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January 22, 2003CORPORATE GOVERNANCE ALERTLISTED COMPANY AUDIT COMMITTEE STANDARDS -SEC PROPOSES RULE IMPLEMENTING SECTION 301OF THE SARBANES-OXLEY ACTOn January 8, 2003, the Securities and Exchange Commission(SEC) proposed a new rule, as directed by Section 301 of theSarbanes-Oxley Act of 2002 (the Act), directing the nationalsecurities exchanges and national securities regulatory associa-tions (SROs) to prohibit the initial or continued listing of secu-rities of any issuer that is not in compliance with the auditcommittee requirements established by the Act and the pro-posed rule. The requirements of the proposed rule relate to:• the independence of audit committee members the audit committee’s responsibility to select and oversee the issuer’s inde-pendent accountant procedures for handling complaints regarding the issuer’s accounting prac-tices the authority of the audit committee to engage advisers funding for the independent auditor and any outside advisers engaged by theaudit committee. Under the Act, the proposed rule must become effective by April 26, 2003.However, the new requirements would need to be put in place by the SROs nolater than the first anniversary of the publication of the SEC’s final rule in theFederal Register. The SROs also must impose an obligation on their listed compa-nies that requires the listed companies to provide the SRO with notice promptlyafter an executive officer becomes aware of any material ...

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• Publié par: Soeg
• Nombre de lectures: 7
• Langue: English

Extrait

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January 22, 2003

This document is distributed for informational use only; it does not constitute legal advice and should not be used as such.

© 2003 Akin Gump Strauss Hauer & Feld LLP

LISTED COMPANY AUDIT COMMITTEE STANDARDS

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SEC PROPOSES RULE IMPLEMENTING SECTION 301

OF THE SARBANES-OXLEY ACT

On January 8, 2003, the Securities and Exchange Commission

(SEC) proposed a new rule, as directed by Section 301 of the

Sarbanes-Oxley Act of 2002 (the Act), directing the national

securities exchanges and national securities regulatory associa-

tions (SROs) to prohibit the initial or continued listing of secu-

rities of any issuer that is not in compliance with the audit

committee requirements established by the Act and the pro-

posed rule.

The requirements of the proposed rule relate to:

• the independence of audit committee members

• the audit committee’s responsibility to select and oversee the issuer’s inde-

pendent accountant

• procedures for handling complaints regarding the issuer’s accounting prac-

tices

• the authority of the audit committee to engage advisers

• funding for the independent auditor and any outside advisers engaged by the

audit committee.

Under the Act, the proposed rule must become effective by April 26, 2003.

However, the new requirements would need to be put in place by the SROs no

later than the first anniversary of the publication of the SEC’s final rule in the

Federal Register

.

The SROs also must impose an obligation on their listed compa-

nies that requires the listed companies to provide the SRO with notice promptly

after an executive officer becomes aware of any material noncompliance by the

issuer with the requirements of the proposed rule.

The provisions of the new rule

are applicable to all companies

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foreign or domestic

-

that have securities (e.g.,

CORPORATE GOVERNANCE ALERT

equity, debt or derivatives) listed on a national securities exchange or an automated inter-dealer quo-

tation system.

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Requirements of the new rule will not, however, be imposed on other reporting compa-

nies registered with the SEC under Section 13(a) or 15(d) of the Exchange Act.

AUDIT COMMITTEE INDEPENDENCE

The new rule (Exchange Act Rule 10A-3) requires each audit committee member to be a member of

the issuer’s board of directors and be “independent.”

The rule states that to be considered “independ-

ent,” a committee member may not, except in his or her capacity as a board or committee member, (i)

accept, directly or indirectly, any consulting, advisory or other compensatory fee from the issuer or (ii)

be an affiliated person of the issuer or any subsidiary thereof.

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Nevertheless, if an audit committee

member also is a shareholder of the issuer, the receipt of any payments made by the issuer to all

shareholders generally (e.g., dividends) would not result in such member being deemed non-independ-

ent.

The SEC clarified that indirect compensatory fees include payments to spouses, minor

children/stepchildren or children/stepchildren sharing a home with a committee member, as well as

payments to an entity in which an audit committee member is a partner, member, principal or the

like, and which entity provides accounting, consulting, legal, investment banking, financial or other

advisory services or similar services to the issuer.

In addition, the SEC stated that it intends to define the terms “affiliate” and “affiliated person” con-

sistent with its other definitions of those terms under the securities laws, such as rule 405 under the

Securities Act, with the caveat that it will recognize a safe harbor for purposes of the new rule.

Under

the new rule, an affiliate of, or a person affiliated with, a specific person will mean “a person that

directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under com-

mon control with, such issuer.”

The term “control” will be defined consistently with other uses of such

term under the securities laws, i.e., “the possession, direct or indirect, of the power to direct or cause

the direction of the management and policies of a person, whether through the ownership of voting

securities, by contract, or otherwise.”

Under the safe harbor of the proposed rule, a person who is not

an executive officer or director of the issuer, or the beneficial shareholder, directly or indirectly, of

more than 10 percent of the issuer’s equity securities, would be deemed not to control the issuer, and

thus would not be an “affiliate” of the issuer.

Audit committee members who do not fall within the scope of the safe harbor can still rely on a facts

and circumstances analysis if such members believe that they do not control the issuer.

However, for

practical purposes, the parameters established by the proposed safe harbor are likely to lead many

public companies to shy away from appointing to the audit committee shareholders owning more than

10 percent of the issuer’s securities.

This document is distributed for informational use only; it does not constitute legal advice and should not be used as such.

© 2003 Akin Gump Strauss Hauer & Feld LLP

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As proposed, issuers that have securities quoted on Nasdaq will be subject to the new rule, but issuers with securities

quoted on the OTC Bulletin Board, the Pink Sheets and the Yellow Sheets will not be subject to the requirements of the

proposed rule.

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This is the proposed rule for non-investment company issuers.

The SEC's proposed rule sets forth separate and distinct

independence requirements for investment company issuers.

Provisions of the proposed rule applicable to investment

company issuers are not addressed in this alert.

Although the SEC’s proposed rule sets forth specific requirements with respect to audit committee

independence, it is not the only directive that public companies will need to be concerned about.

Some

SROs (including the New York Stock Exchange and Nasdaq) have already proposed separate, and in

some cases more rigorous, listing standards for independent directors and audit committee members

that listed companies will need to understand and comply with, in addition to the SEC’s new rule.

(The SEC has yet to act on many of the proposed listing standards submitted to it by the New York

Stock Exchange and Nasdaq, and noted in the release that such listing standards are currently under

consideration.

For a summary of the proposed listing standards of the New York Stock Exchange and

Nasdaq, see our alerts at www.akingump.com/docs/publication/468.pdf and

www.akingump.com/docs/publication/470.pdf, respectively.)

Therefore, compliance with the proposed

rule is required, but

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depending upon the listing standards adopted by the marketplace on which the

issuer’s securities are traded

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may not be totally sufficient.

For foreign private issuers required by home country law to have a two-tier board, i.e., a management

board and a supervisory or non-management board, the requirements of the proposed rule will apply

to the issuers’ supervisory or non-management board.

The supervisory board may elect to establish a

separate audit committee of its members, or the entire supervisory board could function as the issuer’s

audit committee, provided that all members of such supervisory board meet the independence require-

ments of the proposed rule.

RESPONSIBILITIES WITH RESPECT TO OUTSIDE AUDITORS

One of the objectives of the new rule is to enhance the independence of the audit function, thereby fur-

thering the objectivity of financial reporting.

The SEC believes that the audit process is subject to

compromise when the outside auditors perceive that they are beholden to management rather than to

serve under the direction and at the pleasure of the issuer’s board or audit committee.

The new rule

mandates that audit committees have responsibility and authority for the appointment, compensation,

retention and oversight of the outside auditor.

The committee’s oversight responsibilities would

include having the authority to approve all audit engagement fees and terms, along with all significant

non-audit engagements.

In addition, the outside auditor must report directly to the audit committee.

The SEC indicated that the requirement of having the audit committee retain the outside auditor

should not conflict with, and would not be affected by, any governing law, contract or home country

requirement that requires shareholders to ultimately elect, approve or ratify the selection of the

issuer’s outside auditor.

The SEC did note, however, that if generally the board recommended or nom-

inated the outside auditor to the issuer’s shareholders, it should delegate the responsibility for making

such recommendation or nomination to the audit committee.

Even in situations where the board of a

foreign private issuer is restricted by law from delegating this responsibility, the SEC contemplates

that a board could provide the audit committee with advisory powers (including the power to submit

nominations to the board) with respect to selection of the outside auditor.

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This document is distributed for informational use only; it does not constitute legal advice and should not be used as such.

© 2003 Akin Gump Strauss Hauer & Feld LLP

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PROCEDURES FOR HANDLING COMPLAINTS

In order to fulfill its responsibilities of enhancing the audit function, an audit committee must be pro-

vided with all material information regarding the issuer’s financial reporting.

By giving the audit

committee hiring and firing authority over the outside auditor and by requiring outside auditors to

report directly to the audit committee, the SEC has sought to remove any hurdles or disincentives

that the outside auditor may have about raising concerns with respect to an audit of the issuer.

In

addition, any impediments to the internal auditors voicing their concerns must also be addressed.

Under the proposed rule, SROs must require that audit committees establish procedures for:

• the receipt, retention and treatment of complaints received by the issuer regarding accounting,

internal accounting controls or auditing matters

• the confidential, anonymous submission by employees of the issuer of concerns regarding ques-

tionable accounting or auditing matters.

By requiring listed companies to establish formal procedures for handling such complaints, the SEC is

hopeful that audit committees will be alerted about potential problems before serious consequences

arise.

The SEC is not mandating specific procedures for audit committees to adopt.

Rather, it expects

each audit committee to develop procedures that work best for the issuer’s individual circumstances.

ADVISERS AND FUNDING

Under the proposed rule, each audit committee would need to be granted authority to engage its own

advisers, including accounting, legal and other advisers, as it deems necessary to carry out its duties.

In addition, each audit committee must have appropriate funding, as determined by the audit commit-

tee, for the payment of compensation to (i) any independent accounting firm performing any audit,

review or attest service for the issuer and (ii)

any advisers employed by the audit committee.

EXEMPTIONS

The SEC has used its authority under the Act to exempt from the independence requirements of the

new rule particular relationships, many of which are summarized below.

However, an issuer availing

itself of any specific exemption must disclose its reliance on the exemption and provide an assessment

of whether such reliance would materially adversely affect the ability of the audit committee to act

independently.

This disclosure must be included in the issuer’s annual report and in any proxy state-

ment or information statement provided to its shareholders.

Other than the limited exemptive

authority granted to the SEC, the Act does not contain any exemptive provision for exceptional and

limited circumstances (a provision that currently exists under several SRO rules).

Therefore, the

SEC’s new rule does not allow for any additional exemptions with respect to audit committees.

In

addition, the SEC has stated that it has no plans to entertain exemptions or waivers (or requests for

no-action letters) for particular relationships on a case-by-case basis.

Therefore, a listed company that

cannot comply with the requirements of the proposed rule and that does not fall within the scope of

one of the enumerated exemptions will be subject to delisting by the marketplace on which its securi-

ties are traded.

This document is distributed for informational use only; it does not constitute legal advice and should not be used as such.

© 2003 Akin Gump Strauss Hauer & Feld LLP

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Foreign Issuers

.

The SEC has proposed a handful of exemptions exclusively available to foreign pri-

vate issuers that have home country laws in conflict with or other corporate governance arrangements

that differ significantly from general practices among U.S. companies.

As proposed, the SROs would

have no ability to provide foreign private issuers that cannot avail themselves of an enumerated

exemption with an exemption from, or waiver of, the proposed requirements.

The exemptions avail-

able for foreign private issuers are briefly summarized as follows:

• Foreign private issuers incorporated in countries that require companies to have a

non-manage-

ment employee

sit on such companies’ audit committees will be permitted to retain such non-

management employees on their audit committees.

• Foreign private issuers with

controlling shareholders or shareholder groups

(i.e., those own-

ing more than 50 percent of the issuer’s voting securities) will be permitted to have audit commit-

tees in which one member is the controlling shareholder, or representative of a controlling share-

holder group, provided, however, that the member (i) cannot be an executive officer of the issuer,

(ii) can only have observer status on the committee with no voting rights, (iii) cannot chair the

audit committee and (iv) must meet the “no compensation” prong of the independence require-

ment.

• Foreign private issuers that are required to have a

governmental representative

on their audit

committees may have one audit committee member who is a representative or designee of the for-

eign government on the committee, provided that the representative or designee is not an execu-

tive officer of the issuer and meets the “no compensation” prong of the independence requirement.

• Foreign private issuers that have home country laws requiring such issuers to have a

board of

auditors or statutory auditor

(or similar body) separate from the issuer’s board of directors will

be exempt from the independence requirements of the proposed rule.

The issuers’ board of audi-

tors will, however, be required to fulfill the other requirements of the proposed rule, including

establishing procedures for handling complaints, having access to advisers and having adequate

funding to fulfill their duties.

The board of auditors would also, to the extent permitted by law,

need to have responsibility for the appointment and retention of the issuer’s outside auditors.

To

rely on this exemption, the issuer must have securities listed on an exchange outside of the United

States, the members of the board of auditors cannot be elected by management and no executive

officer can be a member of such body.

In addition, the issuer’s home country law must set forth

standards for such body to be independent from management and must provide for such body to

have oversight over the work of the issuer’s outside auditor.

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IPO Issuers

.

Issuers undertaking an initial public offering (IPO) would be permitted to have one

committee member exempt from the independence requirements for a period of 90 days from the date

the issuer’s registration statement is declared effective.

Parent/Subsidiary Ties

.

An audit committee member serving on the board of directors of both a list-

ed company and its direct or indirect consolidated majority-owned subsidiary (or who sits on the

boards of a listed subsidiary and its parent) would be exempt from the “affiliated person” requirement,

assuming that such person otherwise meets the independence requirements for both the parent and its

subsidiary.

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This document is distributed for informational use only; it does not constitute legal advice and should not be used as such.

© 2003 Akin Gump Strauss Hauer & Feld LLP

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This document is distributed for informational use only; it does not constitute legal advice and should not be used as such.

© 2003 Akin Gump Strauss Hauer & Feld LLP

Our lawyers are monitoring these corporate reforms and will keep you apprised of any developments

that arise from the requirements imposed under the Act and from regulatory activity of the SEC.

For

a summary of other key provisions of the Act, as well as Corporate Governance Alerts that provide

detailed analyses of certain other key provisions of the new law, please visit out Web site at

http://www.akingump.com/publication.cfm.

CONTACTINFORMATION

If you have any questions or would like to learn more about this topic, please contact the partner who normally rep-

resents you, or:

Dawn M. Gertz

Director of Client Services

[e-mail]

1.866.AKINLAW

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