Calling for Exemptions for Japanese Corporations from the Provisions of the Sarbanes-Oxley Act

1. Developments in the U.S. economy have an extremely important impact on the entire global economy. Moreover, such developments are of critical concern to the Japanese economy as Japan endeavors to escape its deflationary cycle and to achieve recovery. From this perspective, we highly appreciate the prompt response of the United States to the problem of distrust in corporate accounting practices, and its speedy implementation of comprehensive measures aimed at re-establishing confidence in the capital markets.

2. We wish to state that Japanese corporations have already achieved very high standards of corporate governance and disclosure when measured internationally, as a result of a series of revisions in Japan's Commercial Code and Securities and Exchange Law undertaken in recent years. Continued efforts are being made to further upgrade these standards. Regarding the recently enacted Sarbanes-Oxley Act of 2002, we find that it contains various provisions that are inconsistent with current Japanese laws, rendering it impossible for Japanese corporations to comply with this legislation. Furthermore, fund-procurement activities of Japanese corporations in the United States will be hampered by these inconsistencies. Therefore, Japanese corporations should be exempted from the provisions of the Sarbanes-Oxley Act in areas where the legal provisions of the two countries are overlapping.

3. We are particularly concerned with Section 301, which contains amendments to Section 10A of the Securities Exchange Act. Specifically, the application of sub-section (m) [Rules Relating to Audit Committees], paragraph (3) [Independence] to Japanese corporations will prove highly problematic.
   The Commercial Code of Japan contains the following provisions concerning the audit of large corporations. (See Attachment 1-1 and 2.) Large corporations are required by law to appoint a Board of Auditors ("Audit Committee" instead, under the new corporate governance that will be allowed by the newly enacted Commercial Code) and external accounting auditors. The independence of the Board of Auditors and external accounting auditors from the corporation and from its executive directors is ensured under the provisions of the law.
   Therefore, the "audit committee" prescribed under Section 301 is inconsistent with and overlapping the requirements of the Commercial Code of Japan. As Japanese corporations must comply with the provisions of the Commercial Code of Japan, Japanese corporations should be exempted from the pertinent provisions of Section 301. At the very least, the same procedures should be followed as in the case of the proposed New York Stock Exchange's rules on listing. That is, having exempted Japanese corporations, it should thereafter suffice to make a disclosure of the substantial differences between corporate governance systems in Japan and the United States.

4. To avoid the problem of overlapping laws, on various occasions, the SEC has respected home-country laws and exempted foreign corporations from certain U.S. regulations or has applied special regulations. (See Attachment 1-3.) The same pattern is observed in the New York Stock Exchange and NASDAQ, where foreign corporations are exempted from certain listing standards. The example of this positive tradition should be respected in the application of the Sarbanes-Oxley Act of 2002.

5. We wish to state that Japanese corporations are making every possible effort to comply with the requirements of the Sarbanes-Oxley Act of 2002. However, the details of how this legislation will be enforced remain unclear. Therefore, it is conceivable that new problems will be identified as practical issues of implementation are further clarified. In such cases, we intend to submit additional requests for problem resolution. (See Attachment 2.)

[Attachment 1]

1. Statutory Auditing Systems of Large Japanese Corporations: External Accounting Auditor and Auditors (Board of Auditors)

The Commercial Code of Japan contains the following provisions concerning the auditing systems of large corporations. An external accounting auditor must scrutinize if the accounting practices of the corporation are correct and appropriate (Audit Special Exceptions Law, Article 2). Auditors of the corporations must form a board of auditors (Audit Special Exceptions Law, Article 18-2, Sec. 1). Then, the board of auditors as a body and auditors individually must audit the directors' execution of their duties (Article 274-1 of the Commercial Code) in cooperation with the external accounting auditor (Audit Special Exceptions Law, Article 8). The function of the Audit Committee system, to be introduced on an optional basis on April 1, 2003, is to audit the directors' and executive officers' execution of their duties (Audit Special Exceptions Law, Article 21-8).

2. Auditing System and Independence

(1) External Accounting Auditor

1. An external accounting auditor is appointed at the shareholders' meeting (Audit Special Exceptions Law, Article 3, Sec. 1), not by a board of directors or officers.
2. The representing director must obtain the prior consent of the board of auditors to propose the appointment of an external accounting auditor at the shareholders' meetings (Audit Special Exceptions Law, Article 3, Sec. 2).
3. An external accounting auditor may voice his or her views at the shareholders' meeting concerning the appointment of the external accounting auditor (Audit Special Exceptions Law, Article 6-3).
4. Prior consent of the board of auditors must be obtained when the representing director proposes that an external accounting auditor not be re-appointed (Audit Special Exceptions Law, Article 5-2, Sec. 3).
5. An external accounting auditor may voice his or her views at the shareholders' meeting when a proposal has been made not to re-appoint the external accounting auditor (Audit Special Exceptions Law, Article 6-3).
6. Prior consent of the board of auditors must be obtained when the representing director proposes the removal of an external accounting auditor at the shareholders' meetings (Audit Special Exceptions Law, Article 6, Sec. 3).
7. An external accounting auditor may voice his or her views at the shareholders' meeting when a proposal has been made to dismiss the external accounting auditor (Audit Special Exceptions Law, Article 6-2, Sec. 3).

(2) Auditors and Board of Auditors

1. An auditor is appointed at the shareholders' meeting (Commercial Code, Article 280, Sec. 1).
2. An auditor may voice his or her views at the shareholders' meeting concerning the appointment of an auditor (Commercial Code, Article 275-3).
3. The representing director must obtain the prior consent of the board of auditors to propose the appointment of an auditor at the shareholders' meetings (Audit Special Exceptions Law, Article 18, Sec. 3).
4. An auditor cannot concurrently serve as a director or other employee of the corporation or its subsidiaries (Commercial Code, Article 276).
5. An auditor's term of office is four years (Commercial Code, Article 273, Sec. 1). An auditor may be removed from office only by special resolution of the shareholders' meeting (Commercial Code, Article 280, Sec. 1). An auditor may voice his/her views at the shareholders' meeting concerning a proposal for removal (Commercial Code, Article 275-3).
6. In case of resignation of an auditor during his/her term of office, the resigning auditor and other auditors may voice their views at the shareholders' meeting concerning the resignation (Commercial Code, Article 275-3-2).
7. At least half of auditors must be independent auditors (Audit Special Exceptions Law, Article 18, Sec. 1).

• In this context, "independent" is defined as follows: "A person who has not served as director, manager or other employee of the corporation or its subsidiaries at any time prior to his/her appointment" (Revision of December 2001 deleting the "five-year rule," by which former directors and employees were allowed to serve as "independent auditors").
• Generally, the authority and independence of auditors and the board of directors were reinforced in the December 2001 revision of the Commercial Code.

(3) Audit Committee (which will be formed under the new corporate governance allowed by newly enacted Commercial Code on an optional basis)

1. Members of the audit committee are appointed as members of the board of directors at the shareholders' meeting (Commercial Code, Article 254).
2. The majority of the members of the audit committee must consist of independent directors (Audit Special Exceptions Law, Article 21-8, Sec. 4).
3. Members of the audit committee cannot concurrently serve as officers or other employees of the corporation (Audit Special Exceptions Law, Article 21-8, Sec. 7).

• The definition of independent directors who must comprise the majority of the members of the audit committee stipulates an eligible appointee to be a person who has not served as director or other employee of the corporation or its subsidiaries at any time prior to appointment. (The proposed amendment to the rules of the New York Stock Exchange, currently before the SEC, stipulates an eligible appointee to be a person who has not been employed by the corporation for at least five years.)

3. Exemptions from the Application of U.S. Securities Related Law (Prior examples)

1. Exemption from quarterly reporting of Form 10-Q
2. Exemption from the application of the provisions of Section 14 of the Securities Exchange Act of 1934 concerning restrictions on solicitation of proxies
3. Exemption from the application of the provisions of Section 16 of the Securities Exchange Act of 1934 concerning restrictions on realization of profits from short-term transactions

[Attachment 2]

Other Areas in Which Treatments of Foreign Issuers Should Be Clarified
(Examples)