File No. S7-40-02From: singley@WellsFargo.COM Sent: Wednesday, November 27, 2002 2:56 PM To: rule-comments@sec.gov Subject: File No. S7-40-02 November 27, 2002 VIA ELECTRONIC MAIL Jonathan G. Katz Secretary Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549-0609 (rule-comments@sec.gov) File No. S7-40-02 Dear Mr. Katz: I am writing on behalf of Wells Fargo & Company to comment on the rules proposed in Release No. 33-8138 insofar as they relate to the definition of a "financial expert" serving on a company's audit committee. The proposed definition would seem to restrict a "financial expert" to a member of the accounting profession or a senior financial manager with direct experience in preparing or auditing financial statements. To us this plainly invites the "financial expert" on the audit committee to become deeply involved in the preparation and audit of the company's financial statements. We are concerned that this would lead to a harmful, unprecedented imbalance of responsibilities -- both on the board itself and as between the board and management. Over the longer term, we believe that the proposed definition would discourage qualified non-accountants from serving on audit committees, as they become less comfortable relying on company management and records. Those non-accountants who remained on audit committees would find their contribution diminished as the focus of the committee narrows to technical accounting questions. We believe publicly traded corporations and the U.S. financial markets are best served by allowing audit committee "financial experts" to include persons with more than just technical knowledge who have attained their expertise in the manner traditionally permitted to boards of directors, namely by asking the right questions in their supervision of others. In particular, this would include chief executive officers of publicly traded corporations. A broader definition would also be more in keeping with the appropriate role of a federal rule-making body such as the Commission in an area largely governed by state corporation laws that recognize the role and function of directors as one of experienced oversight rather than focused expertise. We note that Section 407 of the Sarbanes-Oxley Act requires only "experience in the preparation or auditing of financial statements" and "experience in the application of such [generally accepted accounting] principles." This would seem to permit experience as a supervisor of the process rather than direct involvement in it. The proposed rule has made a subtle change in this wording, which would require "experience applying" and "experience preparing." This implies actual involvement in the audit and preparation of financial statements. We submit that this kind of experience is not required by the statute and that Section 407 of the Act actually invites the Commission to determine what similar experience could make a person a "financial expert." We also observe that, as adopted by the Commission on August 29, new Exchange Act Rules 13a-14 and 15d-14 require an issuer's principal executive officer or officers and the principal financial officer or officers, or persons performing similar functions, each to certify in each 10-Q and 10-K filed by the issuer that, among other things: based on his or her knowledge, the financial statements, and other financial information included in the report, fairly present in all material respects the financial condition, results of operations and cash flows of the issuer as of, and for, the periods presented in the report. We believe that the familiarity with accounting principles and the effectiveness of internal controls required to make this certification as well as the others required by Exchange Act Rules 13a-14 and 15d-14 satisfy the mandate of Section 407 of the Sarbanes-Oxley Act, and that any principal executive officer, principal financial officer or other officer making these certifications on behalf of another corporation is ipso facto qualified to serve as a "financial expert" on an audit committee. Accordingly, we suggest that Instruction 1 to proposed Item 309 of Regulation S-K be revised in the following way to carry out the mandate of Section 407 of the Sarbanes- Oxley Act in a manner more hospitable to state corporation laws and in keeping with recently adopted SEC rules. Our proposed revisions appear underlined in bold type. 1. For purposes of the determination by the board of directors under this Item 309, the term "financial expert" means a person who has, through education and experience as, or directly supervising, a public accountant or auditor, or a principal financial officer, controller, or principal accounting officer, of a company that, at the time the person held such position, was required to file reports pursuant to section 13(a) or 15(d) of the Exchange Act (15 U.S.C. 78m(a) and 78o(d)), or experience as a principal executive officer or any other officer certifying annual or quarterly reports of such a company pursuant to Rule 13a-14 or Rule 15d-14, or experience in one or more positions that involve the performance or direct supervision of similar functions (or that results, in the judgment of the board of directors, in the person's having similar expertise and experience), the following attributes: a. An understanding of generally accepted accounting principles and financial statements; b. Experience applying, or directly supervising persons who apply, such generally accepted accounting principles in connection with the accounting for estimates, accruals, and reserves that are generally comparable to the estimates, accruals and reserves, if any, used in the registrant's financial statements; c. Experience preparing or auditing, or directly supervising persons who prepare or audit, financial statements that present accounting issues that are generally comparable to those raised by the registrant's financial statements; d. Experience with internal controls and procedures for financial reporting; and e. An understanding of audit committee functions. The Commission has also asked for comment on whether it would be beneficial to disclose the names and number of "financial experts" serving on the audit committee. If, as the Commission itself has explained in the proposing release, the role of the financial expert is to assist the audit committee, we see no reason this information needs to be made public. We believe that disclosure to the effect that there is at least one "financial expert" on the audit committee should suffice. Members of the public and employees with complaints or comments about the audit process will have access to the audit committee through the procedures mandated by Section 301 of the Sarbanes-Oxley Act. Disclosure of the designated "financial expert" would only attract unnecessary attention and discourage service. We also agree that the designation of a "financial expert" on the audit committee should not increase the duties or obligations of that person or decrease them for others, and we think that a statement to that effect should be included in the Commission's rule- making. The absence of a supporting statement by the Commission would also, we believe, discourage persons from serving in this capacity. We trust that the Commission, with its responsibility for overseeing the federal securities laws and its appreciation for the appropriate roles of federal and state law in the governance of U.S. corporations, will restore the balance between these two bodies of law that seems to be temporarily missing from the proposed definition of "financial expert." We also appreciate the Commission's assistance in protecting this person from unnecessary inconvenience and liability. Thank you for your consideration of these comments. Very truly yours, WELLS FARGO & COMPANY By Robert S. Singley Vice President and Assistant Secretary