Sec. |
Summary |
When Effective |
Status |
Comments |
101 |
Establishment of Public Company Accounting Oversight
Board (“PCAOB”) |
Oversight Board scheduled to begin operation not
later than 4/26/03 |
Organization of PCAOB certified by SEC in Release
No. 33-8223. |
|
102 |
Registration of Accounting Firms: Firms that audit
public companies required to register with PCAOB |
Within 180 days after SEC determines that PCAOB is
ready to begin operation |
Rules on registration system were proposed by PCAOB
in Release No. 34-47990, and order approving rules was issued by SEC
on 7/16/03 in Release No. 34-48180. |
|
201 |
Non-Audit Services: Registered public accounting
firms will be prohibited from performing certain non-audit services,
and those non-audit services that are still permitted will need to
be preapproved by the audit committee |
Language of SOX implies that rule is subject to registration
of auditors with PCAOB, but SEC rules take effect sooner |
Implemented in Release No. 33-8183, effective May
6, 2003. The release also addresses §§ 202, 203, 204 and
206. Under transition rules, non-audit services provided prior to 5/6/04
are not prohibited if they are provided pursuant to a contract in effect
on 5/6/03. The Chief Accountant has issued an FAQ
release dated 8/7/03. |
The SEC incorporates this prohibition into the auditor
independence standards in Regulation S X. The rules modifying the auditor
independence standards specifically cover any public accounting firm,
whether or not it is a “registered public accounting firm.” The
rule allows for a one-year transition to exit non-audit services that
were in effect prior to the rule’s effective date. |
202 |
Preapproval of Auditor Services: All services by
the auditor, including audit services, must be preapproved by the audit
committee, and any non-audit services must be disclosed in periodic
reports |
Language unclear, but believed to be subject to registration
of auditors with PCAOB; SEC rules take effect sooner |
Implemented in Release No. 33-8183, effective May
6, 2003. See the Chief Accountant’s FAQ
release dated 8/7/03. |
The SEC (a) incorporates the preapproval requirement
into the auditor independence standards in Rule 2 01 of Regulation
S X and (b) to create new disclosure items in proxy statements and
annual reports regarding fees paid to auditors for audit and non-audit
services. Preapproval may be effected through adoption of a detailed
policy, which must be disclosed in 10-K. The rule expands the required
Proxy disclosure regarding audit and non-audit fees. |
203 |
Mandatory Rotation: The lead audit partner and the
concurring partner at a registered public accounting firm must be rotated
at least once every five years |
Language of SOX implies that rule is subject to registration
of auditors with PCAOB, but proposed SEC rules would take effect sooner |
Implemented in Release No. 33-8183, effective May
6, 2003. Under the transition rules, the rule applies to lead partner
in the first fiscal year beginning after 5/6/03 and to the concurring
partner in the first fiscal year beginning after 5/6/04, but includes
years of service prior to those dates. See the Chief Accountant’s
FAQ
release dated 8/7/03. |
Incorporated into auditor independence standards
in proposed revision to Rule 2 01 of Regulation S X. Under the rule,
the lead and concurring partners are subject to a 5-years-on-5-years-off
rotation requirement. In addition, certain other partners are subject
to a 7-years-on-2-years-off rotation. The rule is not limited to registered
public accounting firms. |
204 |
Reports by Auditor: The auditor must report to the
audit committee (a) all critical accounting policies used by the registrant,
(b) alternative accounting treatments that have been discussed with
management along with the potential ramifications of using those alternatives
and the auditor’s preferred treatment, and (c) other written
communications provided by the auditor to management, including a schedule
of unadjusted audit differences |
Subject to registration of auditors with PCAOB |
Implemented in Release No. 33-8183, effective May
6, 2003. See the Chief Accountant’s FAQ
release dated 8/7/03. |
These rules refer only to registered public accounting
firms, whereas the rules mandated by §§ 201, 202, 203 and
206 refer to independent auditors, regardless of whether they are registered
with the PCAOB. |
206 |
Cooling-Off Period For Hiring of Former Employees
of Auditor: A registered public accounting firm may not audit an issuer
if the CEO, CFO, controller or chief accounting officer was employed
by the accounting firm and participated during the previous year’s
audit |
Language of SOX implies that rule is subject to registration
of auditors with PCAOB, but proposed SEC rules would take effect sooner |
Implemented in Release No. 33-8183. The rules do
not apply to employment relationships that began prior to May 6, 2003.
See the Chief Accountant’s FAQ
release dated 8/7/03. |
Incorporated into auditor independence standards
in proposed revision to Rule 2 01 of Regulation S X. The rule goes
beyond the requirements and time periods specified in Section 206 and
is not limited to registered public accounting firms. |
301 |
Audit Committees: SROs must adopt listing standards
requiring that (a) the audit committee have sole responsibility for
hiring and supervising the registered public auditor, (b) all audit
committee members be independent, (c) audit committees adopt whistleblowing
procedures, (d) each audit committee have authority to engage independent
counsel and other advisers, and (e) the audit committee have the authority
to approve the amount of fees to be paid to auditors and advisers and
direct the corporation to fund such fee payments |
Subject to SEC approval of SRO rules on or before
4/26/03; rules involving registered public auditors may be subject
to registration of accounting firms with PCAOB |
Implemented in Release No. 33-8220, which requires
SRO rules to require compliance by most companies as of the earlier
of the first annual meeting after 1/15/04 or 10/31/04, with special
transition rules applicable to companies that go public after compliant
SRO rules take effect. Proposed rule changes have been submitted to
the SEC by the NYSE and Nasdaq. Nasdaq’s proposal regarding board
and committee independence has was published for comment by the SEC
on March 17, 2003. It is due to take effect 6 months after SEC approval
of Nasdaq rule change. The requirements regarding board composition
and committees would take effect as of the first annual meeting on
or after 1/1/04. All other requirements would take effect six months
after the rule takes effect. The NYSE’s initial
proposal was
submitted to the SEC on 8/16/02, and revised
director independence standards were submitted on 4/4/03. A redline of the NYSE’s revisions
is posted on its website. Neither of these proposals has been published
by the SEC. |
|
302 |
Certification; Disclosure Controls: Management to
certify regarding (a) accuracy of periodic reports, (b) responsibility
for internal controls, (c) design and evaluation of controls and disclosure
procedures, (d) presentation in report of conclusions re effectiveness
of controls, (e) disclosure to auditors and audit committee regarding
internal control deficiencies and weaknesses and fraud by insiders
and (f) disclosure in report of changes to internal controls and factors
that could affect internal controls in future |
Initial SEC
rules took effect 8/29/02; additional
rules are pending |
SEC
rules are now in effect regarding certification
and “disclosure controls and procedures.” On 10/22/02,
the SEC issued Release No. 33-8138, in which it has proposed to expand
the required certification to cover both disclosure controls and internal
controls. On 6/5/03, the SEC issued Release No. 33-8238, which requires
the certification to be filed as an exhibit beginning 8/14/03. |
See also Gray Cary e-Alert and client memo on the
adoption of disclosure controls and procedures. See also § 404(a),
regarding management’s annual report regarding internal controls.
Release No. 33 8138 addresses both the report required by § 404(a)
and the certification required by § 302. See also § 906,
which contains a certification requirement that overlaps to a large
extent with the requirement under § 302 but is universally interpreted
as requiring a separate certification. |
303 |
Improper Influence on Conduct of Audits: SEC to adopt
rules forbidding any officer or director to “fraudulently influence,
coerce, manipulate, or mislead” the company’s auditor for
the purpose of rendering financial statements materially misleading |
Subject to SEC rulemaking on or before 4/26/03 |
Implemented in Release No. 34-47890, issued May 20,
2003. |
|
304 |
Disgorgement of Bonuses and Stock Profits: If an
issuer is required to restate financials as a result of misconduct,
the CEO and CFO must disgorge any bonus or equity-based compensation
and profits realized from stock sales in the year following original
publication of the financials |
Immediately |
|
|
306 |
Insider Trading During Individual Account Plan Blackout
Periods: During a blackout period affecting an individual account plan
(such as a 401(k) plan), officers and directors may not buy or sell
issuer securities acquired in connection with employment, with “blackout
period” generally defined as suspension of at least 50% of plan
participants from trading |
Effective 1/26/03, subject to such regulations as
the SEC may issue |
Final rules adopted in Release No. 34-47225. Compliance
with the new rule is required beginning March 31, 2003. |
The SEC rule requires that, in addition to providing
the notice of any blackout period to insiders and the SEC as required
by § 306, the notice also be filed on Form 8 K. |
307 |
Rules of Professional Responsibility for Attorneys:
SEC to adopt rules requiring Attorneys representing issuers in SEC
matters to report evidence of material violations of securities law
or breaches of fiduciary duty |
Subject to SEC rulemaking on or before 1/26/03 |
Primary rule implemented in Release No. 33-8185,
with compliance required beginning August 5, 2003. Additional rules
regarding withdrawal by counsel are proposed in Release No. 33-8186,
issued 1/29/03. |
Noisy withdrawal has been omitted from the final
rule, but is still on the table, subject to an extended comment period.
The SEC has also proposed an alternative pursuant to which withdrawal
would trigger a disclosure obligation on the part of the issuer. See
Gray Cary e-Alert. |
| 401(a) |
Adjustments: Reports containing GAAP financials must reflect all material
correcting adjustments identified by “registered public accounting
firm” |
Subject to registration of accounting firms with PCAOB |
|
|
| 401(a) |
Off-Balance Sheet Arrangements: Annual and quarterly financial reports
must disclose all material off-balance sheet transactions, arrangements,
obligations, etc. |
Subject to SEC rulemaking on or before 1/26/03 |
Final rules adopted in Release No. 33-8182. Disclosure regarding off-balance
sheet arrangements is required in filings covering fiscal years ending
on or after June 15, 2003. Disclosure regarding contractual obligations
is required in filings covering fiscal years ending on or after December
15, 2003. |
The proposed rule requires that off-balance sheet arrangements, contractual
obligations and contingent liabilities and commitments be discussed in
MD&A. |
| 401(b) |
Pro Forma Financial Information: Pro forma financial information presented
in periodic reports or public disclosures must conform to specific antifraud
standards and must be reconciled to GAAP financials |
Subject to SEC rulemaking on or before 1/26/03 |
Final rules adopted in Release No. 33-8176, effective March 28, 2003.
See also FAQ
release issued June 13, 2003. |
In addition to regulating the presentation of pro forma financial information,
the rules also prohibit altogether the reporting of certain forms of
non-GAAP financial information and require that earnings releases be
filed on Form 8 K. See Gray Cary e-Alert and Client Memo. |
| 402 |
Prohibition of Loans to Officers or Directors |
Immediately |
|
§ 402 has raised numerous interpretive questions among lawyers,
as discussed in a Gray Cary e
Alert. Initially most law firms advised
their clients to avoid certain transactions that may in fact have been
unintended targets of SOX, such as cashless option exercises and payment
of split-dollar life insurance policies, and also questioned the legality
of advancement of litigation expenses and travel expenses and payment
of refundable signing bonuses. The thinking among leading firms has evolved
to where they are generally comfortable with advancement of expenses,
payment of signing bonuses and some forms of cashless exercise. See Gray
Cary client memo and the 25-firm position paper. |
| 403(a) |
Accelerated Form 4 Reporting |
Applicable to transactions occurring on or after 8/29/02 |
Implemented by SEC pursuant to rules issued in Release No. 34-46421. |
See Gray Cary e-Alerts dated August
9 and August 28, 2002. |
| 403(a) |
Electronic Filing and Posting of Forms 3, 4 and 5 |
Subject to SEC rulemaking on or before 7/30/03; the SEC’s rule
proposal is expected to take effect well before this deadline |
Implemented in Release No. 33-8230, effective 6/30/03. The new rules
require that Forms 3, 4 and 5 be filed via EDGAR and posted on the issuer’s
website (a requirement that an issuer can satisfy by posting hyperlinks
to the EDGAR filings). In the release, the SEC announced that it is adopting
a new online filing system that will enable insiders to complete and
file their Section 16 forms directly through the SEC’s website
rather than having to use EDGARLink software or a financial printer.
Filers will still be required to file a Form ID to obtain individual
EDGAR access codes. |
See Gray Cary e-Alert. |
| 404(a) |
Internal Controls: Annual report to include report stating management’s
responsibility for maintaining internal controls and financial reporting
procedures and containing an assessment of such controls and procedures,
which must be attested to and reported on by the company’s outside
auditors |
Subject to SEC rulemaking; no deadline specified |
Addressed in Release No. 33-8238, issued 6/5/03. Compliance is required
beginning with fiscal years ending on or after 6/15/04 for accelerated
filers and 4/15/05 for other filers. |
See Gray Cary e-Alert. See also § 302. |
| 406(a) |
Code of Ethics: Periodic reports [annual reports, per SEC rules] must
disclose whether the issuer has a code of ethics for senior financial
officers, and if not, why not |
Subject to SEC rulemaking on or before 1/26/03 |
Final rules adopted in Release No. 33-8177, effective 3/3/03, applicable
to annual reports for fiscal years ending on or after 7/15/03. In addition,
under a pending NYSE rule, which was published for comment by the SEC
in Release No. 34-47672 on April 11, 2003, and a similar proposal by
Nasdaq, listed companies would be required to adopt codes of conduct. |
Under the SEC rules, the code of ethics requirement applies to the
CEO as well as the officers listed in § 406(a). The codes of conduct
required by the NYSE and Nasdaq listing standards would apply to all
employees. See also module
on codes of conduct by Corporate Governance
Advisory Group and Gray Cary e-Alert. |
| 406(b) |
Disclosure of Changes to or Waivers of Code of Ethics: Changes to or
waivers of code of ethics must be disclosed on Form 8 K or on company’s
website |
Subject to SEC rulemaking on or before 1/26/03 |
Final rules adopted in Release No. 33-8177, effective March 3, 2003. |
See Gray Cary e-Alert. |
| 407 |
Audit Committee Financial Expert: Periodic reports [annual reports,
per SEC rules] must disclose whether the audit committee has at least
one “financial expert” (as defined in SOX) and if not, why
not |
Subject to SEC rulemaking on or before 1/26/03 |
Final rules adopted in Release No. 33-8177, applicable to annual reports
for fiscal years ending on or after 7/15/03. |
While the statute and rules merely create a disclosure requirement,
Nasdaq and the NYSE may adopt affirmative requirements that each audit
committee include a financial expert. See also module
on audit committees by Corporate Governance Advisory Group and Gray Cary e-Alert. |
| 409 |
Real Time Disclosure: Issuers shall be required to disclose “on
a rapid and current basis...such additional information...as the Commission
determines, by rule, is necessary or useful for the protection of investors....” |
Subject to SEC rulemaking; no deadline specified |
Prior to the adoption of Sarbanes Oxley, on 6/17/02, the SEC issued
Release No. 33-8106, in which it proposed (a) a significant expansion
of the types of transactions and developments that would be required
to be reported on Form 8 K and (b) a shortening of the filing deadline
for most 8 K’s to two business days. This rule is still pending,
and was already a high priority at the SEC before it became enshrined
in SOX. |
The proposed rule is discussed in a Gray Cary e-Alert.
The rule has generated many comment
letters expressing concern that two
business days
was unrealistically short and that the applicability of the rule to nonbinding
contracts such as LOIs might put issuers in difficult situations (as
acknowledged by Shelly Parratt of the Div. of Corp. Fin. at a seminar
in November 2002). One such comment letter was submitted by the Grundfest
Group, with participation by attorneys from Gray Cary. |
| 501 |
Analyst Conflicts of Interest: Regulations governing conflicts of interest
among stock analysts to be issued by SEC or by a securities exchange
under direction of SEC |
Subject to rulemaking on or before 7/30/03 |
Regulation AC Adopted in Release No. 34-47591, effective 4/14/03. |
|
| 805 |
Sentencing Guidelines: U.S. Sentencing Commission to review and amend
Federal Sentencing Guidelines for obstruction of justice or fraud to
ensure appropriate levels of deterrence and punishment and to account
for specific factors |
Subject to rulemaking on or before 1/26/03 |
The U.S. Sentencing Commission issued proposed amendments to the sentencing
guidelines on 11/22/02. |
|
| 906 |
Certification: Management to certify accuracy and completeness of periodic
reports; criminal penalties apply for false certification |
Immediately |
On 6/5/03, the SEC issued Release No. 33-8238, which requires the certification
to be “furnished” as an exhibit beginning 8/14/03. |
See also § 302. |
N/A |
Nasdaq and NYSE Corporate Governance Rule Proposals:
Proposals regarding, among other things, board independence requirements,
director independence criteria, authority of audit and compensation
committees and director nomination process. |
Subject to SEC Approval |
Proposed rule changes by the NYSE were published
for comment by the SEC on April 11, 2003 in Release No. 34-47672. An
amended proposal was issued on October 8, 2003 but has not yet been
published by the SEC for comment. Nasdaq’s proposal regarding
board and committee independence was published for comment by the SEC
on March 17, 2003 in Release No. 34-47516. An amended
proposal was
issued on October 2, 2003 but has not yet been published by the SEC
for comment. Nasdaq’s proposal regarding codes of conduct was
submitted separately on 1/13/03 but has not been published by the SEC
for comment. |
|