Implementing the Sarbanes Oxley Act of 2002 David

Implementing the Sarbanes. Oxley Act of 2002 -David R. Fredrickson Assistant General Counsel U. S. Securities and Exchange Commission

Disclaimer • The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. • The views expressed herein are those of the author and do not necessarily reflect the views of the Commission or the author’s colleagues on the staff of the Commission.

Major Topics of the Act • Public Company Accounting Oversight Board • Auditor Independence • Corporate Governance and Enhanced Company Disclosure • Analyst Conflicts of Interest • Increased Enforcement Remedies – Criminal and Civil

Corporate Responsibility • Increased Role of Audit Committees • Forfeiture of Bonuses and Profits • Prohibition on Personal Loans to Directors and Executive Officers • Faster Public Reporting of Securities Transactions by Officers and Directors

PCAOB • Registration of Accounting Firms • Auditing, Quality Control and Independence Standards • Accounting Standards • Inspections • Investigations and Disciplinary Proceedings

Increased Enforcement Remedies • New Crimes Defined • Debts incurred while violating the securities laws not dischargeable in bankruptcy • Temporary Freeze of “Extraordinary Payments” to Officers and Directors • “Fair Funds” – Penalties can be paid to investors rather than U. S. Treasury

SEC Rules Already Adopted • Ownership Reports and Trading by Officers, Directors and Principal Security Holders, Release 34 -46421 (August 27, 2002) -- SOx section 403(a) • Certification of Disclosure in Companies’ Quarterly and Annual Reports, Release 338124 (August 28, 2002) -- S-Ox section 302(a)

Rules SEC has Proposed - I • Improper Influence on Conduct of Audits, Release 34 -46685 (October 18, 2002) -- S-Ox section 303(a) • Disclosure Required by Sections 404, 406 and 407 of the Sarbanes-Oxley Act of 2002, Release 338138 (October 22, 2002) (audit committee financial experts, internal controls reports, and codes of ethics for senior management)

Rules SEC has Proposed - II • Disclosure in Management’s Discussion and Analysis About Off-Balance Sheet Arrangements, Contractual Obligations, and Contingent Liabilities and Commitments, Release 33 -8144 (November 11, 2002) – S-Ox section 401(a) • Conditions for Use of Non-GAAP Financial Measures, Release 33 -8145 (November 4, 2002) – S-Ox section 401(b)

Rules SEC has Proposed - III • Insider Trades During Pension Fund Blackout Periods, Release 34 -467781 (November 6, 2002) – S-Ox section 306(a) • Implementation of Standards of Professional Conduct for Attorneys, Release 33 -8150 (November 21, 2002) – S-Ox section 307

Rules SEC has Proposed - IV • Retention of Records Relevant to Audits and Reviews, Release 33 -8151 (November 21, 2002) – S-Ox section 802 • Strengthening the Commission’s Requirements Regarding Auditor Independence, Release 33 -8154 (December 2, 2002) – S-Ox sections 201 -207 (Title II)

SEC Rules to be Proposed • SEC rules directing the securities exchanges to prohibit the listing of companies that do not require: – Audit committees to retain auditor – Audit committee members to be independent • Electronic Filing of Insider Trading Reports

Sarbanes-Oxley Generally Applies to “Issuers” • “The term issuer means an issuer (as defined in section 3 of the Exchange Act of 1934) the securities of which are registered under section 12 or that is required to file reports under section 15(d) or that files or has filed a registration statement that has not yet become effective under the Securities Act of 1933, and that is not withdrawn. ” [Section 2(a)(7) of the Sarbanes. Oxley Act]

“Issuers” generally includes • Public Companies, including – Banks – Foreign Private Issuers – Small Business Issuers

Who is an Issuer • The SEC has generally proposed to treat all registered investment companies (“mutual funds”) as “issuers” • The SEC has sometimes proposed to not treat issuers of asset-backed securities and unit investment trusts as “issuers” The SEC has made no final decisions about the scope of “issuers” and has sought public comment on the effect of including and excluding certain classes of issuers, particularly foreign issuers.

What is an “Audit Committee” “A committee (or equivalent body) established by and amongst the board of directors of an issuer for the purpose of overseeing the accounting and financial reporting processes of the issuer and audits of the financial statements of the issuer; “If no such committee exists with respect to the issuer, the entire board of directors. ”