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Date: November 2007
Prepared by:
Martin Frey
Baker & McKenzie Zurich
Zollikerstrasse 225
8034 Zurich
Tel.: +41 44 384 14 14
Fax: +41 44 384 12 84
E-Mail: martin.frey@bakernet.com
Introduction
The Sarbanes-Oxley Act of 2002 (the “Act”) was enacted on July 30, 2002 in response to a series of accounting scandals and business failures in the United States. The Act’s stated objective is to restore investor confidence in public companies, their financial reporting and internal controls. To this end, the Act created significant new regulatory requirements relating to public companies. The scope of the Act encompasses not only domestic public companies, but also “foreign private issuers”, which generally are companies incorporated outside the United States that are required to file periodic or current reports (such as Annual Reports on Form 20-F and Current Reports on Form 6-K). Notably, the Act generally does not apply to non-U.S. companies furnishing information pursuant to Rule 12g3-2(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

Many of the provisions of the Act make no distinction between domestic and non-U.S. companies. However, the United States Securities and Exchange Commission (the “SEC”) has recognized that these requirements may conflict with the laws, regulations, corporate governance standards and methods of providing auditor oversight in the home jurisdiction of many foreign private issuers. In adopting rules pursuant to the mandates of the Act, the SEC has therefore provided for a number of exemptions from and alternatives to the regulations that are available exclusively to non-U.S. public companies.
The Sarbanes-Oxley Act - Details
Corporate Responsibility
Pursuant to Section 302 of the Act, the SEC adopted rules requiring the principal executive officer and principal financial officer, or persons performing similar functions, of certain issuers (for purposes of this document, the term “issuer” includes foreign private issuers, unless otherwise stated) filing periodic reports under Section 13(a) or 15(d) of the Exchange Act, to certify in each annual or quarterly report filed or submitted that:
1.  he or she has reviewed the report;
2. based on his or her knowledge, the report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periods presented in the report;
3. 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 issuer as of, and for, the periods presented in the report;
4. he or she and the other certifying officers are responsible for establishing and maintaining “disclosure controls and procedures” and “internal control over financial reporting” for the issuer and have:
a)  designed such disclosure controls and procedures, or caused such internal control over financial reporting to be designed under their supervision, to ensure that material information relating to the issuer, including its consolidated subsidiaries, is made known to them by others within those entities, particularly during the period in which the periodic report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under their supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the issuer’s disclosure controls and procedures and presented in the report their conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by the report based on such evaluation; and
d) disclosed in the report any change in the issuer’s internal control over financial reporting that occurred during the issuer’s most recent fiscal quarter (the issuer’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is likely to materially affect, the issuer’s internal control over financial reporting; and
5. he or she and the other certifying officers have disclosed, based on their most recent evaluation of internal control over financial reporting, to the issuer’s auditors and the audit committee of the issuer’s board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the issuer’s ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the issuer’s internal control over financial reporting.
For purposes of this rule, “disclosure controls and procedures” are defined as controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports filed or submitted by it under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. “Disclosure controls and procedures” include controls and procedures designed to ensure that information required to be disclosed by an issuer in its Exchange Act reports is accumulated and communicated to the issuer's management, including its principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure. “Internal control over financial reporting” means a process designed by, or under the supervision of, the issuer’s CEO and CFO, and effected by the issuer’s board of directors or management to provide reasonable assurance regarding the reliability of financial reporting and preparation of financial statements for external purposes in accordance with GAAP.

Foreign private issuers that file annual reports on Form 20-F are subject to the Act and these rules. However, as noted in Section 3.4, infra, foreign private issuers have been granted a grace period until their first fiscal year ending on or after July 15, 2006 from including in their annual reports a report of management on the company’s internal control over financial reporting. Accordingly, the CEO and CFO of a foreign private issuer are not required to certify as to their responsibility for establishing and maintaining internal control over financial reporting or the design of such internal control over financial reporting until the first fiscal year ending on or after July 15, 2006. The SEC has stated that Section 302 certifications do not apply to Forms 6-K and 11-K, because such reports are not periodic reports.

Section 906 of the Act requires that each periodic report containing financial statements filed by an issuer with the SEC pursuant to Section 13(a) or 15(d) of the Exchange Act must be accompanied by a written statement by the CEO and CFO of an issuer. This written statement must certify that such report “fully complies” with the requirements of the Exchange Act and that the information contained in the report “fairly presents, in all material respects” the financial condition and results of operations of the issuer. This Section 906 certification is separate from, and in addition to, Section 302 certification.

This certification requirement applies to foreign private issuers. The Section 906 certification must accompany filings made on Form 20-F or 40-F.

Section 402 of the Act prohibits any issuer, directly or indirectly, including through any subsidiary, from extending, maintaining, or arranging the extension of credit in the form of a personal loan to any director or executive officer (or the equivalent thereof). This is a broad prohibition. It is not clear which types of activities will be deemed to constitute “arranging” nor how broadly the concept of “indirectly” will be applied. Additionally, the term “executive officer” is not defined in the Act. The SEC recently obtained a cease and desist order against the CEO and the CFO of a foreign private issuer who had made interest-free advances to themselves on behalf of the company. Issuers are cautioned that the broad and vague language of Section 402 may prohibit many arrangements that were previously permitted under U.S. law, and practices that are currently allowed under applicable foreign law.

The SEC has clarified that foreign banks are exempt from the insider-lending prohibition of Section 13(k) of the Exchange Act, a section which was added by Section 402 of the Act. To claim this exemption, foreign banks must satisfy two conditions: (i) the laws of the bank’s home jurisdiction require the bank to insure its deposits or be subject to a deposit guarantee or protection scheme; and (ii) the Board of Governors of the Federal Reserve System has determined that the bank or another bank organized in the bank’s home jurisdiction is subject to comprehensive regulation on a consolidated basis by the bank supervisor in its home jurisdiction.

Section 306 (a) of the Act prohibits directors and executive officers of an issuer from purchasing or selling any equity security of the issuer “acquired in connection with” his or her service or employment with the issuer during any “blackout period” and instructs the SEC and the Department of Labor to issue rules to implement this section of the Act. This prohibition was introduced in response to the situation that allegedly occurred in Enron where several directors and officers reportedly sold Enron stock while the price was dropping and employees were prohibited from selling because of a company-imposed blackout period. A “blackout period” is defined, with certain exceptions, as any period of more than 3 consecutive business days during which more than 50 percent of the employee participants in a company-sponsored employee benefit plan are prohibited from purchasing, selling, or transferring their interests in equity securities held in such plan. In advance of any “blackout period,” an issuer must notify plan participants, directors, officers, and the SEC.

Pursuant to Section 306(a) of the Act, the SEC adopted regulation BTR, also known as the Blackout Trading Rule, which applies to directors and executive officers of all reporting companies, including foreign private issuers. These provisions are relatively complex and contain references to other U.S. federal legislation which may not be applicable to non-U.S. issuers.

Pursuant to Section 406 of the Act, the SEC promulgated rules requiring a company, other than a registered investment company, to disclose whether it has adopted a code of ethics that applies to its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. A company that has not adopted such a code of ethics must disclose this information and provide an explanation as to why it has not done so. A domestic issuer must also promptly disclose amendments to, and waivers from, the code as it relates to any of the officers to which it applies.

The SEC indicated that the rules are not meant to identify every detail that a company must address in its code of ethics, or prescribe exact language that a code of ethics must include. The SEC also urged companies to put in place codes that are more comprehensive than necessary to meet the requirements of the rules.
Companies may choose one of three methods for making their code of ethics publicly available. A company may:
1.  file a copy of the code of ethics as an exhibit to its annual report;
2. post the code of ethics, or relevant portions, on its Internet site (as long as the Internet address and the availability of the code on the company’s website is disclosed in the company’s annual report); or
3. provide an undertaking in its annual report to provide a copy of its code, free of charge, to any person requesting a copy.
A foreign private issuer need not provide immediate disclosure of any change to, or waiver from, the company’s code of ethics, as required of domestic issuers, as this interim method of reporting changes or waivers is optional (although encouraged by the SEC) for foreign private issuers using Form 6-K on Form 20-F. However, a foreign private issuer is required to disclose in its annual report any change or waiver that has occurred during the last fiscal year.
Enhanced Financial Disclosures
Section 409 of the Act requires all issuers that file reports under Sections 13(a) or 15(d) of the Exchange Act to disclose to the public “on a rapid and current basis” such additional information concerning material changes in the issuer’s financial condition or operations as the SEC determines by rule. The SEC implemented Section 409 by amending Form 8-K to require domestic public companies to accelerate disclosure for reporting certain material events to within four business days following the event and to significantly expand the type of information that must be disclosed on a Form 8-K. Foreign private issuers are not required to file Form 8-Ks and are not subject to these requirements. A similar amendment to Form 6-K has, to date, not been proposed by the SEC.

Pursuant to Section 401(a) of the Act, the SEC promulgated rules requiring a registrant to provide (1) an explanation of its off-balance sheet arrangements in a separately captioned subsection of the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (“MD&A”), (2) an overview of certain known contractual obligations in tabular format, and (3) such other information it believes is necessary for an understanding of its off-balance sheet arrangements and their material effects. The definition of “off-balance sheet arrangements” primarily targets the means through which companies typically structure off-balance sheet transactions or otherwise incur risks of loss that are not fully transparent to investors.

These requirements apply to foreign private issuers that file annual reports on Form 20-F or on Form 40-F (and in registration statements on Form F-l, F-2, F-3 or F-4), but would not apply to current reports submitted by foreign private issuers on Form 6-K with respect to materials required to be made public in their home jurisdictions.

Section 401(b) of the Act required the SEC to issue rules providing that any pro forma financial information included in any periodic or other report filed with the SEC, or in any public disclosure or press or other release, must be presented in a manner that (1) 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 (2) reconciles such financial information with comparable financial information of the issuer prepared under GAAP.

In response, the SEC adopted Regulation G, which applies whenever an issuer publicly discloses or releases material information that includes a “non-GAAP financial measure.” A “non-GAAP financial measure” includes, among other things, pro forma financial information and other non-GAAP financial measures such as EBIT or EBITDA. A “non-GAAP financial measure” does not include financial measures required to be disclosed by GAAP, SEC rules, or a system of regulation of a government or governmental authority or self-regulatory organization that is applicable to a registrant.

Regulation G requires an issuer that publicly discloses or releases non-GAAP financial measures to include in such disclosure or release a presentation of the most directly comparable GAAP financial measure and a reconciliation of the disclosed non-GAAP financial measure to the most directly comparable GAAP financial measure. In addition, if non-GAAP financial measures are included in the reports a registrant files with the SEC, the registrant must present the non-GAAP financial measure in a manner consistent with Regulation G.

Regulation G applies to foreign private issuers, subject to one limited exception. Specifically, Regulation G does not apply to public disclosure of a non-GAAP financial measure by a foreign private issuer where (1) the issuer’s securities are listed or quoted on a securities exchange or inter-dealer quotation system outside of the U.S.; (2) the non-GAAP financial measure is not derived from or based on a measure calculated and presented in accordance with U.S. GAAP; and (3) the disclosure is made by or on behalf of the issuer outside of the U.S., or is included in a written communication that is released by the issuer outside of the U.S.

Provided the criteria above are met, the limited exception would continue to apply even when: (1) a foreign private issuer’s written communication containing non-GAAP financial measures is released in the U.S. as well as outside the U.S., so long as the communication is released in the U.S. contemporaneously with or after the release outside the U.S. and is not otherwise targeted at persons located in the U.S.; (2) foreign or domestic journalists or third parties have access to the information; (3) the information appears on one or more websites maintained by the issuer, so long as the websites, taken collectively, are not targeted at or available exclusively to persons located in the U.S.; and/or (4) the information is included in a Form 6-K submission to the SEC following the disclosure or release of the information outside the U.S.
Section 404 of the Act established rules regarding issuers’ internal controls. Pursuant to Section 404 of the Act, the SEC has adopted rules requiring foreign private issuers to:
1.  maintain internal control over financial reporting;
2. evaluate, with the participation of the CEO and CFO, the effectiveness of such internal control at the end of the fiscal year; and
3. evaluate, with the participation of the CEO and CFO, any change in the issuer’s internal control that occurred during the fiscal year that materially affected, or is materially likely to materially affect, the issuer’s internal control over financial reporting.
The management of a foreign private issuer is required, on Form 20-F, to provide a report on the issuer’s internal control over financial reporting. This evaluation must be based on a recognized control framework established by a body that has followed due process procedures. If management determines that one or more “material weaknesses” exists, the management cannot conclude that the issuer’s internal control over financial reporting is effective. The issuer must identify and disclose all material weaknesses discovered by management.
Recently, the SEC extended the compliance date for foreign private issuers to include in their annual report a report of management on the issuer’s internal control over financial reporting. Foreign private issuers that file their annual reports on Form 20-F or Form 40-F must begin to comply with these requirements for their first fiscal year ending on or after July 15, 2006.
Pursuant to Auditing Standard No. 2, auditors may also identify deficiencies in internal control over financial reporting. This standard also describes when such deficiencies constitute a significant deficiency or a material weakness. Furthermore, it requires the auditor to disclose in writing to management all significant deficiencies and material weaknesses of which the auditor is aware and has not previously informed management, and to inform the audit committee of such communication.
Audit Committees
Section 301 of the Act requires the SEC to direct the NYSE, the Nasdaq Stock Market, and other U.S. national exchanges and national securities associations to prohibit the listing of any security of an issuer that does not comply with the specified audit committee requirements. In late 2003, the SEC approved a series of corporate governance rules proposed by the NYSE. These rules establish a stricter, more detailed definition of independence for directors and require the majority of members on listed companies’ boards to satisfy the standard. In addition, the rules include a number of provisions that require and facilitate independent director oversight of processes relating to corporate governance, auditing, director nominations and compensation.
In general, the NYSE corporate governance rules apply to all companies listing common equity securities on the NYSE. However, a listed company that qualifies as a “foreign private issuer” is permitted to follow home country practice in lieu of the NYSE rules, except that:
  • it must comply with the Audit Committee Requirements of Rule 10A-3 of the Exchange Act;
  • it must disclose all significant differences between its corporate governance practices and the NYSE corporate governance standards for domestic companies;
  • the CEO must promptly notify the NYSE of any material noncompliance with applicable NYSE standards.
    Of course, a foreign private issuer can decide to comply with each of the corporate governance requirements applicable to U.S. domestic companies that are listed on the NYSE. In general, some of these requirements include the following:
  • listed companies must have a majority of independent directors;
  • the non-management directors of each listed company must meet at regularly scheduled executive sessions;
  • listed companies must have a nominating/corporate governance committee and a compensation committee, each committee composed entirely of independent directors, and each with a written charter that addresses the committee's purpose and responsibilities and performance and evaluation of the committee;
  • shareholders must be given the opportunity to vote on all equity compensation plans and material revisions to such plans, with certain limited exceptions;
  • listed companies must adopt and disclose corporate governance guidelines; and
  • listed companies must adopt and disclose a code of business conduct and ethics for directors, officers and employees, and promptly disclose any waivers of the code for directors or executive officers.
    All foreign private issuers listed on the NYSE must have an audit committee that satisfies the requirements of Rule 10A-3 under the Exchange Act. Rule 10A-3 specifically addresses (1) director independence; (2) audit committee responsibilities; (3) procedures for complaints; (4) authority to engage advisors; and (5) funding of the audit committee.
    Rule 10A-3 requires that each member of the audit committee must be a member of the board of directors of the listed issuer, and must otherwise be “independent.” For a director to be “independent,” the board of directors must determine that the director has no material relationship with the listed company. In addition to requiring the absence of a material relationship, the NYSE rules prohibit a finding that a director is independent in the following situations:
  • A director who is an employee, or whose immediate family member is an executive officer of the listed issuer, is not independent until three years after the end of such employment relationship.
  • A director who receives, or whose immediate family receives, more than $100,000 per year in direct compensation from the listed issuer, other than director and committee fees and pensions or other forms of deferred compensation for prior service (provided such compensation is not contingent in any way on continued service), is not independent until three years after ceasing to receive more than $100,000 per year in such compensation.
  • A director who is affiliated with or employed by, or whose immediate family member is affiliated with or employed in a professional capacity by, a present or former internal or external auditor of the listed issuer is not independent until three years after the end of the affiliation or the employment or auditing relationship.
  • A director who is employed, or whose immediate family member is employed, as an executive officer of another company where any of the listed issuer's present executives serve on that company’s compensation committee is not independent until three years after the end of such service or the employment relationship.
  • A director who is an executive officer or an employee, or whose immediate family member is an executive officer, of a company that makes payments to, or receives payments from, the listed issuer for property or services in an amount which, in any single fiscal year, exceeds the greater of $1 million, or 2% of such other company’s consolidated gross revenues, is not independent until three years after falling below such threshold.
    The audit committee must be directly responsible for the appointment, compensation, retention and oversight of the work of the accounting firm engaged to prepare or issue an audit report or perform other audit, review or attest services for the listed issuer. The accounting firm must report directly to the audit committee.

    Each audit committee must establish procedures to deal with complaints received by the listed issuer regarding accounting, auditing or related matters and the submission by issuer employees of concerns regarding questionable accounting or auditing matters.

    Each audit committee must have the authority to engage lawyers and other advisers as it determines necessary to carry out its duties. Each listed issuer must provide appropriate funding to its audit committee for the payment of compensation to any accounting firm for performing audit, review or attest work for the issuer and to any advisers employed by the audit committee, as well as for the ordinary administrative expenses of the committee to allow it to carry out its duties.

    Rule 10A-3 includes a number of exemptions that may be available to foreign private issuers. The SEC noted in its rulemaking that a number of non-U.S. jurisdictions require auditor oversight through a board of auditors or similar body, or through statutory auditors, which function separately, in whole or in part, from the board of directors. The SEC recognized that the establishment of an audit committee in addition to these bodies would be costly and ineffective, and would likely lead to conflicts in duties and responsibilities. Thus, the SEC’s rules provide that none of the five requirements of Rule 10A-3 (listed in Section 4.3 above) apply where a non-U.S. company meets all of the following requirements.
  • It has a board of auditors, statutory auditor or similar body established or selected pursuant to its home country legal or listing provisions expressly requiring or permitting such an arrangement;
  • The board or body is required under its home country legal or listing requirements either to be separate from the board of directors or to be composed of one or more directors and one or more non-directors;
  • The board or body is not elected by the issuer's management and no executive officer of the issuer is a member of the board or body;
    The issuer's home country legal or listing provisions provide for standards of independence of the board or body from the issuer or the issuer's management;
  • The board or body, in accordance with applicable home country legal or listing requirements or the issuer's governing documents, is responsible, to the extent permitted by law, for the appointment, retention and work of the registered public accounting firm engaged for the purpose of preparing or issuing an audit report or performing other audit, review or attest services for the issuer; and
  • The audit committee requirements relating to complaints, authority to engage advisers and funding, as summarized above, apply to the board or body to the extent permitted by law.
    However, the SEC did not create a “safe harbor” exemption for non-U.S. companies that voluntarily create their own board of auditors in the absence of home country legal or listing requirements, or that otherwise fail to comply with the other aspects of the SEC’s audit committee requirements. In addition, under this exemption, the issuer is required to disclose its reliance on the exemption and provide an assessment of whether and in what manner this reliance would materially adversely affect the ability of the audit committee or audit board to act independently and to satisfy its related responsibilities.
    All foreign private issuers listed on the NYSE must disclose any significant ways in which their corporate governance practices differ from those followed by domestic companies under the NYSE listing standards. According to commentary from the NYSE, foreign private issuers must make their U.S. investors aware of the significant ways in which their home-country practices differ from those followed by domestic companies under the NYSE listing standards. However, foreign private issuers are not required to present a detailed, item-by-item analysis of these differences. Such a disclosure would be long and unnecessarily complicated. Moreover, this requirement is not intended to suggest that one country’s corporate governance practices are better or more effective than another. The NYSE believes that U.S. shareholders should be aware of the significant ways that the governance of a listed foreign private issuer differs from that of a U.S. listed company. The NYSE underscores that what is required is a brief, general summary of the significant differences, not a cumbersome analysis. Listed foreign private issuers may provide this disclosure either on their web site (provided it is in the English language and accessible from the United States) and/or in their annual report as distributed to shareholders in the United States (again, in the English language). If the disclosure is only made available on the web site, the annual report shall so state and provide the web address at which the information may be obtained.
    All foreign private issuers listed on the NYSE must comply with NYSE Rules 303A.12(b) and 303A.12(c). In general, these rules provide that the CEO must promptly notify the NYSE in writing after any of its executive officers become aware of any material non-compliance with the NYSE’s audit committee requirements.
    Section 407 of the Act required the SEC to adopt rules requiring an issuer to disclose whether its audit committee includes among its members at least one “financial expert,” and if not, the reasons the committee does not include such an expert.
    In its rulemaking, the SEC adopted the term “audit committee financial expert,” and defined an “audit committee financial expert” as a person who has the following attributes:
  • an understanding of generally accepted accounting principles and financial statements or, in the case of a foreign private issuer, an understanding of the generally accepted accounting principles used by the foreign private issuer in preparing its financial statements;
  • the ability to assess the general application of such principles in connection with the accounting for estimates, accruals and reserves;
  • experience preparing, auditing, analyzing or evaluating financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of issues that can reasonably be expected to be raised by the issuer’s financial statements, or experience actively supervising one or more persons engaged in such activities;
  • an understanding of internal controls and procedures for financial reporting; and
  • an understanding of audit committee functions.
    Under the rules, a person shall have acquired such attributes through:
  • education and experience as a principal financial officer, principal accounting officer, controller, public accountant or auditor or experience in one or more positions that involve the performance of similar functions;
  • experience actively supervising a principal financial officer, principal accounting officer, controller, public accountant, auditor or person performing similar functions;
  • experience overseeing or assessing the performance of companies or public accountants with respect to the preparation, auditing or evaluation of financial statements; or
  • other relevant experience.
    An issuer is required to disclose whether its board of directors has determined that the issuer has at least one audit committee financial expert serving on its audit committee; or has determined that the issuer does not have such an audit committee financial expert. Where an issuer indicates that it has an audit committee financial expert, it must disclose the expert’s name. Where an issuer does not have an audit committee financial expert, it must provide an explanation as to why. Disclosure must be made by foreign private issuers in the annual report on Form 20-F or 40-F.

    Sections 201 and 202 of the Act prohibit a registered public accounting firm from providing certain non-audit services to an issuer contemporaneously with the audit and require pre-approval by the audit committee of all other non-audit services. The prohibited non-audit services include: (1) bookkeeping or other services related to the accounting records or financial statements of the audit client; (2) financial information systems design and implementation; (3) appraisal or valuation services, fairness opinions, or contribution-in-kind reports; (4) actuarial services; (5) internal audit outsourcing services; (6) management functions or human resources; (7) broker or dealer, investment advisor, or investment banking services; (8) legal services and expert services unrelated to the audit; and (9) any other service determined by regulation to be impermissible. Pursuant to the Act, the SEC has adopted rules requiring that all audit services and all permissible non-audit services provided to an issuer by the auditor of the issuer be pre-approved by the issuer’s audit committee. Such audit committee approval must be disclosed in periodic reports required by the Exchange Act.

    In addition, the SEC’s rules define an accountant as not being independent from an audit client if at any point during the audit and professional engagement period any audit partner who is a member of the engagement team earns or receives compensation based on any service provided or sold to that client other than audit, review and attest services. These rules also amend and require additional disclosure to investors of information related to the audit and non-audit services provided by, and fees paid by the issuer to, the auditor of the issuer’s financial statements. The rules also require disclosure of an audit committee’s policies and procedures concerning pre-approval of an audit and non-audit services in Forms 20-F and 40-F.
    Auditors
    This document does not address the significant regulation introduced concerning by the Act regulation of auditors. However, it is important to recognize that, among other things, the Act and rules promulgated by the SEC pursuant to the Act require:
  • each registered public accounting firm to report to the issuer’s audit committee (1) all critical accounting policies and practices, (2) all alternative treatments of financial information within GAAP that have been discussed with management, implications of their use and the accounting firm’s preferred treatments, and (3) any other written communications between the accounting firm and management;
  • lead and concurring audit partners to rotate after a threshold number of years and, upon rotation, to take a “time-out” period for a certain number of years; and
  • a registered public accounting firm to refrain from performing any audit service if a chief executive officer, controller, chief financial officer, chief accounting officer, or any person serving in an equivalent position for the issuer, was employed by that registered independent public accounting firm and participated in any capacity in the audit of that issuer during the one year period preceding the date of the initiation of the audit.
    The Act created the Public Company Accounting Oversight Board (the “PCAOB”), a regulatory body with investigative and enforcement powers to oversee the accounting industry and to discipline auditors. Again, this document does not purport to address this complex and evolving area of law. However, it should be noted that, among other things, the PCAOB has the following duties:
  • register U.S. and non-U.S. public accounting firms that prepare audit reports for U.S. and non-U.S. issuers;
  • establish or adopt auditing, quality control, ethics, independence and other standards relating to the preparation of audit services;
  • conduct inspections, investigation and disciplinary proceedings concerning, and impose appropriate sanctions upon, registered U.S. and non-U.S. public accounting firms and associated persons of such firms; and
  • perform such other duties or functions as the PCAOB or the SEC determines are necessary and appropriate to promote high professional standards with respect to auditors and audit reports, or to otherwise carry out the Act.
    Generally, non-U.S. accounting firms that prepare or furnish audit reports with respect to any U.S. or non-U.S. issuer are subject to the Act and the rules of the PCAOB and the SEC issued there under in the same manner and to the same extent as U.S. public accounting firms.
    Enhanced Remedies and Miscellaneous Provisions
    Section 304 of the Act provides that, if an issuer is required to prepare an accounting restatement due to material noncompliance with any financial reporting requirement “as a result of misconduct,” the CEO and CFO of the issuer must make certain reimbursement payments to the issuer. These payments include all bonuses and other incentive-based or equity based compensation paid to the CEO and CFO during the 12 months following the filing of the materially inaccurate financial statements. In addition, the CEO and CFO must pay back any profits that they have realized from the sale of company securities during that same time period.

    Section 307 of the Act required the SEC to issue rules setting forth the minimum standards for “attorneys appearing and practicing before the SEC in any way in the representation of issuers,” including rules (1) requiring attorneys to report to the chief legal officer, or CLO, or CEO of the issuer evidence of material violation of U.S. securities law or breach of fiduciary duty or similar violation by the issuer or any agent of the issuer and (2) if the CLO or CEO does not appropriately respond, requiring the attorney to report the evidence to the issuer’s audit committee or to another committee of independent directors, or to the board of directors of the issuer.

    The SEC rules promulgated pursuant to Section 307 establish the “up the ladder” procedures called for by the Act. In addition, the rules provide that an issuer is permitted to establish a “qualified legal compliance committee,” or QLCC, as an alternative procedure for reporting evidence of a material violation.

    Foreign private issuers are included within the definition of “issuer” and, therefore, are covered by these rules. The rules cover attorneys who provide legal services to an issuer, who have an attorney-client relationship with the issuer, and who “appear and practice” before the SEC. The rules cover all attorneys who are admitted, licensed or otherwise qualified to practice law, whether employed in-house by an issuer or retained to perform legal work on behalf of an issuer.
    An attorney generally will be considered to “appear and practice” before the SEC if he or she:
  • transacts any business with the SEC, including communications in any form;
  • represents an issuer in a SEC administrative proceeding or in connection with a SEC investigation, inquiry, information request or subpoena; or
  • provides advice regarding U.S. securities laws or the SEC’s rules and regulations regarding any document that the attorney has notice will be filed with or submitted to (or incorporated into a filed or submitted document with) the SEC.
    Although rules also cover attorneys licensed, or otherwise qualified to practice, in foreign jurisdictions, they provide an exemption for “non-appearing foreign attorneys.” Specifically, foreign attorneys who are not admitted in the U.S., and who do not advise clients regarding U.S. law or hold themselves out as such (with certain limited exceptions), would not be covered by the rules. Foreign attorneys who provide legal advice regarding U.S. law would be covered to the extent they are appearing and practicing before the SEC, unless they provide such advice in consultation with U.S. counsel. Non-U.S. attorneys who do not meet the definition of “non-appearing foreign attorney” will be subject to this rule, but are not required to comply with the requirements of these rules to the extent that such compliance is prohibited by applicable foreign law.

    It is important to note that even if the CLO of a foreign private issuer is a “non-appearing foreign attorney,” he or she is required to respond in accordance with these rules if an attorney reports evidence of a material violation of the securities laws, fiduciary duties, or similar violations. The rule defines “material violation” in terms of a violation of U.S. federal or state law and does not include violations of foreign laws.

    Among other provisions providing whistleblower protection under the Act, Sections 1107 and 806 of the Act establish new protections for “whistle-blowers.” Section 1107 makes it a criminal offense for any person “knowingly, with the intent to retaliate” to take any action harmful to any other person for providing truthful information to any law enforcement officer with respect to the possible commission of any federal offense. Section 806 makes it unlawful for any company with a class of securities registered under Section 12 of the Exchange Act, or any officer, employee, contractor, subcontractor, or agent, to take adverse employment-related action against an employee for providing information to an investigatory body or a supervisor concerning certain specified securities violations. Section 806 creates a civil cause of action for employees who believe they have been discharged or who suffer other discrimination in violation of this provision.

    Sections 802 and 1102 of the Act broaden the definition of unlawful document destruction. Section 802 makes destroying evidence to obstruct an investigation or any other matter within the jurisdiction of any department or agency of the United States illegal. Section 1102 of the Act makes it a criminal offense to corruptly alter, destroy, mutilate or conceal a record or document with the intent to impair its integrity or use in an official proceeding or to otherwise obstruct, influence or impede any official proceeding or attempt to do so. For purposes of Section 1102, there is no requirement that any investigation or official proceeding be pending at the time of the document destruction.

    Foreign private issuers that are subject to the Act should be aware that the SEC’s rules under Section 802 also increase the period during which records need to be retained by the issuer’s auditors from five years to seven years following the conclusion of the audit or review. Records to be retained include work papers and other documents that form the basis of the audit or review and memoranda, correspondence, communications, other documents, and records (including electronic records), which are created, sent or received in connection with the audit or review, and which contain conclusions, opinions, analyses, or financial data related to the audit or review.

    Sections 802 and 1102 apply to a foreign private issuer to the extent it is in possession of documents that relate to matters within the jurisdiction of any department or agency of the U.S. This would include items related to filings with the SEC.

    Section 1105 of the Act authorizes the SEC, in any administrative cease-and-desist proceeding, to bar a person from serving as a director or officer of any issuer if such person has violated the anti-fraud provisions of the U.S. securities laws and if the conduct of that person demonstrates “unfitness” to serve as an officer or director. Section 1105 applies to officers and directors of foreign private issuers if they were found to have violated the anti-fraud provisions of the U.S. securities laws.
    Significantly, the Act imposes criminal penalties for certain violations, including among other things:
  • Section 802 of the Act doubles the maximum prison sentences associated with unlawful destruction of documents, in some cases setting them at up to twenty years;
  • Section 807 of the Act makes it a crime to engage in any “scheme or artifice” to defraud investors or shareholders in connection with any security of a non-U.S. issuer, and the punishment for such offense includes fines and up to 25 years in prison; and
  • Section 904 of the Act raises the maximum sentence for defrauding pension funds to ten years in prison.