Sarbanes-Oxley Act 2002 Summary
Public Company Accounting Oversight Board § § § § § § A five-member “Public Company Accounting Oversight Board” will oversee audits of public companies. Section 101(a). The Board will have five members, of whom exactly two are to be certified public accountants. Section 101(e). “Public accounting firms” (firms that audit public companies) must register with the Board. Section 102(a). The Board will establish and enforce auditing, quality control, and independence standards. Section 103. The Board itself will be subject to SEC oversight. Section 107. The Board will be funded by fees on public companies based on their equity market capitalizations, and the Board will also use these fees to fund the Financial Accounting Standards Board, which will continue to establish generally accepted accounting principles. Section 109. Within 90 days after the Act’s enactment, the SEC must appoint the members of the Board, after consultation with the Chairman of the Federal Reserve Board and the Secretary of the Treasury. Section 101(e)(4). Within 270 days after the Act's enactment, the SEC must determine whether the Board has the capacity to carry out the Act's requirements. Section 101(d). Within 180 days of that determination, public accounting firms must register with the Board. Section 102(a).
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Auditor Independence § A public company may not obtain certain non-audit services from its auditor under any circumstances. Section 201(a).
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A public company may obtain any other non-enumerated non-audit services from its auditor, only with the pre-approval of the audit committee and disclosure in its SEC reports. Section 202. This preapproval requirement is subject to a de minimus exception. Section 202. A public accounting firm must rotate the lead audit partner and the audit partner responsible for reviewing the audit of a public company every five years. Section 203. A public accounting firm may not audit an issuer if the issuer's chief executive officer, controller, chief financial officer, chief accounting officer, or equivalent person was employed by the public accounting firm and participated in the audit of the issuer during the one-year period preceding the date of the initiation of the audit. Section 206. Within 180 days after the Act’s enactment, the SEC must adopt final regulations to carry out these provisions. Section 208.
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Audit Committees § Each audit committee will be responsible for the appointment, compensation, and oversight of the work of the auditor (including resolution of disagreements between management and the auditor regarding financial reporting). Section 301. All listed companies will be required to have audit committees composed entirely of directors who are not affiliated with the issuer and do not accept any consulting, advisory, or other compensatory fee from it. Section 301. The audit committee must establish procedures for the confidential, anonymous submission by employees of concerns regarding questionable accounting or auditing matters. Section 301. The audit committee shall have the right to engage independent counsel and other advisers. Section 301. Within 270 days after the Act’s enactment, the SEC must by rule direct the exchanges to require these standards. Section 301. The issuer must disclose if the audit committee has at least one member who is a financial expert. Section 407.
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CEO/CFO Certifications § Chief executive officers and chief financial officers will be required to certify that, among other things, the financial information in each annual and quarterly report fairly presents in all material respects the financial condition and results of operations of the issuer as of, and for, the periods presented in the report (as well as several representations concerning the issuer's internal controls). Section 302(a). Within 30 days after the Act's enactment, the SEC must have rules effectuated requiring these certifications. Section 302(c). In addition, the Act imposes criminal penalties on CEOs and CFOs whose periodic report certifications do not comport with the Act. Section 906.
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Note: The pending CEO/CFO certification proposal has a comment deadline of August 19. The certification described in the Act is more detailed and, at least for annual reports, somewhat less broad than the SEC proposal, which would include a representation that the annual report contains all information about the company of which they are aware that they believe is important to a reasonable investor. Note: It is not clear whether Section 906 is intended to impose a separate certification requirement effective upon enactment. Developments over the next few days should hopefully clarify the relationship between these provisions. Improper Influence of Conduct of Audit § The SEC will have the authority to bring a civil or criminal proceeding against any officer or director of a public company or any person acting at their direction, who fraudulent influences, coerces, manipulates, or misleads any auditor in the performance of an audit for the purpose of rendering such financial statements materially misleading, in contravention of SEC rules. Section 303(a). Within 90 days of the Act’s enactment, the SEC must propose the rules, and within 270 days, issue the final rules. Section 303(d).
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Forfeiture of Certain Bonuses and Profits § If an issuer is required to prepare an accounting restatement due to the material noncompliance of the issuer, as a result of misconduct, with any financial reporting requirement, the CEO and CFO must reimburse the issuer for any bonus or other incentivebased or equity-based compensation received by that person from the issuer during the 12month period after the initial issuance of the financial statements and any profits from the sales of securities of the issuer during that period. Section 304.
Pension Fund Blackout Periods § Directors and executive officers may not purchase or sell any equity securities during any pension fund blackout period with respect to such equity security, if the director or officer acquires the equity security in connection with service or employment as a director or executive officer. Section 306.
SEC Rules of Professional Responsibility for Attorneys § § Within 180 days after the Act’s enactment, the SEC must issue rules of professional responsibility for securities lawyers. Section 307. The rules are to include a rule requiring an attorney to report evidence of a material violation of securities law or breach of fiduciary duty to the issuer's chief legal counsel or chief executive officer. Section 307. If the counsel or CEO does not appropriately respond to the evidence, the attorney must report the evidence to the audit committee, another committee composed entirely of independent directors, or the board of directors. Section 307
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Note: This certification of legal ethics is one of the most controversial provisions of the Act, at least among securities lawyers, and it will be interesting to see how this issue develops.
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FAIR Funds for Investors § § Civil penalties for securities law violations may be added to the disgorgement fund for the benefit of the victims of the violation. Section 308. The SEC also is to develop methods to improve collection rates and provide restitution to injured investors. Section 308.
Disclosures in Periodic Reports § Within 180 days after the Act’s enactment, the SEC is to issue final rules providing for the disclosure of all material off-balance sheet transactions, arrangements, and obligations, and other relationships that may have a material current of future effect. Section 401. Within 180 days after the Act’s enactment, the SEC must issue final rules providing that pro forma financial information in any press release or other public disclosure must not include any material misstatement or omission and must be reconciled with generally accepted accounting principles. Section 401.
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Personal Loans to Executives § No public company may directly or indirectly extend credit to any director or executive officer, other than certain specified margin or other loans made in the ordinary course of business. Section 402. This provision is effective upon enactment, but an extension of credit maintained on the date of enactment is not subject to its provisions, provided that there is no material modification or renewal of its terms. Section 402.
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Acceleration of Insider Reporting § § § Changes in equity ownership by directors, officers, and 10% beneficial owners must be reported by the end of the second business day following the trade. Section 403. Within one year of the Act’s enactment, reports are to be filed electronically and posted on the issuer's and the SEC's web sites. Section 403. The accelerated reporting requirement is effective 30 days after enactment. Section 403.
Note: This is a substantial acceleration from existing law, which requires reports within 10 days after the close of the calendar month. Real Time Issuer Disclosures § The Act authorizes the SEC to require public companies to disclose on a rapid and current basis information concerning changes in the issuer's financial condition or operations. Section 409.
Securities Analysts and Research Reports § Within one year after the Act’s enactment, the SEC or the SROs must adopt rules designed to address securities analysts' conflicts of interest. Section 501.
Note: On July 25, 2002, the SEC proposed a new Regulation AC, which if adopted, would govern research analysts' research reports and public appearances.
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Authorization of Appropriations § The Act authorizes an appropriation of $776 million for fiscal year 2003, including $102 million to fund additional employee compensation, $108 million for information technology and security enhancements, and $98 million to add at least 200 qualified professionals. Section 601.
Note: This is merely an authorization; the necessary funds still must be appropriated.
Statute of Limitations § The Act provides a limitations period for private securities fraud claims of the earlier of two years after the discovery of the facts constituting the violation or five years after the violation. Section 804. This new limitations period is applicable to all proceedings commenced on or after the date of enactment. Section 804.
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Note: The applicable statutes do not currently provide an explicit limitations period, but the courts apply a period of one year after discovery or three years after the violation. Criminal Penalties § § § A number of criminal penalties have been added or increased, including a new crime of securities fraud with a maximum penalty of 25 years. See, e.g., Section 802, Section 807. The Act also provides that debts are nondischargeable in bankruptcy if incurred in violation of securities fraud laws. Section 803. The Act increases the authority of the SEC to bar persons from serving as a director or officer of a public company. Section 305.
Please see the attached list of Davis Graham & Stubbs CF&A attorneys if you have a question that you would like answered on this matter.
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Davis Graham & Stubbs LLP Corporate Finance & Acquisitions Group You can also send an email to CF&Anews@dgslaw.com.
PARTNERS Wanda Abel (303) 892-7314 wanda.abel@dgslaw.com Scot Anderson (303) 892-7383 scot.anderson@dgslaw.com Joel Benson (303) 892-7470 joel.benson@dgslaw.com Deborah Friedman (303) 892-7356 deborah.friedman@dgslaw.com Pantea Garroussi (303) 892-7353 pantea.garroussi@dgslaw.com Laura Gill (303) 892-7333 laura.gill@dgslaw.com Ron Levine (303) 892-7514 ron.levine@dgslaw.com Alan Loeb (303) 892-7494 alan.loeb@dgslaw.com John McCabe (303) 892-7351 john.mccabe@dgslaw.com Jay Newcom (303) 892-7318 jay.newcom@dgslaw.com Patricia Peterson (303) 892-7477 patricia.peterson@dgslaw.com Chris Richardson (303) 892-7420 chris.richardson@dgslaw.com Lee Terry (303) 892-7484 lee.terry@dgslaw.com Les Woodward (303) 892-7392 les.woodward@dgslaw.com OF COUNSEL Ted Sikora (303) 892-7324 ted.sikora@dgslaw.com ASSOCIATES Ilida Alvarez (303)892-7499 ilida.alvarez@dgslaw.com Ryan Arney (303) 892-7373 ryan.arney@dgslaw.com Robert Attai (303) 892-7408 robert.attai@dgslaw.com Jeff Brandel (303) 892-7331 jeff.brandel@dgslaw.com Kristin Lentz (303) 892-7334 kristin.lentz@dgslaw.com Josh Maxfield (303) 892-7313 josh.maxfield@dgslaw.com Peter Schwartz (303) 892-7381 peter.schwartz@dgslaw.com Michelle Shepston (303) 892-7344 michelle.shepston@dgslaw.com
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