President Bush signed into law the Sarbanes-Oxley Act of 2002 to amend federal securities laws to substantially change public company reporting and compliance practices and to reduce opportunities for corporate fraud. The new law requires expanded and more frequent disclosures, enhances the SEC's power to monitor and investigate compliance with securities laws, adds stiff penalties for violations by corporations, their officers and accountants, regulates accounting practices and creates the Public Company Accounting Oversight Board to register and regulate accounting firms.

The Act is a complex mixture of new requirements that applies to all companies registered under the Securities Exchange Act of 1934, their directors, officers, attorneys and auditors. The law imposes some of the new requirements with immediate effect and some in the form of directives to the SEC to adopt rules, and those rules will take effect once they are properly promulgated.

The following is a general summary of the Sarbanes-Oxley Act. This summary does not purport to be a complete description of the provisions of the Act, rather it offers an introductory overview of the changes the Act effects in respect of securities and other laws.

CORPORATE GOVERNANCE

CEO and CFO certification; Standards of management's responsibility

The Act requires that the SEC adopt rules that shall become effective within 30 days (August 29, 2002), requiring that the CEO and CFO of a reporting company certify that they have reviewed each of the company's annual and quarterly reports and that based on their knowledge, such report does not contain any untrue statement of a material fact or omits to state a material fact necessary to make the statements not misleading and that the financial statements and other financial information included in the report fairly present the financial condition and results of operations of the company.

In addition, such officers must also certify that they:

• are responsible for and have established internal controls so that any material information relating to the company is made known to them;
• evaluated and presented their conclusions on the effectiveness of these internal controls in the report; and
• have disclosed to the company's auditors and audit committee all significant deficiencies in the company's internal controls and any fraud involving employees with a significant role in such internal controls.

Effective immediately, a CEO or CFO who certifies a securities filing that includes financial information knowing that the filing does not comply with the requirements of the applicable securities laws may face a fine of up to $1 million and up to 10 years in prison. Willful violations carry fines of up to $5 million and up to 20 years imprisonment. (Due to the ambiguous way in which this provision was drafted, some commentators are of the opinion that companies' officers could be required to certify their financial information securities filings prior to August 29, 2002.)

The Act also requires that the SEC issue final rules within nine months to prohibit officers and directors from fraudulently influencing or misleading the auditors of an issuer for the purpose of influencing the financial statements being audited.

Under the Act, if a reporting company is required to restate its financials due to material non-compliance with financial reporting requirements because of misconduct, the Company's CEO and CFO must reimburse the company for any bonus or other incentive or equity-based compensation he or she received from the company during the 12-month period after the relevant financial document was filed or otherwise released to the public and any profits he or she realized from the sale of the company's securities during that 12-month period.

The SEC is required to issue final rules within six months, requiring reporting companies to disclose whether or not they have adopted a code of ethics for senior financial officers applicable to their principal financial officer and comptroller or principal accounting officer.

Loans to directors and executive officers; Restrictions on trading in securities during plan "blackout periods"

The Act generally prohibits loans to directors and executive officers with certain limited exceptions that are not likely to be applicable to most reporting companies. The prohibition does not apply retroactively to loans outstanding on July 30, 2002, provided that there is no material modification to any term or any renewal of such loans on or after that date.

The Act prohibits transactions in company equity by directors and executive officers if such directors or officers acquire equity securities in connection with their service or employment with the company during "blackout periods" (which are periods in which purchasing or selling equity securities held in a company's plan by at least 50% of the participants or beneficiaries under all of the company's individual 401(k) or profit sharing plan accounts is temporarily suspended for any 3 or more consecutive business day period). Any profits from such transactions can be recovered (regardless of intent) by or in the name of the company in a manner similar to the way short-swing profits are recovered. Notice of such "blackout periods" to directors and officers, as well as to the SEC, must be given at least 30 days in advance. The Act also amends ERISA to require notice of "blackout periods" to plan participants.

Audit committees

The Act also directs the SEC to adopt rules within nine months to prohibit listing on an exchange the securities of any company that does not comply with specified standards related to audit committees. These standards must require that an audit committee be directly responsible for the appointment, compensation and oversight of the work of any registered public accounting firm employed by a reporting company, and that each registered public accounting firm must report directly to the audit committee. All audit committee members must be independent directors, the committee must establish procedures to receive and consider complaints by the company or its employees (including anonymous submissions) regarding accounting or auditing matters and the audit committee must have the authority to engage independent counsel and other advisers as it may deem necessary.

SEC FILINGS

The SEC is required to review disclosures made by reporting companies at least once every three years. More frequent reviews will apply to reporting companies that (i) have issued material restatements of their financial results, (ii) are experiencing significant volatility in their stock price, (iii) have large market capitalization, (iv) are emerging companies and have significant disparities in price to earning ratios, and (v) have a significant affect on any material sector of the economy.

Disclosure of material financial changes; Disclosure of off-balance sheet transactions

Under the Act, reporting companies are required to disclose to the public, on a rapid basis, additional information concerning material changes in the financial condition or operations of the company that may be necessary or useful for the protection of investors. The SEC has been directed to promulgate rules to appropriately explain and expand upon this requirement.

In addition, the SEC is required to issue final rules within six months mandating disclosure in annual and quarterly financial reports of all material off-balance-sheet transactions, arrangements, obligations and other relationships with unconsolidated entities or other persons that may have a material current or future effect on the financial condition, results of operations, liquidity, capital expenditures, capital resources or significant components of revenue or expense of the company.

Pro forma financial information

The SEC is required to issue final rules within six months requiring that all pro forma financial information included in SEC filings or in any other public disclosure be presented in a manner that does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the pro forma financial information, in light of the circumstances under which it is presented, not misleading and the disclosure must reconcile the pro forma information with the financial condition and results of operations of the company under GAAP.

Annual Report's Internal Control Report

The SEC is required to adopt rules that will require annual reports to contain an "internal control report", acknowledging management's responsibility for establishing adequate internal control structures and procedures for financial reporting and containing an assessment of the effectiveness of those controls and procedures. Auditors will be required to attest to and report on management's assessment.

REGULATION OF ACCOUNTING PRACTICES

Audit partner rotation

The Act immediately mandates rotating lead audit partners at least every five years by making it unlawful for a registered public accounting firm to audit a reporting company if the lead audit partner has performed audit services for such company in each of the five previous years.

Prohibition on non-audit services; Pre-approval of auditor's services

Under the Act, the audit committee of a reporting company must pre-approve all services, whether auditing or otherwise, to be provided to the company by its auditors.

The Act prohibits a registered public accounting firm performing audit services for a reporting company from providing to such company, within the scope of its audit services, any non-audit services, including:

• bookkeeping services;
• financial information systems design and implementation;
• appraisal or valuation services, fairness opinions or contributions-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 and expert services unrelated to the audit; and
• any other service that the Board determines by regulation is impermissible.

A reporting company may engage its auditor for tax or other non-audit services other than those listed above, following pre-approval by its audit committee and must disclose the engagement in its public reports.

PUBLIC COMPANY ACCOUNTING OVERSIGHT BOARD

The Act establishes a Public Company Accounting Oversight Board, a new non-governmental agency, to oversee public accountants in their auditing of public companies. The Board's duties will include registering public accounting firms, establishing auditing, quality control, ethics and independence standards and rules for auditors and inspecting, investigating and imposing appropriate sanctions upon public accounting firms and persons associated with such firms. The Board will consist of five members, each appointed by the SEC for five-year staggered terms, two of whom will be past or present certified public accountants and all of whom will be independent of public accounting firms. The SEC must determine the composition of the Board within nine months, after which all public accounting firms will have six months to register with the Board.

CRIMINAL AND CIVIL ENFORCEMENT

The Act codifies several new crimes related to fraudulent activities and increases criminal penalties for a number of existing white collar crimes. For example, the Act makes it a crime to knowingly execute, or attempt to execute, a scheme or artifice (i) to defraud any person "in connection with any security" of a reporting company or (ii) to obtain, by means of false or fraudulent pretenses, representations or promises, any money or property in connection with the purchase or sale of any such security. Crimes related to the destruction, alteration or falsification of corporate audit records and records in federal investigations and bankruptcy cases are also codified under the Act. In addition, maximum penalties for mail and wire fraud are increased from five to 20 years imprisonment and the statute of limitations for private securities fraud actions is extended to five years after commission of the fraud or two years after its discovery. Civil penalties levied by the SEC as a result of judicial or administrative action will be directed to a fund for the benefit of harmed investors.

MISCELLANEOUS

The Act authorizes the SEC to address matters of analyst independence by enhancing the separation between investment bankers and research analysts.