A 2002 (the Act), the Securities and and in other public - PDF document

G Corporate Finance Alert January 29, 2003 Update on the Sarbanes-Oxley Act: SEC Adopts Final Rules Relating to Corporate Codes of Ethics, Audit Committee Financial Experts and New Form 8-K Disclosure s directed in the Sarbanes-Oxley Act of company files with, or submits to, the SEC A 2002 (the “Act”), the Securities and and in other public communications made by Exchange Commission (the “SEC”) the company; recently issued final rules implementing Sections · compliance with applicable governmental 406, 407 and 409 of the Act regarding corporate laws, rules and regulations; codes of ethics, financial expert audit committee · the prompt internal reporting to an members, and public disclosure of earnings releases appropriate person or persons identified in or announcements. the code of violations of the code; and · Corporate Codes of Ethics accountability for adherence to the code. Under Section 406 of the Act, the SEC issued Companies are not required by the final SEC final rules requiring public companies to disclose in rules to adopt a code of ethics, however, companies their annual reports whether or not they have that do not will be required to publicly disclose why adopted a written code of ethics, which applies to they have not. A company that has adopted a its principal executive officer, principal financial code of ethics will be required to make it available officer, principal accounting officer or controller, or to the public either by (i) filing it as an exhibit to persons performing similar functions (a company its annual report, (ii) posting it on its Internet may have separate codes of ethics for different types website (and disclosing this fact along with the of officers). In order to satisfy the SEC’s Internet address in its annual report), or (iii) requirements, the code of ethics must set forth including an undertaking in its annual report to standards that are reasonably designed to deter provide a copy to any person upon request without wrongdoing and to promote: charge. A company will also be required to · honest and ethical conduct, including the disclose on Form 8-K or its website any changes to ethical handling of actual or apparent or waivers of any provisions of the code of ethics conflicts of interest between personal and relating to its principal executive officer or senior professional relationships; financial officers within five business days of the · full, fair, accurate, timely, and understandable amendment or waiver. (Note that the website disclosure in reports and documents that the option may only be used if the company has This document is published by Lowenstein Sandler PC to keep clients and friends informed about current issues. It is intended to provide general information only. L Roseland, New Jersey Telephone 973.597.2500 65 Livingston Avenue www.lowenstein.com 07068-1791 Fax 973.597.2400

G previously indicated in its most recently filed the SEC has expanded the definition of who will annual report that it may use that method.) qualify as an audit committee financial expert. Effective Date The final rules define an audit committee Companies will be required to provide the financial expert as a person who has all of the disclosures relating to their code of ethics in annual following attributes: · reports for fiscal years ending on or after July 15, an understanding of generally accepted 2003. accounting principles and financial statements; Audit Committee Financial Experts · the ability to assess the general application of Under Section 407 of the Act, the SEC issued such principles in connection with the final rules requiring public companies to disclose in accounting for estimates, accruals and their annual reports whether or not they have at reserves (as opposed to the proposed least one “audit committee financial expert” requirement to have experience applying such serving on their audit committee, and if they do, principals in connection with estimates, the name of at least one such person (it is accruals and reserves that are generally permissible, but not necessary, to name more than comparable to those in the company’s one person), and whether or not they are financial statements); independent from management 1 . Although · experience preparing, auditing, analyzing or companies are not required by the rules to have evaluating financial statements that present a audit committee financial experts, companies that breadth and level of complexity of accounting do not will be required to publicly disclose that they issues that are generally comparable to the do not and explain why not. The SEC rules state breadth and complexity of issues that can that it would not be appropriate for a company to reasonably be expected to be raised by the state that it does not have an audit committee company’s financial statements, or experience financial expert if its board has determined that actively supervising one or more persons such an expert does in fact serve on the audit engaged in such activities (this test has been committee. broadened to include experience other than “preparing or auditing”); Definition of “Audit Committee Financial Expert” · The definition of “financial expert,” now an understanding of internal controls and referred to by the SEC as “audit committee procedures for financial reporting (this test financial expert,” has been the subject of was broadened from “experience with internal substantial controversy since the SEC’s initial rule controls and procedures”); and proposal release on October 22, 2002. As a result,

G · · an understanding of audit committee a person who is determined to be an audit functions. committee financial expert will not be deemed an “expert” for any purpose as a result of being Under the final rules, a person must have designated or identified as an audit committee acquired such attributes through any one or more financial expert; of the following: · · education and experience as a principal the designation or identification of a person as financial officer, principal accounting officer, an audit committee financial expert does not controller, public accountant or auditor or impose on such person any duties, obligations experience in one or more positions that or liability that are greater than the duties, involve the performance of similar functions; obligations and liability imposed on such · person as a member of the audit committee experience actively supervising a principal and board of directors in the absence of such financial officer, principal accounting officer, designation or identification; and controller, public accountant, auditor or · person performing similar functions; the designation or identification of a person as · an audit committee financial expert does not experience overseeing or assessing the affect the duties, obligations or liability of any performance of companies or public other member of the audit committee or board accountants with respect to the preparation, of directors. auditing or evaluation of financial statements (this option was not included in the proposed rules); or Effective Date · Companies other than small business issuers other relevant experience. must comply with the audit committee financial expert disclosure requirements in their annual Safe Harbor reports for fiscal years ending on or after July 15, Following the SEC’s release of its proposed 2003. Small business issuers will be required to rules, some parties expressed concern that the comply for fiscal years ending on or after December identification of a person as a “financial expert” 15, 2003. would increase his or her potential liability as an audit committee member. In response to those New Item 12 of Form 8-K concerns, the final rules contain a safe harbor that The SEC amended Form 8-K by adding a new provides: Item 12 entitled “Disclosure of Results of Operations and Financial Condition.” Item 12 requires a reporting company to furnish to the SEC a Form 8-K within five (5) business days of any