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Putting The Sarbanes-Oxley Pieces
Together — What You Need to Know Now
Brian LaneRonald O. MuellerAmy L. GoodmanStephen I. Glover
Gregory T. Davidson
Gibson, Dunn & Crutcher LLP©
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Confirmation # 1464
Brian LaneA corporate partner in the Washington, D.C. office, Mr. Lane focuses his practice on securities regulation and disclosure issues. He served from 1996 to 2000 as Director of the Division of Corporation Finance of the SEC, where he was the principal architect of important regulatory developments involving financial reporting and accounting issues as well as many other areas. During his 16 years with the SEC, he also served as counsel to Chairman Arthur Levitt, counsel to Commissioner Richard Roberts, and staff attorney with the Corporation Finance and Market Regulation Divisions.
Contact Information:
(202) 887-3646 — direct dial
Ronald O. MuellerA corporate partner in Gibson Dunn’s Washington, D.C. Office, Mr. Mueller has extensive experience in the corporate securities area with an emphasis on proxy and disclosure issues, corporate governance, executive compensation and corporate transactions. Mr. Mueller served as legal counsel to SEC Commissioner Edward H. Fleischman from 1989 to 1991, during which time the SEC comprehensively revised the section 16 reporting rules. He is a member of the ABA's Committee on Federal Regulation of Securities, and has written numerous articles and spoken extensively on executive compensation issues and the SEC’s reporting and disclosure requirements.
Contact Information:(202) 955-8671 — direct [email protected]
Amy L. GoodmanBased in Washington, D.C., Ms. Goodman previously served with the SEC for 11 years, holding several positions with the Division of Corporation Finance, including Associate Director (EDGAR), Deputy Associate Director, Assistant Chief of the Office of Disclosure Policy, and Chief of the Task Force on Corporate Accountability. She also served as Legal Assistant and Special Counsel to SEC Chairman Harold Williams and as a staff attorney in the SEC's Division of Investment Management. Ms. Goodman has been an editor and author of books and newsletters on securities and corporate law topics, including Editor-in-Chief of Insights: The Corporate and Securities Law Advisor, The Investment Lawyer, and The Corporate Governance Advisor.
Contact Information:(202) 955-8653 — direct [email protected]
Stephen I. GloverA corporate partner in Washington, D.C., Mr. Glover is a former member and has served as co-chair of the Steering Committee for the D.C. Bar Association's Corporation, Finance and Securities Law Section. He is a D.C. representative to the New York Tribar Opinion Committee, a member of the advisory board of BNA's Mergers & Acquisitions Law Report and a member of the editorial boards of The M&A Lawyer and The Start-Up and Emerging Companies Strategist. He is a member of the Securities Regulation Committee, the Negotiated Acquisitions Committee and the Venture Capital Committee of the American Bar Association's Business Law Section. He is chair of the Venture Capital Committee's Government Relations Task Force.
Contact Information:(202) 955-8593 — direct [email protected]
Gregory T. DavidsonA corporate partner in the firm’s Palo Alto office, Mr. Davidson's practice includes extensive experience in advising public companies regarding securities laws matters, including disclosure and periodic reporting obligations, issues relating to securities offerings and interactions with the SEC. Mr. Davidson also has extensive experience in corporate governance matters and mergers and acquisitions on behalf of public and private companies. He is a member of the Committee on Federal Regulation of Securities of the American Bar Association Section of Business Law.
Contact Information:
(650) 849-5350 — direct dial
Overview of PresentationCopies of the slides will be emailed to attendees after the presentation
I. Disclosure Earnings Releases Non-GAAP Financial Measures MD&A Certification/Disclosure Controls & Procedures/Item 307 Disclosure
II. Relationship with Outside Auditor Retaining, Supervising and Managing Relationship with Outside Auditor Non-audit Services — Procedures For Pre-approval and Disclosure
III. Boards and Committees
IV. Other Governance Issues Codes of Ethics Lawyer Professional Responsibility
I. Disclosure Earnings Release
Earnings Release New Earnings Release Filing Requirement.
Earnings releases regarding a completed fiscal quarter or a completed fiscal year must be furnished on Form 8-K.
Timing: must be furnished to the SEC within five business days after release is disseminated.
Requirement is set forth in new Item 12 on Form 8-K.
Requirement effective beginning March 23, 2003.
Filing Information vs. Furnishing Information: Liability and Incorporation by Reference
Information provided under Item 12 of Form 8-K will be treated as “furnished” rather than “filed” for Exchange Act and Securities Act purposes.
This means that the company will not have liability for the information under Section 18 of the Exchange Act.
But the company will still have liability under Rule 10b-5.
The fact that the information is “furnished” rather than “filed” also means that the earnings release will not be automatically incorporated by reference in a registration statement, proxy statement or other report, unless the company expressly so states. This means you don't have automatic Securities Act liability.
What Is and Isn’t Covered by Item 12?
You must furnish if you make a public announcement or release of material non-public information regarding results of operations or financial condition for a completed quarterly or annual fiscal period.
You don’t have to furnish again if you repeat the same information in subsequent announcements. For example, if you mail quarterly reports to stockholders that contain the same information, you don’t need to file the report.
You do need to furnish again if you amend or supplement the previous announcement in material ways.
You don’t have to furnish announcements of earnings estimates for future or ongoing fiscal periods, unless these estimates are included as part of the earnings release.
What Does the Rule Say About Earnings Calls and Similar Announcements
of Earnings Information? If you disclose the information orally, telephonically, or by broadcast or webcast, you don't need to furnish if:
the disclosure occurs within 48 hours after related written release that has already been furnished on Form 8-K;
the presentation is broadly accessible to the public;
the financial and statistical information is made available on the registrant's website; and
the presentation was announced by a widely disseminated press release that included information on how to access the information.
What Does This Mean?
If you are doing an earnings call, you should file an 8-K in advance, and make sure that the other requirements regarding announcement and availability of the information are satisfied.
Good news: many companies are already doing this as part of their regular procedures.
Relationship of New Filing Requirement to Regulation FD
Regulation FD provides that if you disclose material nonpublic information to specified persons, you must simultaneously disclose to the public generally.
Companies can satisfy the Regulation FD disclosure requirement by filing a Form 8-K. The rules provide that you can furnish the information under Item 9. This is not the only way, however. Other forms of public dissemination also work.
Regulation FD, Cont.
Principal differences between Regulation FD and new earnings release filing requirements relate to timing and form of disclosure. Earnings release rules require filing in 5 business days; Regulation FD requires immediate disclosure. Earnings release rules require filing on 8-K; Regulation FD permits other forms of disclosure.
Suggestion for earnings call procedures: file furnish earnings release on Form 8-K in advance of call. Satisfy other earnings release rules regarding telephonic announcements. Then you are OK under both rules.
I. Disclosure Earnings Release Non-GAAP Financial Measures
Non-GAAP Financial Measures
New Regulation G Pro-forma is defined as including or excluding amounts from comparable
GAAP Measures (e.g. EBITA, “core earnings”) Press Releases
Must include GAAP number Prominence Reconcile
In a Filing Must include reason why Non-GAAP measure is useful
Prohibited No Non-GAAP in financials or notes Omitting items identified as “non-recurring” when there was a similar item
within the two previous years or is likely to be within the succeeding two years
Liquidity measures that exclude cash settled charges Giving non-GAAP items titles that make them sound like GAAP
I. Disclosure Earnings Release Non-GAAP Financial Measures MD&A
Recent Guidance on MD&A Both before and after SOX, the SEC has focused extensively on
MD&A
January 2002 interpretive release focuses on MD&A discussion of liquidity and capital resources, including off-balance sheet financing, trading activities involving non-exchange traded contracts accounted for at fair value, and transactions with related parties
December 2001 release on “critical accounting policies,” followed by May 2002 release proposing rules requiring a new section in MD&A discussing “critical accounting estimates”
January 2003 final rules on off-balance sheet financing
Recent Guidance On MD&A, Continued
Preparing MD&A that will satisfy the rules and SEC staff is more difficult than ever
The rulemaking is not yet over—the staff is still working on the final critical accounting estimates rules
Some commissioners have recently expressed concern about making MD&A disclosure too voluminous and burdensome
New Rules on Off-Balance Sheet Arrangements
Companies must expand discussion of off-balance sheet arrangements. The final rule defines these arrangements more narrowly than the proposed rule.
The company must discuss the transaction if it is “reasonably likely” to have a material effect on the company. The staff did not adopt the “more than highly remote” standard it originally proposed, which would have been more demanding.
MD&A must include tabular disclosure of contractual obligations. The table must disclose the nature and the amount of the obligation.
The rules apply to filings that include financial statements for fiscal years ending on or after June 15, 2003.
What Is Covered
Covered Off-balance Sheet Arrangements Guarantee contracts Retained interest in assets transferred to an unconsolidated entity Obligations under certain derivative instruments Obligations arising out of variable interests
Contractual Obligations Table Must Identify: Long term debt obligations Capital lease obligations Operating lease obligations Purchase obligations Other long term liabilities on balance sheet
Other Liquidity and Capital Resources Issues
Discuss short-term liquidity needs.
How will short-term liquidity needs be satisfied? Identify the sources of short term liquidity.
What are the circumstances that are reasonably likely to affect sources of short term funding?
Remember that the SEC staff takes the view that “reasonably likely” is a lower threshold than “more likely than not.”
Related Party Transactions
The January 2002 interpretive release discussed these transactions. The focus has only intensified since then.
The release makes the point that discussion of related party transactions may be appropriate even if transaction is not covered by Item 404 of Regulation S-K.
Does a party have a relationship with the company that enables the company to negotiate transactions that would not be available in true arms' length negotiations?
Critical Accounting Estimates
Proposal: companies must identify “critical accounting estimates.”
A critical accounting estimate is an accounting estimate that is highly uncertain at the time made, and different estimates that the company reasonably could have used would have had a material impact on the financial statements.
The proposed rules would require a discussion of the critical estimates, and a quantitative sensitivity analysis showing how financial statements and financial performance would have changed if the estimates had changed. They would also require a discussion of any changes in the estimates.
I. Disclosure Earnings Release Non-GAAP Financial Measures MD&A Certification/Disclosure Controls
& Procedures/Item 307 Disclosures
CEO/CFO Certification Under Section 302 Of The Act
He/She has reviewed the report.
Based on his or her knowledge, the report does not contain any untrue statement of material fact or omit to state a material fact necessary in order to the statement made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by the report.
Based on his or her knowledge, the financial statements, and other financial information included in the report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in the report. (emphasis added.)
He or she and the other certifying officers: (a) are responsible for establishing and maintaining disclosure controls and procedures; (b) have designed such disclosure controls and procedures to ensure that material information is made know to them, particularly during the period in which the periodic report is being prepared; (c) have evaluated the effectiveness of the disclosure controls and procedures as of a date within 90 days prior to the filing date of the report; and (d) have presented i the report their conclusions about the effectiveness of the disclosure controls and procedures based on the required evaluation as of the date.
CEO/CFO Certification Under Section 302 Of The Act, Cont.
He or she and the other certifying officers have disclosed to the auditors and the audit committee: (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the company’s ability to record, process, summarize and report financial data and have identified for the auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the internal controls.
He or she and the other certifying officers have indicated in the report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
CEO/CFO Certifications Under Section 906 of the Act
Requires the CEO/CFO of public companies to submit a statement with certain filings certifying that the filing “fully complies” with the Exchange Act reporting requirements and “fairly presents” in all materials respects the company’s financial condition and results of operations.
Applies to each Form 10-K and Form 10-Q filed by a company subject to Section 13(a) or 15(d) of the Exchange Act, as well as to Forms 20-F filed by foreign issuers or any 11-K filed by an employee benefit plan.
Section 906 certifications are not required to be included with8-K and 6-K or with proxy statements.
Certification/Disclosure Controls & Procedures
You already have procedures
Create disclosure committee
Review and document Your disclosure controls and procedures
Flow down certification
Procedural Steps
Complete a documentation file Involve GC to protect privilege Discuss the disclosure committee’s findings with the principal
officers Meet with the outside auditors Meet with the audit committee and the board Complete final evaluation of disclosure controls and procedures Sign-off on disclosure in the periodic report and execute
principal officer certifications
II. Relationship with Outside Auditors
Relationship with Outside Auditors
Intent of SOX and rules is clear:
Make sure auditors act independently and don't align themselves too closely with management
Audit committee plays a critical role in serving as the check and balance on a company's financial reporting system
Retention of Outside Auditors, Etc.
Section 301 of SOX requires audit committees to: Have independent members Be “directly responsible,” in its capacity as a committee of the
board, for the appointment, compensation and oversight of the work of the outside auditor
Put in place procedures for the submission of complaints and concerns about auditing and accounting matters
Have the authority to engage outside advisors and to compensate both the advisors and the outside auditor
Be appropriately funded by the issuer
Rules direct the national securities exchanges/associations to refuse listing of issuers whose audit committees don't comply with the requirements
Proposed rules – not yet adopted; comment period still open (Feb. 18)
Retention and Oversight of Outside Auditors
The audit committee must be directly responsible for the appointment, compensation, retention and oversight of the work of any outside auditor engaged (including resolution of disagreements between management and the auditor regarding financial reporting) for the purpose of preparing or issuing an audit report or related work or performing other audit, review or attest services for the issuer, and each such outside auditor must report directly to the audit committee
Includes power not to retain, or to terminate, the outside auditor
Includes authority to approve all engagement fees and terms
Not in conflict with any charter document or statutory (e.g., state or foreign) provisions, such as shareholder selection of the auditor
Engagement of Advisors and Funding
Each audit committee must have the authority to engage independent counsel and other advisors, as it determines necessary to carry out its duties
Needed to perform its role effectively
Each issuer must provide appropriate funding for the audit committee
Don't want management to have discretion regarding funding
Non-Audit Services
Prohibited Activities
Section 201 of SOX prohibited accountants who audit an issuer from contemporaneously providing 9 specific types of non-audit services, plus any other service that the Accounting Oversight Board determines is impermissible
Any other non-audit service can be provided only if pre-approved by the audit committee
Non-Audit Services
Audit Committee Pre-Approval
The audit committee must pre-approve all allowable services by the company's auditors
May establish policies and procedures for pre-approval provided they are: Detailed as to the particular service The audit committee is informed of each service Not a delegation of responsibilities to management Designed to safeguard the continued independence of the auditors
Appointment of Designated Representatives
Disclosure of Pre-Approval Procedures in proxy statement/annual report
Limited Exceptions—de minimus; unanticipated connection
Companies should put these in place now if they haven’t already
Non-Audit Services
Bookkeeping or other services related to the accounting records or financial statements
Financial information systems design and implementation
Appraisal or valuation services, fairness opinions or contribution-in-kind reports
Actuarial services
Internal audit outsourcing services
Management functions or human resources
Broker or dealer, investment adviser, or investment banking services
Legal services
Expert services unrelated to the audit
Any other service that the Accounting Oversight Board determines is impermissible
Non-Audit Services
Tax Services
Section 201 specifically states that an “accounting firm may engage in any non-audit service, including tax services, that is not described [above]...” after audit committee approval
The SEC’s proposed rule appeared to prohibit tax services
Significant discussion and comment about whether tax services should be allowed
Under the final rules, accountants will be able to continue to provide tax compliance, tax planning and tax advice to audit clients, subject to pre-approval requirements
However, the rules prohibit auditors from representing an audit client in tax court or other situations involving public advocacy
Close scrutiny by audit committees
Disclosure of Audit and Non-Audit Services
Have to disclose in periodic reports all non-audit services approved by the audit committee
Also have to disclose in the proxy statement/annual report fees paid to the independent accountant during the past 2 fiscal years for: Audit services Audit-related services Tax services Other services
Disclosure of the audit committee's pre-approval policies and procedures and the percent of fees paid pursuant to the de minimus exception by category
Audit Partner Rotation
Lead partner and concurring/reviewing partner must rotate after 5 years and be subject to a 5-year "time out" period after rotation
Certain other significant “audit partners” will have a 7-year rotation period with a 2-year time out period
“Audit partner”: A partner who is a member of the engagement team who has
responsibility for decision-making on significant auditing, accounting and reporting matters that affect the financial statements or who maintains regular contact with management and the audit committee.
Includes the lead partner on audits of 20% subsidiaries Does not include technical or industry-specific partners
Limits on Compensation
Accountant is not independent if, at any time during the audit and professional engagement period, any audit partner earns or receives compensation based on that partner procuring engagements with the client to provide any services other than audit, review or attest services.
Cooling Off Period
Section 206 of SOX set a 1-year cooling off period before a member of the audit engagement team can accept employment in certain, designated positions with a company.
Under the rules, if a member of management involved in overseeing financial reporting matters for an issuer was the lead partner, concurring partner or any other member of the audit engagement team who provided more than 10 hours of audit review or attest services (with certain exceptions) within 1 year preceding the commencement of the audit of the current year’s financial statements, then the accounting firm is not independent. Calculation of time period – could effectively be 23-month period
Communication with Audit Committee
Accounting firm has to report, prior to the filing of its audit report with the SEC, to the audit committee:
All critical accounting policies and practices used by the issuer
All material alternative accounting treatments of financial information within GAAP that have been discussed with management, including the ramifications of the use of such alternative treatments and disclosures and the treatment preferred by the accounting firm
Other material written communications between the accounting firm and management
Improper Influence of Auditors
Section 303 of SOX prohibits “any officer or director of an issuer, or any other person acting under the direction thereof, to take any action to fraudulently influence, coerce, manipulate, or mislead any...accountant engaged in the performance of an audit of the financial statements of that issuer for the purpose of rendering such financial statements materially misleading.”
Proposed rules – not final Rule mirrors Section 303 but instead of "for the purpose of...” uses
the words “knew or was unreasonable in not knowing that such action could, if successful, result in rendering financial statements materially misleading”
No Scienter/Intent Test? Persons acting "at the behest or on behalf of” officers or directors v.
“under the direction” Specific examples of improper action or influence
Additional Practical Considerations — What
You Should Be Doing
Effective dates
Review and amend (as necessary) audit committee charters
Resolving disputes with auditors
What if there is an accounting mistake?
III. Boards and Committees
The Regulatory Landscape
SOX
Corporate governance provisions primarily impact audit committees
New York Stock Exchange and NASDAQ Proposed Listing Standards
Boards of directors
Audit committees and auditor independence
Nominating/corporate governance committees
Compensation committees
The Board of DirectorsNYSE
Majority of “independent” directors “No material relationship” with company Five year “cooling-off” period for employees of company and
outside auditor (includes immediate family members)
Board must determine independence of each director Board may adopt categorical independence standards
NASDAQ Objective independence standards
Look back three years Greater of 5% or $200,000 for business relationships
Board Committees — NYSE
Structure and responsibilities Audit, compensation, nominating/corporate governance committees
required Composed entirely of independent directors
Charters — Key committees must have charters that: Address purpose and responsibilities enumerated by NYSE Provide for annual performance evaluation
Outside advisors Audit committee must have authority to retain advisors without
Board approval Compensation, nominating/corporate governance committees
should have sole authority to retain advisors
Board Committees — NASDAQ
Structure and responsibilities Audit committee required Compensation and nominating/corporate governance committees
not required, but Director nominations and compensation of Section 16 officers
must be approved by: An independent committee or
“Independent” committee may have 1 non-independent director
A majority of the independent directors
Charters Audit committee must have charter that addresses responsibilities
mandated by SOX
The Audit Committee
Qualifications mandated by SOX:
Members may not:
Receive fees other than for serving as a director
Direct and indirect payments
Also prohibited under NYSE proposals
Be an “affiliated person” of company or its subsidiaries
Audit committee financial expert
Disclosure
Definition
Safe harbor
The Audit Committee
Responsibilities mandated by SOX:
Relationship with outside auditor SOX — “Directly responsible” for appointment,
compensation and oversight NYSE — Sole authority to hire and fire, including to
approve all audit engagement fees and terms
Pre-approve all audit and permissible non-audit services
Authority to engage and compensate outside advisors
Establish procedures for receiving complaints about auditing and accounting matters
The Audit CommitteeNYSE proposals require that charter address specific responsibilities,
including:
Discussing financial statements with management and outside auditor, including MD&A
Discussing company policies on earnings releases, financial information and earnings guidance provided to analysts and rating agencies
Holding periodic private sessions with management, internal auditors and outside auditor
Discussing policies on risk assessment and risk management
Setting hiring policies for former employees of outside auditor
NASDAQ: Charter must cover items mandated by SOX
The Nominating/Corporate Governance Committee
NYSE proposals require that charter address:
Committee’s purpose, which must be to:
Identify individuals qualified to become Board members, and select (or recommend that Board select) director nominees
Develop and recommend corporate governance principles to Board
Committee’s responsibilities, which must reflect:
Board criteria for selecting new directors
Oversight of Board and management evaluations
The Nominating/Corporate Governance Committee
Optional responsibilities that many companies are including in their charters:
Make recommendations to the Board regarding the structure, composition and functioning of the Board and its committees
Review and recommend retirement and other tenure policies for directors
Review other public company directorships held by or offered to directors and senior officers
Review and assess the channels through which the Board receives information and the quality and timeliness of information received
Review and recommend changes to director compensation
May be done in whole or in part by compensation committee at some companies
The Compensation CommitteeNYSE proposals require that charter address:
Committee’s purpose, which must be to:
Discharge Board responsibilities relating to compensation of executives
Produce annual report on executive compensation for inclusion in proxy statement
Committee’s responsibilities, which must be to:
Review and approve corporate goals and objectives relevant to CEO compensation, evaluate CEO performance in light of objectives, and set CEO compensation based on evaluation
Make recommendations to Board about incentive-compensation and equity-based plans
The Compensation CommitteeOptional responsibilities that many companies are including in their
charters:
Oversee the company’s overall compensation structure, policies and programs and assess whether that structure establishes appropriate incentives for management and employees
Monitor compliance by officers and directors with the company’s stock ownership guidelines
Review and recommend employment agreements and severance arrangements for executives
Review succession plans relating to the CEO and other senior officers
May be done in whole or in part by nominating/corporate governance committee at some companies
IV. Other Governance Issues
Codes of EthicsCodes of ethics for senior financial officers (SOX)
Also covers principal executive officers under SEC rules Definition Disclosure
Whether company has code Alternatives
File a copy of code with 10-K Post on website Provide copies on request
Changes or waivers on 8-K or website Effective Dates
July 15, 2003 December 15, 2003 (smaller issues)
NYSE-listed companies must adopt and post on their websites code(s) of business conduct and ethics for:
Employees Officers Directors
NASDAQ-listed companies must adopt a code of conduct and make it public. It must meet the SOX and SEC rule requirements and provide for an enforcement mechanism.
Codes of Ethics, Continued
Under the NYSE proposals, a company’s code of conduct must: require that any waivers of the code for directors or executive officers be
made only by the board or a board committee and that these waivers be promptly disclosed to stockholders; and
contain compliance standards and procedures that provide for prompt and consistent action against violations
At a minimum, the code of conduct should address: conflicts of interest corporate opportunities confidentiality fair dealing protection and proper use of company assets compliance with laws, rules and regulations, including laws on insider
trading encouraging the reporting illegal or unethical behavior
New Standards of Professional Conduct For Attorneys
Adopted January 23, 2003
Rules implement Section 307 of the SOX
Effective 180 days after publication in the Federal Register (late July or early August)
Additional 60-day comment period for proposed “noisy withdrawal” requirements
What Will The Rules Require Attorneys To Do?
An attorney must report evidence of a material violation by an issuer or its agent “up the ladder” to the issuer's chief legal counsel or the chief legal officer and the CEO (or to the Qualified Legal Compliance Committee, if the issuer has created one).
If the chief counsel or CEO does not “respond appropriately” to the evidence, the attorney must report the evidence to the audit committee, another independent committee or the full board of directors.
What Is A Qualified Legal Compliance Committee?
Consists of at least one member of the issuer's audit committee and two or more additional, independent directors
May be created by the issuer as an alternative procedure for reporting evidence of material violations
Responsible for receiving and reviewing evidence of material violations, and recommending appropriate issuer responses
What Will The Rules Permit Attorneys To Do?
An attorney may, without the consent of the issuer-client, reveal confidential information related to the representation to the extent that the attorney reasonably believes necessary:
To prevent the issuer from committing a material violation likely to cause substantial injury to the financial interests or property of the issuer or investors;
To prevent the issuer from committing an illegal act; or
To rectify the consequences of a material violation or illegal act in which the attorney's services have been used.
Note possible conflict with state law obligations.
To Whom Will The Rules Apply?
The rules will apply to attorneys “appearing and practicing” before the SEC in the representation of issuers, but the proposed definition of “appearing and practicing” has been narrowed significantly.
Under the final rules, a covered attorney is one who provides legal services to an issuer and has an attorney-client relationship with that issuer. This includes the issuer's in-house attorneys and its outside counsel.
If the representation involves preparing or reviewing documents to be filed with or submitted to the SEC, the attorney must have notice that such documents will be filed with or submitted to the SEC.
What Evidence Will Trigger An
Attorney’s Reporting Obligations?
The rules contain an objective standard.
An attorney’s reporting obligation will be triggered only if he or she has “credible evidence” based upon which it would be unreasonable for a prudent and competent attorney not to conclude that it is “reasonably likely” that a material violation has occurred, is occurring or is about to occur.
What Happened To The Proposed “Noisy Withdrawal” Requirements?
The proposed rules would have required an attorney to withdraw and report his or her withdrawal to the SEC if the board failed to respond appropriately to evidence of a material violation.
The SEC received numerous comments from attorneys, issuers and others concerned about the impact these provisions could have on the attorney-client relationship.
In response to comments, the SEC has revised the noisy withdrawal provisions and will extend the comment period for an additional 60 days.
The revised proposal still would require attorney withdrawal, but would require the issuer (rather than the attorney) to disclose publicly the attorney's withdrawal.
Questions?
Thank You For Attending
Brian Lane Ronald O. Mueller Amy L. Goodman Stephen I. Glover Gregory T. Davidson
