Member Article

25th Annual Conference On Securities Regulation and Business Law Problems, Dallas, Texas 1. INTRODUCTION 1.1. Scope of Outline. In the aftermath of the recent failure of Enron and other major companies and the resulting loss of public confidence in the capital markets, the U.S. Congress conducted lengthy investigative hearings to determine the root causes of these problems. By the end of the hearings, major weaknesses had been identified in: (i) corporate governance; (ii) the accounting and external audit functions; (iii) the public disclosure system; (iv) corporate ethics; and (v) the standards of conduct of key professionals in the capital markets. To remedy these perceived weaknesses, Congress and the major stock exchanges quickly moved to fashion regulatory reforms that would strengthen the way corporate America operates. Other than for audit committee issues (which are covered in detail in a different outline prepared by the authors and entitled “The Ins and Outs of Audit Committees In The Post-Enron Era”), this outline discusses how these reforms impact (i) corporate governance, (ii) officer and director responsibilities and accountability, (iii) corporate ethics, and (iv) public disclosures. This outline does not address the impact of these reforms on foreign issuers. 1.2. Key Regulatory Reforms. A. Sarbanes-Oxley Act Of 2002 (“SOA”). Signed into law by President Bush on July 30, 2002, the SOA is an extremely aggressive legislative effort to prevent future Enron-type problems even to the point of encroaching into areas that were once considered to be only within the purview of state corporation laws. B. Securities And Exchange Commission (“SEC”) Rules And Regulations Implementing The Provisions Of The SOA. The SOA requires that the SEC adopt rules to implement several of its regulatory reforms. So far the SEC has finalized and adopted rules covering the following ten matters: (i) CEO and CFO certifications; (ii) Non-GAAP financial information; (iii) Code of ethics for senior management; (iv) “Audit Committee Financial Experts;” (v) Insider trading during pension plan blackout periods; (vi) Disclosure of material off-balance sheet transactions and contractual obligations; (vii) Retention of audit records; (viii) External auditor independence standards; (ix) Standards of conduct for attorneys; and (x) Expedited filing of Section 16 reports and Form 8-Ks containing earnings release information. C. Corporate Governance Reforms Through The Listing Requirements Of The Organized Securities Markets. The NYSE and NASDAQ also have proposed new governance requirements for listed companies that impact the function of audit committees. These proposals were submitted in the late summer and early fall of 2002 to the SEC for its review and approval. However, given its demanding schedule in meeting the SOA’s deadlines for adopting new rules and regulations, the SEC’s response to these proposed new listing requirements is not expected before the fall of 2003. Because the proposals of the NYSE and NASDAQ differ in many respects, we anticipate the SEC will consider how they can be best harmonized with each other and with the SEC’s own rules affecting corporate governance. This outline includes the proposed New York Stock Exchange Listing Requirements (“NYSE Proposed Rules”) and the proposed The NASDAQ Stock Market Inc. Listing Requirements (“NASDAQ Proposed Rules”) relating to corporate governance (other than the audit committee), ethical conduct and public disclosures. If adopted in their current form, NYSE and NASDAQ listed companies will have two years to comply with the NYSE Proposed Rules (although shorter 6 and 12 month compliance deadlines apply to select provisions of the rule) and one year to comply with the NASDAQ Proposed Rules, respectively. Role of Legal Counsel . The magnitude and speed of these regulatory reforms has created a great deal of anxiety amongst compliance-minded directors in boardrooms nationwide. Directors and management have turned to legal counsel to guide them through the maze of new regulatory reforms. The blizzard of new SEC rules and the proposed new listing requirements of the NYSE and NASDAQ has made the preparation of extensive presentations to boards on the SOA a challenge for legal counsel.

 

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