DRAFT COMMENT LETTER ON SEC PROPOSALS REGARDING FINANCIAL EXPERTS, CODES OF ETHICS AND INTERNAL CONTROLS; NOVEMBER 21ST CONFERENCE CALL TO DISCUSS

[15362] November 18, 2002 TO: ACCOUNTING/TREASURERS COMMITTEE No. 51-02 CLOSED-END INVESTMENT COMPANY COMMITTEE No. 45-02 SEC RULES COMMITTEE No. 91-02 RE: DRAFT COMMENT LETTER ON SEC PROPOSALS REGARDING FINANCIAL EXPERTS, CODES OF ETHICS AND INTERNAL CONTROLS; NOVEMBER 21ST CONFERENCE CALL TO DISCUSS As we previously indicated, the Securities and Exchange Commission recently proposed amendments to certain forms under the Securities Exchange Act of 1934 and the Investment Company Act of 1940, and certain rules under the Investment Company Act, to implement the requirements in Sections 406 (codes of ethics for senior financial officers) and 407 (disclosure of audit committee financial expert) of the Sarbanes-Oxley Act of 2002.1 The proposal also would make technical changes to the Commission’s rules and forms implementing Section 302 of the Act (corporate responsibility for financial reports). The Institute has prepared a draft comment letter on these proposals. A copy of the draft letter is attached and it is briefly summarized below. A conference call to discuss the draft letter has been scheduled for Thursday, November 21st at 11:00 a.m. Eastern time. The dial-in information for the call is as follows: Dial-in number: 1-888-391-6580 Pass code: Financial Experts/Frances Stadler If you will not be able to participate on the call, please provide any comments on the draft letter to Dorothy Donohue (202/218-3563 or donohue@ici.org), Frances Stadler (202/326-5822 or frances@ici.org), or Barry Simmons (202/326-5923 or bsimmons@ici.org) before 11:00 a.m. on Thursday. 1 See Memorandum to Accounting/Treasurers Members No. 41-02, Closed-End Investment Company Members No. 51-02 and SEC Rules Members No. 93-02, dated October 25, 2002. 2 Disclosure Regarding Audit Committee Financial Expert The Commission’s proposal would require a registered management investment company to disclose annually on proposed Form N-CSR: (1) the number and names of persons that the board of directors has determined to be the financial experts serving on the investment company’s audit committee; (2) whether the financial expert(s) are independent and if not, why not; and (3) if applicable, that the investment company does not have a financial expert serving on its audit committee, and an explanation of why. To qualify as a “financial expert,” an investment company director would be required to have several specific attributes including, among others, experience preparing or auditing financial statements that present accounting issues that are generally comparable to those raised by the investment company’s financial statements. In response to the Commission’s request for comments, the Institute’s draft letter recommends revising the proposed definition with respect to investment companies so that a director’s experience preparing or auditing financial statements that present issues that are generally comparable to those raised by the investment company’s financial statements would be a factor to be considered, rather than a requirement that must be met in all cases. The draft letter argues that this change is appropriate because fund financial statements are relatively straightforward and because the proposed definition in its current form would inappropriately limit the pool of candidates potentially qualified to serve as investment company financial experts. The draft letter also recommends that the Commission take further steps to give effect to its view that identification as a financial expert should not increase individual responsibility, obligation or liability. In addition, it recommends that the commission provide a transition period of eighteen months before requiring any new disclosure regarding financial experts, to allow investment companies that wish to do so sufficient time to recruit new directors to serve in that capacity. Disclosure Regarding Codes of Ethics The Commission’s proposal would require investment companies to disclose annually in Form N-CSR or Form N-SAR, as applicable, whether each of the investment company, its investment adviser, and its principal underwriter has adopted a written code of ethics that applies to the principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions, of such entities. In addition, investment companies would be required to disclose any amendment made to or waiver granted from the code during the period covered by the report. The draft letter expresses strong support for the flexible approach of the proposal, under which companies would be permitted to design their own codes and develop appropriate procedures to ensure compliance with those codes. The letter recommends that the Commission clarify that the waivers from codes of ethics required to be disclosed are those that involve action (i.e., an express grant of permission) or inaction with respect to a known or reported violation of the code, either before or after such violation occurs. In response to the Commission’s request for comment on the entities covered by the code of ethics disclosure 3 requirements, the draft letter supports the proposal as drafted and opposes extending the requirements to fund administrators. The letter requests a twelve-month transition period before compliance with any new requirements with respect to codes of ethics is required. Technical Changes to Rules and Forms Implementing Section 302 The draft letter opposes the Commission’s proposed revisions to Rule 30a-2 under the Investment Company Act of 1940 that would require an investment company’s principal executive and financial officers to certify that they are responsible for establishing, maintaining and designing internal controls and procedures for financial reporting. It indicates that these changes constitute a “back door” application of Section 404 of the Sarbanes-Oxley Act to investment companies, directly contrary to Congressional intent. In addition, the letter urges the Commission to retain the current 90-day period within which investment companies must perform an evaluation of their disclosure controls and procedures before filing a report on Form N-SAR or Form N-CSR. It notes that requiring such an evaluation “as of the end of the period covered by the report,” as the Commission has proposed, would severely and inappropriately limit the ability of investment company complexes to use a single evaluation for certifications with respect to multiple funds, an approach that the Commission previously had endorsed. Frances M. Stadler Deputy Senior Counsel Attachment (in .pdf format)