Office of the Chief Accountant:
KPMG LLP (UK)

May 14, 2004

KPMG LLP (UK)
Attn: Mr. Neil Lerner
8 Salisbury Square
London EC4Y 8BB
United Kingdom

Dear Mr. Lerner:

The staff has reviewed your letter of May 13, 2004 concerning KPMG LLP's ("KPMG" or "KPMG Member Firms") separation of various legal practices (individually, a "Separated Legal Practice") from their respective KPMG Member Firms. In your letter, you detail key terms of the transaction and conditions that KPMG, including entities that have been considered part of KPMG under Rule 2-01(f)(2) of Regulation S-X, will comply with in connection with the completion of the separation. Your letter concludes that, based on its compliance with those terms and conditions, KPMG should not be considered to be "providing legal services" to, or to have a "mutuality or conflict of interest" or a "direct or material indirect business relationship" with, or a "direct financial interest or material indirect financial interest" in, any audit client (1) that also is a client of, or enters into a business relationship with, such Legal Practice, or (2) in which such Legal Practice invests.

As you are aware, the Sarbanes-Oxley Act of 2002 (the "Act") expressly prohibits any registered public accounting firm, or any associated person or entity of that firm, from providing certain non-audit services to its audit clients that are "issuers" as defined in the Act. The representations set forth in your letter indicate that the terms and conditions of each separation agreement among other things: (1) provide that no KPMG Member Firm or partner of a KPMG Member Firm has received or retained any equity interest in the Separated Legal Practice, (2) impose limitations on the use by the Separated Legal Practice of the "KPMG" and "KLegal" names and logos, including that such names and logos only be used in the context of historical reference and that the Separated Legal Practice must adopt and use a distinctive name and logo from the effective date of the Separation, (3) provide that there be a strict separation of the corporate governance of the KPMG Member Firms and the Separated Legal Practice, (4) forbid any revenue or profit sharing between the KPMG Member Firms and the Separated Legal Practice, (5) prohibit preferred collaboration relationships between the KPMG Member Firms and the Separated Legal Practice and require in certain circumstances separate engagements by common clients of the KPMG Member Firms and the Separated Legal Practice (provided that in jurisdictions where tax services are only permitted to be provided by licensed lawyers, the Separated Legal Practice may provide limited tax services, not to exceed 10 professional hours in any calendar year, without a separate client engagement letter), (6) limit any financial relationship between the KPMG Member Firms and the Separated Legal Practice to transitional credit support, if any, that is provided to expedite the Separation and not as an investment or as continuing support, is on terms that permit creditors to seek payment from the KPMG Member Firms only after they have unsuccessfully sought payment from the Separated Legal Practice and its partners, is restricted in time and scope and must be removed as soon as practicable but no later than the first to occur of the date that is nine months after the effective date of the Separation or March 31, 2005, and (7) limit any shared services between the KPMG Member Firms and the Separated Legal Practice.

Assuming that the representations set forth in your letter continue to be accurate, and further assuming that KPMG continues to comply with each of the terms and conditions set forth in your letter, the Office of the Chief Accountant ("OCA" or the "staff") will not recommend an enforcement action asserting that KPMG lacks independence as a result of non-audit services provided to KPMG's audit clients by the Separated Legal Practices or any Separated Legal Practice Partner or employee. Of course, KPMG otherwise remains fully subject to the Commission's independence requirements, as well as the provisions of the Act, with respect to matters not expressly covered by your letter and this response. OCA has taken this position based on the specific facts and circumstances represented in your letter. KPMG will consent to any review deemed necessary by the staff or the Public Company Accounting Oversight Board to ascertain compliance. If the divestiture is found not to have satisfied the terms and conditions represented to the staff or if any of the remaining terms or conditions in your letter are not met, the staff's position will be vitiated, and the staff may recommend an enforcement action. Further, OCA has taken this position based on its evaluation of the relevant policy considerations and does not thereby adopt or endorse the analysis or conclusions set forth in your letter. This response expresses OCA's position only on these particular facts and circumstances and does not purport to express any legal conclusions on this or any other matter.

Incoming Letter:

Office of the Chief Accountant
United States Securities and Exchange Commission
450 Fifth Street NW
Washington DC 20549USA

May 13, 2004

Ladies and Gentlemen

Terms and Conditions for the Proposed Separations of Various Legal Practices from their Respective KPMG Member Firms

We hereby request that the Staff of the United States Securities and Exchange Commission (the "SEC" or "Commission") advise that, based upon and subject to the matters referred to herein, it will not recommend that the Commission take enforcement action against KPMG LLP (UK) or any other firms conducting audit activities for SEC registrants under the name "KPMG" or derivations thereof (each a "KPMG Member Firm" and, collectively, "KPMG") asserting that KPMG is not "independent" of any of its audit clients that are required to file reports with the Commission (each an "Audit Client") based upon the attribution to KPMG of the legal services activities of any legal practice that was an associate of or had another relationship with a KPMG Member Firm (a "Legal Practice"), provided that such Legal Practice has effected a separation (a "Separation") from KPMG and become a "Separated Legal Practice" in accordance with the terms and conditions set forth herein.

Legal Analysis

Auditor Independence Requirement. The federal securities laws require that financial statements filed with the Commission by public companies, investment companies, broker-dealers, public utilities, investment advisers and others be certified (audited) by independent public accountants.¹ The federal securities laws also authorize the Commission to define "accounting, technical and trade" terms used in the federal securities laws.² With respect to independence of auditors, the Commission has adopted Rule 2-01 of Regulation S-X.

General Independence Standard. The general standard set forth in Rule 2-01(b) of Regulation S-X provides that:

"[t]he Commission will not recognize an accountant as independent, with respect to an audit client, if the accountant is not, or a reasonable investor with knowledge of all relevant facts and circumstances would conclude that the accountant is not, capable of exercising objective and impartial judgment on all issues encompassed within the accountant's engagement."³

Rule 2-01(b) further provides that:

"[I]n determining whether an accountant is independent, the Commission will consider all relevant circumstances, including all relationships between the accountant and the audit client, and not just those relating to reports filed with the Commission."⁴

The preliminary note to Rule 2-01 states that, in considering the standard set forth in Rule 2-01(b), the Commission looks to, among other criteria, whether a relationship or the provision of a service "creates a mutual or conflicting interest between the accountant and the audit client."⁵

Prohibitions on Specified Relationships. Rule 2-01(c) applies the general standard of Rule 2-01(b) to particular circumstances. With respect to the provision of legal services, Rule 2-01(c)(4) and new subparagraph (ix) thereof specifically provide that an accountant is not independent with respect to an audit client if, at any point during the audit and professional engagement period, "the accountant provides … any service to an audit client that, under circumstances in which the service is provided, could be provided only by someone licensed, admitted, or otherwise qualified to practice law in the jurisdiction in which the service is provided."⁶ New subparagraph (ix) is the principal motivation for this request as many Legal Practices have determined that it is in their best interests to establish a clear separation from their respective KPMG Member Firm (and announce such separation to the marketplace).

Rule 2-01(c) also provides that an accountant will not be considered independent with respect to an audit client if, at any point during the audit and professional engagement period, "the accountant has a direct financial interest or a material indirect financial interest in the accountant's audit client."⁷ In addition, Rule 2-01(c) provides that an accountant will not be considered independent if, at any point during the audit and professional engagement period, "the accounting firm or any covered person in the firm has any direct or material indirect business relationship with an audit client, or with persons associated with the audit client in a decision-making capacity, such as an audit client's officers, directors, or substantial stockholders."⁸

The Commission's interpretations of Rule 2-01 are collected in Section 600 of the Codification of Financial Reporting Policies (the "Codification"), entitled "Matters Relating to Independent Accountants."⁹ Section 602.02.c of the Codification restricts the independent accountant from performing "bookkeeping and related professional services" that might cause a "mutuality of interest" to develop between the auditor and its client. In addition, Section 602.02.e of the Codification addresses business relationships - such as joint ventures, limited partnership agreements, and investments - that may impair an auditor's independence. That section provides, in part, that:

"[d]irect and material indirect business relationships, other than as a consumer in the normal course of business, with a client or with persons associated with the client in a decision-making capacity, such as officers, directors or substantial stockholders, will adversely affect the accountant's independence with respect to that client. Such a mutuality or identity of interests with the client would cause the accountant to lose the appearance of objectivity and impartiality in the performance of his audit because the advancement of his interest would, to some extent, be dependent upon the client."

The Codification does not provide interpretations that specifically address the provision of legal services.

Application of the Auditor Independence Rules to the Relationship Between the KPMG Member Firms and the Legal Practices. KPMG believes that, if a Legal Practice has effected a Separation in accordance with the terms and conditions detailed in this letter (the "Terms and Conditions"), KMPG should not be considered to be "providing legal services" to, or to have a "mutuality or conflict of interest" or a "direct or material indirect business relationship" with, or a "direct financial interest or material indirect financial interest" in, any Audit Client (1) that also is a client of, or enters into a business relationship with, such Legal Practice, or (2) in which such Legal Practice invests.¹⁰

A Legal Practice that has effected a Separation in accordance with the Terms and Conditions is referred to herein as a "Separated Legal Practice". KPMG's conclusions are based on the Terms and Conditions, which, with respect to each Separation, among other things: (1) provide that no KPMG Member Firm or partner of a KPMG Member Firm has received or retained any equity interest in the Separated Legal Practice, (2) impose limitations on the use by the Separated Legal Practice of the "KPMG" and "KLegal" names and logos, including that such names and logos only be used in the context of historical reference and that the Separated Legal Practice must adopt and use a distinctive name and logo from the effective date of the Separation, (3) provide that there be a strict separation of the corporate governance of the KPMG Member Firms and the Separated Legal Practice, (4) forbid any revenue or profit sharing between the KPMG Member Firms and the Separated Legal Practice, (5) prohibit preferred collaboration relationships between the KPMG Member Firms and the Separated Legal Practice and require in certain circumstances separate engagements by common clients of the KPMG Member Firms and the Separated Legal Practice (provided that in jurisdictions where tax services are only permitted to be provided by licensed lawyers, the Separated Legal Practice may provide limited tax services without a separate client engagement), (6) limit any financial relationship between the KPMG Member Firms and the Separated Legal Practice to transitional credit support, if any, that is provided to expedite the Separation and not as an investment or as continuing support, is on terms that permit creditors to seek payment from the KPMG Member Firms only after they have unsuccessfully sought payment from the Separated Legal Practice and its partners, is restricted in time and scope and must be removed as soon as practicable but no later than the first to occur of the date that is nine months after the effective date of the Separation or March 31, 2005, and (7) limit any shared services between the KPMG Member Firms and the Separated Legal Practice.

In addition, the KPMG Member Firms note that the provision of legal services is a regulated activity in the relevant jurisdictions and the KPMG Member Firms believe that the regulators of legal and accounting services in each such jurisdiction would view a Legal Practice that effected a Separation in accordance with the Terms and Conditions as providing professional services on an independent basis from the KPMG Member Firms and vice versa.

Accordingly, KPMG desires to obtain assurance that, based on the transactions described below, a Separated Legal Practice would not be considered an associated entity of KPMG, and, accordingly, to the extent that a Separated Legal Practice that has effected a Separation in accordance with the Terms and Conditions provides legal services to, enters into business relationships with, or makes investments in, any Audit Client, KPMG's independence will not be deemed impaired with respect to that Audit Client pursuant to Rule 2-01 or any other provision of the Commission's auditor independence rules.

Factual Background

General. As of June 1, 2003, there were Legal Practices in approximately 60 jurisdictions, comprising approximately 3,200 lawyers, with the three largest practices (i.e., those in France, the United Kingdom and Germany) accounting for approximately 60% of the lawyers. None of the Legal Practices is located in the United States or practices U.S. law. The U.S. KPMG Member Firm has no financial or organizational relationships with any Legal Practice.

Relationships between the Legal Practices and their Respective KPMG Member Firms. At the time Rule 2-01(c)(4)(ii) was adopted, the relationships between the Legal Practices and their respective KPMG Member Firms varied from jurisdiction to jurisdiction and from insignificant to extensive.¹¹ In a majority of the jurisdictions, the Legal Practices operated as independent legal entities that were controlled and managed separately from the respective KPMG Member Firms. In these jurisdictions, which included approximately 72% of the lawyers, the relationships between the Legal Practices and the KPMG Member Firms were principally of an operational nature (e.g., common information technology platforms, common office service arrangements and coordinated marketing, including related names, trademarks and trade dress).

In the remaining jurisdictions, which included approximately 28% of the lawyers, the KPMG Member Firms and the Legal Practices were (and many remain) organized as multi-disciplinary professional practices or similar organizations. This organizational structure has been driven by various factors, including (1) that multidisciplinary practices have been encouraged by regulators in some of these jurisdictions and (2) that in many of these jurisdictions the KPMG Member Firm and the Legal Practice have not serviced Audit Clients to any significant extent. In these jurisdictions, the governance, capital structure and operations of the KPMG Member Firm and the Legal Practice often overlap significantly.

Relationships among the Legal Practices. None of the Legal Practices has any governance or capital structure relationships with any other Legal Practice. From an operational perspective, the relationships among the Legal Practices vary, depending on which Legal Practices are being analyzed, but generally these relationships are akin to "best friends" relationships that are common in the international legal community. In July 1999, in an effort to foster better relationships among the Legal Practices, several of the core Legal Practices formed a coordinating association, KLegal International, which at one time had a staff of five persons and is currently in the process of being wound down.

The principal purpose of KLegal International was to assist the Legal Practices in coordinating their cross-border marketing and client servicing efforts so that each Legal Practice would be better positioned to obtain and perform cross-border assignments. KLegal International does not provide professional services, has no ownership interest in or management influence over the Legal Practices and does not receive any dividends, interest, fees, royalties or other payments from the Legal Practices or the KPMG Member Firms. KLegal International has been funded by several of the Legal Practices and non-U.S. KPMG Member Firms through KPMG International. After the date of the first Separation, all future funding for KLegal International, if any, will be provided by Separated Legal Practices, except that any outstanding funding commitments may be satisfied no later than June 30, 2004, provided they are fixed in amount at such effective date of the first Separation.

Provision by the Legal Practices of Professional Services to Audit Clients. As far as the provision of professional services to Audit Clients is concerned, the relationships among the Legal Practices and the KPMG Member Firms are limited. It is estimated that fees generated by the Legal Practices from Audit Clients aggregate to less than 5% of their total revenues. In addition, if tax services, which (1) are not prohibited non-audit services under Rule 2-01(c) and (2) in many jurisdictions are required to be provided by persons licensed to practice law, are excluded from these calculations, Legal Practice fees from Audit Clients aggregate to less than 4% of total Legal Practice revenues.

Timing of the Separations. Because the relationships between the Legal Practices and their respective KPMG Member Firms vary from jurisdiction to jurisdiction it is not practical to effect all Separations simultaneously. Various Legal Practices have undertaken significant steps to separate themselves from their respective KPMG Member Firms and the KPMG Member Firms expect that the first Separations will be effective on or shortly after the date the Staff issues the confirmation requested by this letter and that the latest Separation will occur prior to December 31, 2006.¹² We understand that the confirmation requested by this letter may apply only to Separations effected prior to December 31, 2005.

Terms and Conditions of No-Action Confirmation

We request that, subject to compliance with the following Terms and Conditions, the Staff not recommend enforcement action to the Commission based upon the attribution to KPMG of the legal service activities of any Legal Practice that has effected a Separation from its respective KPMG Member Firms. For purposes of the Terms and Conditions, Legal Practices that have effected a Separation are referred to as "Separated Legal Practices" and those that have not effected a Separation are referred to as "Incumbent Legal Practices".

Terms and Conditions for the Separation of a Legal Practice from its Respective KPMG Member Firm

1. As a consequence of the Separation, no KPMG Member Firm or its partners will have received or retained any equity, debt or similar interest in the Separated Legal Practice, and the Separated Legal Practice will not have received any equity or similar interest in any KPMG Member Firm. Notwithstanding the foregoing, the KPMG Member Firm in the relevant jurisdiction may provide limited transitional credit support to the Separated Legal Practice (e.g., in the form of a guarantee of a working capital revolving credit facility), provided that (a) the credit support is provided to expedite the Separation and not as an investment or as continuing support, (b) is on terms that permit creditors to seek payment from the KPMG Member Firm only after they have unsuccessfully sought payment from the Separated Legal Practice and its partners, (c) the KPMG Member Firm and the Separated Legal Practice use their reasonable best efforts to secure stand-alone financing for the Separated Legal Practice as promptly as practicable, (d) the credit support is provided only in respect of financing for the working capital needs of the Separated Legal Practice and not for capital expenditures, investments or similar uses, (e) the compensation for the credit support, if any, is determined on an arm's length basis, and (f) the credit support does not extend beyond the first to occur of the date that is nine months after the effective date of the Separation or March 31, 2005.
    
2. The Separated Legal Practice may be permitted to use the "KPMG" name and the "KLegal" name and logo for historic reference purposes (e.g., "formerly known as . . .") for a transitional period of not more than 12 months from the effective date of the Separation, provided that from the effective date of the Separation:
    
1. The Separated Legal Practice has adopted a name and a logo that are distinct from the "KPMG" and "KLegal" names and logos;
    
2. All publications, letterhead and stationery, name plates, office signage, business cards and similar materials clearly designate the Separated Legal Practice as separate from the KPMG Member Firms (e.g., if any historical or other reference to KPMG is made, a phrase such as "an independent law firm" is used);
    
3. No KPMG Member Firm represents in any publication, advertisement, press release, name plates, office signage, business cards or other similar material that it is the same firm, or controls, manages, governs or is affiliated with the Separated Legal Practice or any other affiliate, subsidiary or division of the Separated Legal Practice; and
    
4. The Separated Legal Practice does not represent in any publication, advertisement, press release, name plates, office signage, business cards or other similar material that it is the same firm, or controls, manages, governs or is affiliated with a KPMG Member Firm or any affiliate, subsidiary or division of a KPMG Member Firm.
    
3. From the effective date of the Separation, the KPMG Member Firms and the Separated Legal Practice will maintain separate corporate governance, management and financial structures and interests, including separate governing bodies¹³, executives, employees, capital, credit lines or facilities, client bases, governing documents, operating policies, financial operations and financial and accounting policies. No KPMG Member Firm will exert any financial or other influence over the Legal Practice's corporate governance, management and financial structures or interests and the Legal Practice will not exert any such influence over any KPMG Member Firm.
    
4. From the effective date of the Separation, no KPMG Member Firm will accrue, pay to or receive from the Separated Legal Practice any royalty, interest, dividend or other similar payment, whether or not tied to the performance of the Separated Legal Practice, except for payments under the Transition Services Agreement described below. In addition, no KPMG Member Firm will share profits or revenue from the provision of legal services or any other engagements or agreements with the Separated Legal Practice.
    
5. From the effective date of the Separation, no KPMG Member Firm will make any compensatory or similar payments to the partners of the Separated Legal Practice, except under fully funded retirement or other benefit plans available to partners or under retirement or other benefit plans available to employees of the KPMG Member Firm generally, in each case for the amount of benefits accrued through the effective date of the Separation.
    
6. The KPMG Member Firms will not enter into any separate licensing agreements with the Separated Legal Practice with respect to the intellectual property owned by the Separated Legal Practice, provided that in the areas of tax services and other non-prohibited services, such licensing agreements may be entered into on an arm's length basis.
    
7. The KPMG Member Firms and the Separated Legal Practice may, but will be under no obligation to, refer clients to one another (other than as described below); and the KPMG Member Firms and the Separated Legal Practice may not pay referral fees or other compensation for such referrals to each other nor to any subsidiary, affiliate, employee or agent of the other. Notwithstanding the foregoing, the KPMG Member Firms and the Separated Legal Practice may use reasonable efforts, consistent with applicable professional standards, to refer professional services engagements to each other on a non-exclusive basis and at no cost to each other, provided that neither party may publicize such referral arrangements to clients. The KPMG Member Firms and the Separated Legal Practice will not enter into any co- or joint marketing, advertising or similar agreements or arrangements which are inconsistent with the foregoing conditions or which do not clearly state that the KPMG Member Firms and the Separated Legal Practice are separate firms. On the date that is the latest of the dates that (a) the Separated Legal Practice ceases to occupy office space subleased from any KPMG Member Firm, (b) the Separated Legal Practice ceases referring to its historic relationship with KPMG, (c) any transitional credit support arrangements have been terminated, (d) services provided by the KPMG Member Firms to the Separated Legal Practice are no more extensive and of no longer duration than provided in the Transitional Services Agreement, and (e) all other Terms and Conditions have been, and continue to be, satisfied, the Separated Legal Practice and the KPMG Member Firms will be free to contract and enter into business relationships with one another as would any other two independent entities, including compensated referral and joint marketing arrangements, provided that such arrangements are consistent with Regulation S-X and other applicable laws, regulations and professional standards.
    
8. The Separated Legal Practice and the KPMG Member Firm may purchase each other's professional services, including tax services, in exchange for customary arm's-length compensation or may agree to provide such services to each other upon demand or otherwise on an arm's length basis. In addition, the KPMG Member Firm and the Separated Legal Practice may cooperate in the provision of tax services pursuant to arrangements consistent with the terms and conditions described in this letter.¹⁴ Prior to the date that all transitional credit support arrangements (if any) have been terminated, when providing professional services to the same client, the KPMG Member Firm and the Separated Legal Practice will do so only pursuant to separate individual agreements with that client.¹⁵ During this period, the KPMG Member Firm and the Separated Legal Practice will not enter into prime/subcontractor relationships to provide professional services to the same client. ¹⁶
    
9. In connection with the Separation, the KPMG Member Firm and the Separated Legal Practice may enter into a Transition Services Agreement for internal accounting and information services, office facilities and other services specified therein. The services provided under this arrangement may have varying terms. Services and facilities may be provided in accordance with the Transition Services Agreement so long as (a) the Separated Legal Practice is physically distinct from the KPMG Member Firm's other businesses and (b) charges for such use are determined at arm's length and appropriate provision is made so that confidential information is not communicated between the KPMG Member Firm and the Separated Legal Practice. Under the Transition Services Agreement, the KPMG Member Firm will not receive transition services from the Separated Legal Practice and the KPMG Member Firm will not generate a profit on the services it provides to the Separated Legal Practice. The term for the provision of the services pursuant to the Transition Services Agreement initially shall be no longer than three years from the effective date of the Separation (the parties may include a clause in the agreement pursuant to which they may mutually agree to extend the term for a maximum of two one-year periods). To the extent that the Separated Legal Practice and the KPMG Member Firm have entered into sublease arrangements for office space currently occupied by the Legal Practice, in connection with the Separation, and as necessary whenever the main lease is modified, each sublease arrangement will be modified such that the Separated Legal Practice will pay the pro rata cost of such space, including related services and capital costs, based on the total square footage of each facility used by the Separated Legal Practice. No sublease arrangement will extend beyond the term of the main lease currently held by the KPMG Member Firm (the leases have remaining terms ranging from approximately 1 year to approximately 15 years), and the KPMG Member Firm will use commercially reasonable efforts to assist the Separated Legal Practice in its efforts to enter into a lease directly with the relevant landlord. The Separated Legal Practice and the KPMG Member Firm will not enter into new leases or subleases with each other for office space after the effective date of the Separation. To the extent that the Separated Legal Practice and the KPMG Member Firm occupy adjacent space (as lessor/sublessor or otherwise), the KPMG Member Firm and the Separated Legal Practice will have separate and distinct office signage and their offices will be physically separate and clearly distinguishable from one another.
    
10. The KPMG Member Firm will consent to periodic reviews by Commission Staff or an independent party designated by the Commission or its Staff to ascertain that the KPMG Member Firm is complying with the conditions herein provided.
     

Terms and Conditions Applicable to Relationships Involving the Incumbent Legal Practices and the Separated Legal Practices, Including Through KLegal International

1. All relationships, whether direct or indirect, between Incumbent Legal Practices and Separated Legal Practices will be subject to the terms and conditions described above for the relationships between KPMG Member Firms and Separated Legal Practices.
    
2. No Incumbent Legal Practice, until such time as it has effected a Separation from its respective KPMG Member Firm, will exert financial or other influence over the governance, management and financial structures or interests of any Separated Legal Practice. Furthermore, no Incumbent Legal Practice will accrue, pay to, or receive from, any Separated Legal Practice any royalty, interest, dividend or similar payment, whether or not tied to the performance of the Separated Legal Practice.
    
3. From the effective date of the first Separation, KLegal International will agree with the KPMG Member Firms to restrict its activities vis-à-vis the Incumbent Legal Practices to (a) assisting such Legal Practices with preparing for, and effecting separations from, their respective KPMG Member Firms, (b) acting as a referral resource for Legal Practices seeking expertise in other jurisdictions, provided that such arrangements are not mandatory and no referral fees are paid, and (c) conducting seminars and other training sessions for the Legal Practices, provided that all participants from Incumbent Legal Practices reimburse KLegal International for the cost of such services. From the effective date of the first Separation, KLegal International will not receive funding from the KPMG Member Firms or the Incumbent Legal Practices, except that any outstanding funding commitments that are fixed in amount at such effective date may be satisfied no later than June 30, 2004. KLegal International will agree with the KPMG Member Firms to terminate all activities no later than December 31, 2004.¹⁷
    

Certain Confirmations

In connection with its request herein, KPMG hereby confirms to the Staff that:

1. After the effective date of the first Separation, the KPMG Member Firms will continue to be subject to the independence requirements of the securities laws and the Commission's independence rules and interpretations issued thereunder to the same extent as they were so subject prior to such date.
    
2. The KPMG Member Firms agree to the above conditions and have furnished a copy of this letter (and will furnish any response from the Staff on this subject) to the Legal Practices. In connection with each Separation, the relevant Legal Practice will expressly acknowledge that it has been furnished a copy of such correspondence.
    

Confirmation Requested

Based upon the foregoing representations and subject to compliance with the Terms and Conditions, we hereby request that the Staff advise that if an Audit Client of KPMG also is a client of, enters into a business relationship with, or is invested in by a Separated Legal Practice, the Office of the Chief Accountant will not recommend an enforcement action asserting that KPMG lacks independence. KPMG acknowledges that the relief requested by this letter will become effective if the first Separation occurs within 120 days of the date of the issuance by the Staff of the confirmation requested above and will apply to all Separations effected between such date and December 31, 2005. In the event the first Separation does not take place within 120 days of the receipt of such confirmation, KPMG may reapply for the relief requested in this letter.

* * *

Thank you for your attention to this matter. We look forward to receipt of the above-mentioned confirmation letter.

Very truly yours

KPMG LLP

Endnotes

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¹ See e.g., 15 U.S.C. 77aa(25) and (26), 15 U.S.C. 78l(b), 78q(e), and 78m(a), 15 U.S.C. 79e(b), 79j(a) and 79n, 15 U.S.C. 80a-8, 80a-29(g) and 80b-3(c).

² See 15 U.S.C. 77s(a), 15 U.S.C. 77sss(a), 15 U.S.C. 78c(b), 15 U.S.C. 79t(a), and 15 U.S.C. 80a-37(a).

³ 17 C.F.R. 210.2-01(b) (2003).

⁴ Id.

⁵ 17 C.F.R. 210.2-01 (2003) (para. 2 of Preliminary Note).

⁶ 17 C.F.R. 210.2-01(c)(4)(ix) (2003). Rule 2-01(c)(4)(ix) was adopted by the Commission pursuant to the Sarbanes-Oxley Act of 2002 and became effective on May 6, 2003. Rule 2-01(e)(1)(iii) provides transitional relief and provides that legal services provided prior to May 6, 2004 pursuant to contracts in place on May 6, 2003 will not be deemed to impair an accountant's independence, provided that such services did not impair the accountant's independence under pre-existing requirements of the Commission.

⁷ 17 C.F.R. 210.2-01(c)(1) (2003).

⁸ 17 C.F.R. 210.2-01(c)(3) (2003).

⁹ Financial Reporting Codification, Section 600 - Matters Relating to Independent Accountants, reprinted in SEC Accounting Rules (CCH) 73,251 et seq.

¹⁰ KPMG expects that, as a result of a variety of jurisdiction-specific factors, the Separations of Legal Practices from their respective KPMG Member Firms will occur at varying times. Accordingly, KPMG is requesting no-action confirmation, and the Terms and Conditions will apply, on a practice-by-practice basis.

¹¹ KPMG believes that in some jurisdictions the relationship between the Legal Practice and the KPMG Member Firm is so limited that the activities of the Legal Practice would not be attributed to KPMG under applicable SEC rules. For example, in certain jurisdictions professional responsibility standards applicable to the legal and auditing professions have required these practices to adopt safeguards similar to the Terms and Conditions. Nonetheless, in the interest of clarity and consistency, the KPMG Member Firms intend to ensure that all Legal Practices adopt a policy of requiring compliance with the Terms and Conditions as a prerequisite for the provision of legal services to Audit Clients.

¹² It is expected that in some jurisdictions where (1) there is not a significant international practice (e.g., the KPMG Member Firm does little or no work for Audit Clients) and (2) local regulations and customs encourage deeper relationships among accounting firms and law firms, the Legal Practices may not effect Separations. In these jurisdictions, the Commission's auditor independence rules will still apply to the Legal Practices.

¹³ For example, there will be no contractual right by any KPMG Member Firm to representation on the Separated Legal Practice's governing body and no service on the Separated Legal Practice's governing body by any then-active partner or employee of a KPMG Member Firm or former partner or employee of a KPMG Member Firm with continuing financial ties to a KPMG Member Firm other than under fully-funded retirement benefit plans available to broad categories of former personnel.

¹⁴ Given (1) the long-standing requirement in certain non-U.S. jurisdictions that tax services be provided by persons licensed to practice law, (2) new requirements in the United States and various other jurisdictions that, as a practical matter, will cause accounting firms and legal firms to separate, and (3) practical and professional considerations that require tax and accounting advisors to coordinate their efforts, it is expected that in several jurisdictions, including France and Spain, significant contact among the relevant KPMG Member Firms and the Separated Legal Practices in the area of tax services is likely to continue following the Separations. Such contact will be consistent with the Terms and Conditions.

¹⁵ This restriction will not prohibit a Legal Practice in a jurisdiction where tax services are only permitted to be provided by licensed lawyers from providing tax services to a KPMG Member Firm client without a separate agreement with the client provided that such services are of the type provided by the Legal Practice in the ordinary course and the aggregate amount of professional time devoted by the Legal Practice on this basis for the client and its affiliates does not exceed 10 professional hours in any calendar year.

¹⁶ KPMG acknowledges that, for purposes of Rule 2-01(c)(4)(ix) of Regulation S-X, acting as a prime contractor for legal services (and subcontracting such services to an independent law firm) is equivalent to providing such services directly. Accordingly, no KPMG Member Firm will enter into enter into any prime/subcontracting arrangements with any firm for the provision of legal services to an Audit Client.

¹⁷ It is expected that KLegal International will cease using the "KLegal" name and logo shortly after the first Separation and that all Legal Practices will cease using such name by December 31, 2004 except in the context of historic references, to the extent permitted by the Terms and Conditions. It also is expected that the Separated Legal Practices may form a new association for the purpose of coordinating activities among themselves and with other non-KPMG related legal practices. Separated Legal Practices and Incumbent Legal Practices will not be members of the same coordinating organization and any coordinating organization that includes Separated Legal Practices will not have any relationship with any coordinating organization that includes Incumbent Legal Practices that is inconsistent with the Terms and Conditions.

http://www.sec.gov/info/accountants/staffletters/kpmg051404.htm