audit committee members.

Legal Standard

Section 407 of Sarbanes-Oxley imposes a new disclosure requirement with respect to any "financial experts" on an issuer's audit committee:

"The Commission shall issue rules, as necessary or appropriate in the public interest and consistent with the protection of investors, to require each issuer . . . to disclose whether or not, and if not, the reason therefor, the audit committee of that issuer is comprised of at least one member who is a financial expert, as such term is defined by the Commission."

With respect to responsibility and potential liability of audit committee members, the Commission states:

"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 intend for the financial expert designation to decrease the duties and obligations of other audit committee members of the board of directors. Furthermore, in order to avoid any confusion in the context of Section 11 of the Securities Act, we do not intend for such a person to be considered an expert for purposes of Section 11 solely as a result of his or her designation as a financial expert on the audit committee. The role of the financial expert is to assist the audit committee in overseeing the audit process, not to audit the company. A conclusion that a financial expert is an "expert" for purposes of Section 11 might suggest a higher level of due diligence than is consistent with the audit committee's oversight responsibilities."

The SEC has requested comment on whether it should 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.

PSEG believes that the Commission should address the responsibility and liability of persons designated as financial experts to provide certainty and encouragement to competent persons to serve on audit committees. PSEG agrees with the Commission that the benefit of having financial expertise serving on an audit committee is that the persons with such expertise can serve as a resource for the audit committee as a whole in carrying out its functions. This must be accomplished without creating a two-tiered class structure within the audit committee, which could destroy the collegiality within the committee and impair its ability to function as a committee. Committee decisions will become difficult to make in some instances if there are different legal standards applicable to individual members.

Thus, it is important for the Commission to state clearly in the body of the final rule that designation as a financial expert will neither increase the responsibility or potential legal liability of the individual members so designated, nor increase the responsibility, obligation or liability of the board of directors as a whole in appointing such "financial expert" to the audit committee. Otherwise, the rule will chill the prospects of qualified members being willing to be designated as financial experts or to serve as audit committee members at all.

This result conforms to the many areas of inquiry and experience required of an audit committee. Among other things, members must understand the business, the future trends for the business and the industry, the principal areas of risk in the business, the strengths and weaknesses of the management, internal controls, legal obligations of the company and other matters for which "financial expertise" is not the only, and may not be the most important, qualification. Such a legal standard is also consistent with the fact that, as the Commission has recognized, no board or committee can or should manage the daily operations of a large corporation or audit its financial statements.

One corporate remedy to mitigate potential increased responsibility for designated "financial experts" would be for a board of directors to require the right mix of experience and expertise to serve on an issuer's audit committee, but to not designate any members as "financial experts" under Section 407 of Sarbanes-Oxley. Section 407 creates a disclosure requirement, not a governance requirement. While this may seem to be an extreme approach, in the end, the responsibility of the board of directors is to establish the most effective audit committee. PSEG believes that the Commission's interest is the same.

Required Disclosure

In its draft rule, the SEC has proposed to expand the disclosure mandated by the Act by requiring that issuers specify the number and names of any audit committee members determined to be "financial experts". PSEG expects that directors who have the qualifications for being "financial experts" will carefully consider whether they are willing to be named as such in documents filed with the SEC. The Commission can certainly mitigate this concern by adopting a uniform standard for all audit committee members as recommended above.

Nevertheless, PSEG submits that the additional disclosure proposed by the Commission is not information that a reasonable investor would want to know and may cause some individuals to decline to be named as financial experts. As stated by the Commission:

"The primary benefit of having a financial expert serving on a company's audit committee is that the person, with his or her enhanced level of financial sophistication or expertise, can serve as a resource for the audit committee as a whole in carrying out its functions."

The proposed disclosure of the number and names of financial experts on the audit committee implies that an audit committee with more financial experts will be stronger than a committee with fewer financial experts. PSEG submits that this is not the case. Would an audit committee with one financial expert be weaker than a committee with two financial experts? This proposed disclosure also implies that an otherwise competent director who is not a "financial expert" would be less valuable as an audit committee member. PSEG submits this also is not the case. It is thus unclear how such disclosure will be useful to investors.

Certainly, financial expertise is an important competency on any audit committee. The Act mandates disclosure that will convey the requisite information if there is no financial expert on an audit committee. It is extremely important that the disclosure requirements not impede retention of the most highly qualified individuals to serve on audit committees. There is a balance here that the Commission needs to be careful to strike.

Financial Expert Requirements

PSEG agrees with the Commission that the board of directors should be able to consider as financial experts, persons who do not have a formal education and experience as a public accountant or auditor, or a principal financial officer, controller or principal accounting officer. For example, in PSEG's experience, many chief executive officers, chief operating officers and other senior executives have an understanding of generally accepted accounting principles and financial statements, and experience with internal controls and procedures for financial reporting. It is important that such individuals be included within the universe of people who may be considered as financial experts in order to populate audit committees with the best talent. In this sense, a "bright line" test is not appropriate. PSEG agrees with the Commission that such individuals should meet the basic requirements for a financial expert, as established in Instruction 1 to Item 309 of Regulation S-K.


PSEG submits that a final rule with the following attributes will accomplish the mutual objective of the SEC and PSEG to have effectively functioning audit committees with financial expertise:

  • The Commission should adopt a safe harbor provision, in the body of the final rule, to provide that members of the audit committee who are designated as financial experts are not, as such, subject to any greater responsibility or liability than other audit committee members. The final rule should also clearly state that the board of directors as a whole has no greater responsibility, obligation or liability for the selection or performance of its designated financial expert(s). The rule should cover Section 11 of the 1933 Act, as well as other provisions imposing liability. Such a provision in the rule would allow boards of directors and audit committee members to rely upon the Commission's determination. This would facilitate the recruitment and retention of the best quality people.

  • The final rule should not require the names of the financial experts to be disclosed. While it is reasonable to have the board of directors make the determination of whether individual audit committee members meet the requirements of a financial expert under Section 407 of Sarbanes-Oxley, it is not necessary or helpful to investors to disclose the individuals by name. Further, such disclosure may discourage individuals from being willing to be designated as financial experts or to serve on audit committees.

  • The Commission should continue in the final rule its proposal that the requirements for "financial expert" can be satisfied by persons other than CPAs, chief financial officers and chief accounting officers. For example, it is PSEG's experience that many, if not most, CEOs have the ability to read and understand financial statements, have knowledge of internal controls, understand financial assumptions and judgments inherent in financial statements, understand the fundamental drivers of a business and industry trends, and can correctly assess whether financial statements fairly present the financial position of a company. CEOs also have "clout" when applying this expertise and their experience. In the interests of good corporate governance, and reflective of reality, such expertise should continue to be allowed in satisfying the requirements of the final rule, in situations that honestly meet the basic qualifications of a financial expert as enumerated by the SEC.

PSEG appreciates the opportunity to comment on the Commission's proposed rule on financial experts.

Respectfully submitted,

R. Edwin Selover
Senior Vice President and General Counsel