Aktienoptionen Sarbanes Oxley

Schnelle Antworten Die Gesetze, die die Securities Industry Securities Act von 1933 Die häufig als Quotruth in Securitiesquot Gesetz bezeichneten Securities Act von 1933 hat zwei grundlegende Ziele: verlangen, dass die Anleger erhalten finanzielle und andere wichtige Informationen über Wertpapiere für den öffentlichen Verkauf angeboten werden und Verbot von Betrug, Falschdarstellungen und anderen Betrug beim Verkauf von Wertpapieren. Zweck der Registrierung Ein primäres Mittel zur Erreichung dieser Ziele ist die Offenlegung wichtiger Finanzinformationen durch die Registrierung von Wertpapieren. Diese Informationen ermöglichen es Investoren, nicht der Regierung, fundierte Urteile darüber abzugeben, ob ein Unternehmen Wertpapiere kaufen soll. Während die SEC verlangt, dass die Informationen richtig sind, kann es nicht garantieren. Anleger, die Wertpapiere kaufen und Verluste erleiden, haben wichtige Verwertungsrechte, wenn sie nachweisen können, dass eine unvollständige oder ungenaue Offenlegung wichtiger Informationen vorliegt. Der Registrierungsprozess Im Allgemeinen müssen Wertpapiere, die in den USA verkauft werden, registriert werden. Die Registrierungsformulare Unternehmen Datei liefern wesentliche Fakten bei gleichzeitiger Minimierung der Belastung und Kosten der Einhaltung der Gesetze. Grundsätzlich verlangen die Registrierungsformulare: eine Beschreibung der Unternehmenseigen - schaften und des Unternehmens eine Beschreibung der zu erbringenden Wert - papierinformationen über die Geschäftsführung und der von unabhängigen Buchhaltern bestätigten Jahresabschlüsse. Anmeldungen und Prospekte werden kurz nach der Einreichung bei der SEC veröffentlicht. Wenn sie von inländischen U. S.-Unternehmen eingereicht werden, sind die Aussagen auf der EDGAR-Datenbank zugänglich, die auf sec. gov zugänglich ist. Registrierungserklärungen unterliegen der Einhaltung der Offenlegungsanforderungen. Nicht alle Wertpapiere müssen bei der Kommission registriert sein. Einige Ausnahmen von der Registrierungspflicht umfassen: private Angebote für eine begrenzte Anzahl von Personen oder Institutionen, die Angebote von eingeschränkten Angeboten in ländlicher Qualität und Wertpapieren von kommunalen, staatlichen und föderalen Regierungen anbieten. Durch die Freistellung vieler kleiner Angebote aus dem Registrierungsprozess versucht die SEC die Kapitalbildung zu fördern, indem sie die Kosten für das Anbieten von Wertpapieren an die Öffentlichkeit senkt. Securities Exchange Act von 1934 Mit diesem Gesetz schuf der Kongress die Securities and Exchange Commission. Das Gesetz ermächtigt die SEC mit einer breiten Zuständigkeit für alle Aspekte der Wertpapierbranche. Dazu gehört auch die Regulierung, Regulierung und Kontrolle von Maklerfirmen, Transferstellen und Clearingagenturen sowie der nationalen Selbstregulierungsorganisationen (SROs). Die verschiedenen Wertpapierbörsen, wie die New York Stock Exchange, die NASDAQ Stock Market und die Chicago Board of Options sind SROs. Die Financial Industry Regulatory Authority (FINRA) ist ebenfalls eine SRO. Das Gesetz identifiziert und verbietet bestimmte Verhaltensweisen auf den Märkten und erteilt der Kommission disziplinarische Befugnisse gegenüber beaufsichtigten Unternehmen und Personen, die mit diesen verbunden sind. Das Gesetz ermächtigt die SEC auch, periodische Berichterstattung über Informationen von Unternehmen mit öffentlich gehandelten Wertpapieren zu verlangen. Corporate Reporting Unternehmen mit mehr als 10 Millionen in Vermögenswerte, deren Wertpapiere von mehr als 500 Eigentümer gehalten werden, müssen jährliche und andere periodische Berichte. Diese Berichte stehen der Öffentlichkeit über die EDGAR-Datenbank SEC39 zur Verfügung. Stimmrechtsvertretungen Das Securities Exchange Act regelt auch die Offenlegung in den Materialien, die verwendet werden, um Aktionäre39 Stimmen in jährlichen oder besonderen Sitzungen für die Wahl der Direktoren und die Genehmigung von anderen Corporate Action. Diese Informationen, die in Vollmachtsmaterialien enthalten sind, müssen bei der Kommission im Vorfeld einer Aufforderung zur Einhaltung der Offenlegungsvorschriften eingereicht werden. Solicitations, ob vom Management oder von Gesellschaftergruppen, müssen alle wichtigen Tatsachen über die Fragen offenlegen, auf denen die Inhaber zur Abstimmung aufgefordert werden. Tenderangebote Das Securities Exchange Act erfordert die Offenlegung wichtiger Informationen durch jeden, der mehr als 5 Prozent der Wertpapiere eines Unternehmens durch Direktkauf oder Übernahmeangebot erwerben möchte. Ein solches Angebot wird oft verlängert, um die Kontrolle über das Unternehmen zu erlangen. Wie bei den Stimmrechtsvertretern können Aktionäre auch über diese kritischen Unternehmensereignisse informiert entscheiden. Insiderhandel Die Wertpapiergesetze verbieten betrügerische Aktivitäten jeglicher Art im Zusammenhang mit dem Angebot, dem Kauf oder dem Verkauf von Wertpapieren weitgehend. Diese Bestimmungen sind die Grundlage für viele Arten von Disziplinarmaßnahmen, einschließlich Maßnahmen gegen betrügerische Insiderhandel. Insiderhandel ist illegal, wenn eine Person eine Sicherheit tauscht, während sie im Besitz von materiellen nichtöffentlichen Informationen ist, die gegen eine Verpflichtung zur Zurückhaltung der Informationen oder zum Verzicht auf den Handel verstoßen. Registrierung von Börsen, Verbänden usw. Das Gesetz verpflichtet eine Vielzahl von Marktteilnehmern, sich bei der Kommission anzumelden, einschließlich Börsen, Makler und Händler, Transferstellen und Clearingstellen. Die Registrierung für diese Organisationen beinhaltet die Einreichung Offenlegungsunterlagen, die regelmäßig aktualisiert werden. Der Austausch und die Financial Industry Regulatory Authority (FINRA) werden als Selbstregulierungsorganisationen (SRO) bezeichnet. SROs müssen Regeln aufstellen, die die Disziplinierung von Mitgliedern für falsches Verhalten und die Festlegung von Maßnahmen zur Gewährleistung der Marktintegrität und des Anlegerschutzes ermöglichen. SRO vorgeschlagenen Regeln unterliegen der SEC Überprüfung und veröffentlicht, um öffentliche Stellungnahme zu stellen. Während viele SRO vorgeschlagen Regeln sind wirksam bei der Einreichung, einige unterliegen der SEC-Genehmigung, bevor sie in Kraft treten können. Trust Indenture Act von 1939 Dieses Gesetz gilt für Schuldverschreibungen wie Anleihen, Schuldverschreibungen und Schuldverschreibungen, die zum öffentlichen Verkauf angeboten werden. Obwohl diese Wertpapiere nach dem Securities Act registriert werden dürfen, dürfen sie nicht öffentlich angeboten werden, es sei denn, dass eine förmliche Vereinbarung zwischen dem Emittenten von Anleihen und dem Anleihegläubiger, bekannt als Vertrauensvertrag, den Standards dieses Gesetzes entspricht. Investmentgesellschaftsgesetz von 1940 Dieses Gesetz regelt die Organisation von Gesellschaften, einschließlich Investmentfonds, die vorwiegend in Anlagen investieren, reinvestieren und in Wertpapieren handeln und deren eigene Wertpapiere dem investierenden Publikum angeboten werden. Die Verordnung soll die Interessenkonflikte minimieren, die bei diesen komplexen Vorgängen auftreten. Das Gesetz verpflichtet diese Unternehmen, ihre Finanzlage und Investitionspolitik an Investoren zu offenbaren, wenn die Aktien anfänglich verkauft werden und anschließend regelmäßig. Das Hauptaugenmerk dieses Gesetzes liegt auf der Offenlegung der Informationen über den Fonds und seiner Anlageziele sowie der Struktur und der Struktur der Investmentgesellschaft für die investierende Öffentlichkeit. Es ist wichtig, sich daran zu erinnern, dass das Gesetz der SEC nicht gestattet, die Anlageentscheidungen oder - aktivitäten dieser Unternehmen direkt zu überwachen oder die Verdienste ihrer Anlagen zu beurteilen. Der vollständige Wortlaut dieses Gesetzes ist abrufbar unter: sec. govaboutlawsica40.pdf. Anlageberatergesetz von 1940 Dieses Gesetz regelt die Anlageberater. Mit bestimmten Ausnahmen erfordert dieses Gesetz, dass Unternehmen oder Einzelpraktiker, die für die Beratung anderer über Wertpapieranlagen entschädigt werden, sich bei der SEC registrieren und den Vorschriften zum Schutz der Anleger entsprechen müssen. Da das Gesetz in den Jahren 1996 und 2010 geändert wurde, müssen sich in der Regel nur Berater, die über mindestens 100 Millionen verwaltete Vermögen verfügen oder eine eingetragene Investmentgesellschaft beraten, bei der Kommission registrieren lassen. Den vollständigen Wortlaut dieses Gesetzes finden Sie unter: sec. govaboutlawsiaa40.pdf. Sarbanes-Oxley Gesetz von 2002 Am 30. Juli 2002 unterzeichnete Präsident Bush das Gesetz von Sarbanes-Oxley von 2002, das er als die weitesten Reformen der amerikanischen Geschäftspraktiken seit der Zeit von Franklin Delano Roosevelt bezeichnete Eine Reihe von Reformen zur Stärkung der Unternehmensverantwortung, zur Verbesserung der finanziellen Offenlegung und zur Bekämpfung von Unternehmens - und Rechnungsführungsbetrug sowie zur Schaffung des "Public Accounting Oversight Board", das auch als PCAOB bekannt ist, um die Tätigkeiten des Prüfungsberufs zu überwachen. Der vollständige Wortlaut des Gesetzes ist abrufbar unter: sec. govaboutlawssoa2002.pdf. (Überprüfen Sie bitte die vom Repräsentantenbüro des US-Repräsentantenhauses verwalteten Klassifikationstabellen des Gesetzesüberprüfungsbeauftragten für Aktualisierungen eines der Gesetze.) Sie können Links zu allen Regelungen und Berichten der Kommission finden, die unter dem Sarbanes-Oxley-Gesetz herausgegeben werden: sec. govspotlightsarbanes - oxley. htm. Dodd-Frank Wall Street Reform und Verbraucherschutzgesetz von 2010 Die Dodd-Frank Wall Street Reform und Verbraucherschutzgesetz wurde in Gesetz am 21. Juli 2010 von Präsident Barack Obama unterzeichnet. Die Gesetzgebung sah vor, das U. S.-Regulierungssystem in einer Reihe von Bereichen umzugestalten, einschließlich, aber nicht beschränkt auf Verbraucherschutz, Handelsbeschränkungen, Kreditratings, Regulierung von Finanzprodukten, Corporate Governance und Offenlegung sowie Transparenz. Den vollständigen Wortlaut des Gesetzes finden Sie unter: sec. govaboutlawswallstreetreform-cpa. pdf. (Bitte überprüfen Sie die Klassifizierung Tabellen von der US House of Representatives Office des Gesetzes Revision Counsel für Aktualisierungen eines der Gesetze gepflegt.) Sie können Links zu allen Regelungen der Kommission und Berichte nach dem Dodd Frank Act unter: sec. govspotlightdodd - Frank. shtml. Jumpstart Unser Business Startups Act von 2012 Das Jumpstart Unser Business Startups Act (das JOBS Actquot) wurde am 5. April 2012 verabschiedet. Das JOBS-Gesetz zielt darauf ab, Unternehmen bei der Beschaffung von Mitteln in öffentlichen Kapitalmärkten zu helfen, indem gesetzliche Anforderungen minimiert werden. Der vollständige Wortlaut des Gesetzes ist abrufbar unter: gpo. govfdsyspkgBILLS-112hr3606enrpdfBILLS-112hr3606enr. pdf. (Bitte überprüfen Sie die Klassifizierung Tabellen von der US House of Representatives Office des Gesetzes Revision Counsel für Aktualisierungen eines der Gesetze gepflegt.) Sarbanes-Oxley sollte nicht ausschließen, alle Broker-Assisted Cashless Option Übungen von Insider Obwohl einige Anwaltskanzleien haben die Öffentlichkeit beraten Emittenten, brokerunterstützte bargeldlose Aktienoptionsübungen für leitende Angestellte und Direktoren im Sinne von Section 402 des Sarbanes-Oxley Act auszusetzen, glauben wir unter bestimmten Einschränkungen, dass diese Aussetzung nicht erforderlich ist. Die Satzung Section 402 des Sarbanes-Oxley Act von 2002 (quotSOquot) ändert § 13 des Securities Exchange Act von 1934 (quotExchange Actquot) durch Hinzufügen eines neuen Absatzes (k). Dieser Unterabschnitt, der unmittelbar nach Inkrafttreten der SO39-Verordnung am 30. Juli 2002 in Kraft getreten ist, sieht folgendes Verbot vor: "Es ist für jeden Emittenten (wie in Abschnitt 2 des Sarbanes-Oxley Act von 2002 definiert), direkt oder indirekt, Eine Verlängerung des Kredits oder eine Verlängerung des Kredits in Form eines persönlichen Darlehens an oder für einen Direktor oder Vorstand (oder ein gleichwertiges Ding) dieses Emittenten zu veranlassen Abschnitt 2 Buchstabe a Ziffer 7 definiert SO wie folgt: "Der Begriff 39issuer39 bezeichnet einen Emittenten (gemäß § 3 des Securities Exchange Act von 1934 (15 USC 78c), dessen Wertpapiere gemäß § 12 Abs Dieses Gesetz (15 USC 78l), oder das zur Einreichung von Berichten nach § 15 (d) (15 USC 78o (d)) erforderlich ist oder das eine Registrierungserklärung eingereicht hat, die nach dem Securities Act of 1933 (15 USC 77a ff.), Und dass es sich nicht zurückgezogen hat. Die QuoteExecutive Officerquot ist in Regel 3b-7 unter dem Börsengesetz wie folgt definiert: "Der Begriff 39Ausschussbeauftragter, 39, wenn er mit Bezug auf einen Registranten verwendet wird, bedeutet sein Dem Präsidenten, einem Vizepräsidenten des Registranten, der für eine Hauptgeschäftseinheit, - abteilung oder - funktion zuständig ist (z. B. Vertrieb, Verwaltung oder Finanzen), einen anderen Offizier, der eine Politikfunktion ausübt, oder jede andere Person, Der Registrierungspflichtige. Vorstandsmitglieder von Tochtergesellschaften können als leitende Angestellte des Registranten angesehen werden, wenn sie für die Registranten solche Policenrichtungsfunktionen durchführen. "1Directorquot ist in 393 (a) (7) des Börsengesetzes definiert als: der Direktor eines Unternehmens oder einer Person Die ähnliche Funktionen in Bezug auf jede Organisation ausüben, unabhängig davon, ob sie gegründet oder uneingetragen sind. Das neue Statut verbietet den Emittenten, die ihre Deckung direkt oder indirekt (auch über eine Tochtergesellschaft) untersagen, die Verlängerung oder Aufrechterhaltung der Kreditvermittlung für die Verlängerung des Kredits oder die Verlängerung Eine Verlängerung der Gutschrift in jedem Fall in Form einer persönlichen Darlehen an eine der aufgezählten Klasse von Personen. Die Begriffe quotextend, quot quotainain, quotquecredit, quotalrange, quot und quotpersonal loanquot werden im Statut verwendet, sind aber nicht definiert. Anders als viele andere Bestimmungen von SO sehen diese Abschnitte keine Klarstellungs - oder Durchführungsbestimmungen der SEC oder anderer Regulierungsbehörden vor. SEC-Vertreter haben informell angegeben, dass keine Regulierungsmaßnahmen in diesem Abschnitt kurzfristig wahrscheinlich sind. So ist der bloße gesetzliche Text wahrscheinlich alle Leitlinien, die für die absehbare Zukunft zur Verfügung stehen. Mechanik brokerunterstützter bargeldloser Optionsübung Brokerunterstützte bargeldlose Optionsübung wird üblicherweise mit Unterstützung einer Brokerfirma in einer der folgenden Moden durchgeführt: Zum Zeitpunkt der Ausübung der Option erhält der Broker vom Optionsnehmer eine Kopie der Hat der Optionsnehmer eine unwiderrufliche Mitteilung an den Emittenten der Ausübung der Option sowie eine Kopie der unwiderruflichen Anweisungen des Optionsnehmers an den Emittenten zur Lieferung der Optionsaktie an den Broker gegen den Broker, gleichzeitige Zahlung an den Emittenten des Optionsausübungspreises. Am Tag des Erhalts dieser Unterlagen verkauft der Makler vor der eigentlichen Emission durch die Gesellschaft die Aktien der Gesellschaft, die für die Erfüllung des Ausübungspreises und der anwendbaren steuerlichen Verpflichtungen erforderlich sind. Wenn der Makler die Barmittel aus diesem Verkauf erhält (in der Regel drei Handelstage nach dem Verkauf), legt der Makler diese Erträge dem Emittenten zur gleichzeitigen Übergabe durch den Emittenten des Subjekts an den Broker oder den Broker vor Insider des für die Ausübung der Option notwendigen Erlöses und liefert die Zahlung an die Gesellschaft am selben Tag wie die Ausübung des Erhalts der Ausübungsmitteilung durch den Broker mit unwiderruflichen Anweisungen an den Emittenten zur Lieferung des Optionsbestands. Obwohl die zur Erfüllung der Optionsverpflichtung des Optionsinhabers notwendigen Aktien fast immer gleichzeitig mit der Ausübung verkauft werden, wird der Makler in der Regel Zinsen auf die geförderten Fonds gezahlt. Wir glauben, dass Section 402 diese Verfahren nur dann verbieten würde, wenn sie erstens als eine Verlängerung der Kreditwürdigkeit des Brokers an den Exekutivdirektor des Optionskreises angesehen werden, und zweitens wurde die Verlängerung des Kredits als von der Gesellschaft vereinbart angesehen. 2 Die Gesetzgebungsgeschichte dieser SO-Bestimmung enthält keine Anhaltspunkte für die Absicht des Kongresses, ob bargeldlose Optionsübungen innerhalb oder außerhalb des SO39-Verbots erfolgen sollten. 3 Verlängerung von Krediten durch Broker Die oben beschriebenen brokerunterstützten bargeldlosen Ausübungsverfahren beinhalten den Verkauf oder die Vorfinanzierung von Geldmitteln durch den Broker in Bezug auf Aktien, die der Optionsnehmer noch nicht erhalten hat, gegen die Zusicherung der Anlieferung dieser Anteile kurz danach von der Gesellschaft . Wenn die Aktien aus irgendeinem Grund nicht von der Gesellschaft erworben werden, wäre der Broker verpflichtet, seine Abwicklungspflicht für die Aktien aus irgendeiner anderen Quelle zu begleichen, sei es aus eigenen Aktien, die er selbst besitzt oder von anderen Aktien erworben hat. In diesem Sinne könnte das Verfahren als Darlehen durch den Makler von Aktien an den Optionsnehmer für den Verkauf für sein Konto charakterisiert werden, um durch die Ausgabe von Aktien durch die Gesellschaft zurückgezahlt werden. 4 Diese brokerunterstützten bargeldlosen Ausübungsverfahren werden ausdrücklich als außerhalb der Deckung der Regelung T, die im Allgemeinen Einschränkungen für die Verlängerung der Kredite durch Makler. 5 § 220 Abs. 3 Buchst. E Ziff. 4 der Verordnung T sieht vor: "Zur vorübergehenden Finanzierung des Erhalts von Wertpapieren eines Kunden nach einem im SEC-Formular S-8 eingetragenen Personalvorsorgeplan oder den Quellensteuern für einen Mitarbeiterbeteiligungsplan kann ein Gläubiger zustimmen Anstelle der Wertpapiere, gegebenenfalls eine ordnungsgemäß ausgeführte Ausübungsmitteilung sowie Anweisungen an den Emittenten, die Aktien an den Gläubiger zu liefern. Vor der Annahme hat der Gläubiger zu überprüfen, dass der Emittent die Wertpapiere unverzüglich ausliefert und der Kunde das Konto, in das die Wertpapiere zu hinterlegen sind, benennen muss. Bezug auf die aufsichtsrechtlichen Beschränkungen bei Kreditvergabe durch Vermittler gemäß der Vorschrift T sieht weniger vor Klare Anleitung für Abschnitt 402 Zwecke. Die vorstehende Bestimmung könnte darauf hindeuten, dass diese Art von Vereinbarungen nicht durch die Beschränkungen der Vermarktung von Vermittlerausweitungen von Krediten verboten sind, sollten sie nicht als Verlängerungen von Krediten im Sinne des Abschnitts 402 angesehen werden Dass diese Tätigkeiten zwar nicht den Einschränkungen der Verordnung T unterliegen, sie aber tatsächlich eine Finanzierung darstellen. Im Übrigen ist Vorsicht geboten, die Verordnung T als Bezugspunkt für die Auslegung des Abschnitts 402 zu verwenden Von ähnlichen Begriffen (quotextension of credit, quot quotmaaintaining, quotarrangingquot) und ihrer spezifischen Ausrichtung auf die genaue Art der Transaktion, für die 40239s Anwendbarkeit analysiert wird (bargeldlose Optionsprogramme), hat die Regulation T eine völlig andere politische Basis als Section 402. 6 Letztlich stellt die Bezugnahme auf die Verordnung T, wie auch die Gesetzgebungsgeschichte von Section 402, keine solide Grundlage für das Erreichen einer Schlussfolgerung dar, ob die Tätigkeit von Brokerfirmen bei der Durchführung bargeldloser Optionsübungen eine Quotextension von creditquot in Form eines Personals darstellt Kreditvergabe an den Optionsnehmer, wie sie in Abschnitt 402 verwendet werden. Anordnen der Krediterweiterung durch die Emittentin Wenn die Broker-Erleichterung von bargeldlosen Übungen, wie oben beschrieben, eine Anhebung der Creditquot an Führungskräfte darstellt, würde Abschnitt 402 das Unternehmen daran hindern, eine solche Erweiterung zu quotieren . Das Konzept der quotarrangingquot Erweiterungen der Kredit wurde das Thema der erweiterten Federal Reserve Board und SEC Interpretation nach Regulation T, die die Fähigkeit von Maklern, solche Erweiterungen von anderen Parteien zu beschränken beschränkt. Der allgemeine Tenor einer solchen Auslegung besteht darin, dass der Begriff der "quotarrangingquot" nach dem Regulation T-Kontext eine sehr breite Bedeutung erhalten hat. Die Einführung eines Kunden an einen Kreditgeber wurde dahin ausgelegt, dass er eine Quote der Kreditvergabe des Kreditgebers nach der Regulierung T darstellt. Die Empfehlung eines bestimmten Kreditgebers wurde als solche arrangiert. Sogar die einfache Übergabe von Wertpapieren an einen Kreditgeber gegen Erhalt der Erlöse aus einem Darlehen ist eine Vereinbarung des Darlehens nach der Regelung T gewesen. 7 Wurde bei der Auslegung von § 402 eine so breite Auffassung von quotarrangingquot angewandt, Kann der Emittent im Zusammenhang mit einem bargeldlosen Ausübungsprogramm in die Kategorie der Quotierung der Kreditwürdigkeit des Brokers fallen und damit verboten sein. Gewöhnlich wird ein Unternehmen vereinbaren, dem Broker eine Bestätigung zu geben, dass er die Mitteilung über die Ausübung und Anweisungen erhalten hat, Anteile an den Broker zu liefern, und (manchmal), dass die Optionsausübungserklärung den Bedingungen des Options - und Optionsvertrages entspricht . Im Allgemeinen wird der Emittent gemäß den Anweisungen des Optionsnehmers vereinbaren, die Anteile an den Broker gegen die gleichzeitige Zahlung des Brokers zu liefern. Oft Unternehmen empfehlen Brokerfirmen an Mitarbeiter für Cash Option Übungen. Häufig behält sich das Unternehmen das Recht vor, die von dem Optionsnehmer für diese Zwecke ausgewählte Maklerfirma zu genehmigen. Manchmal wird der Emittent eine oder mehrere Maklerfirmen benennen, die für diese Zwecke von den Optionsnehmern benötigt werden. Jedoch argumentieren die Unterschiede in den Politikgrundlagen nach der Verordnung T und Abschnitt 402, dass der Begriff "quotarrangingquot" unter 402 mehr gemäß dem Begriff "natürliche Bedeutung" auszulegen ist als in der in der Verordnung T festgelegten Weise Die in Wertpapierspekulation gerichtet sind, und weg von anderen Quellen. Zudem sollen die Wertpapiermärkte vor übermäßigen Schwankungen und Störungen durch überhöhte Kredite geschützt und Anleger vor überhöhten Kreditzusagen geschützt werden. Der Schutz von Broker-Händlern gegen übermäßiges Kreditrisiko gegenüber Kunden war kein originärer Zweck hinter den Margin-Vorschriften. 8 In späteren Jahren haben die Regulierungsagenturen darauf hingewiesen, dass es wünschenswert ist, Makler vor übermäßiger Kreditausweitung zu schützen, dies ist jedoch nicht der primäre Schub der Marginregelungen. Ein regulatorischer Zweck, der auf die Kontrolle der Gesamtversorgung von Krediten auf dem Markt ausgerichtet ist, eignet sich selbstverständlich zu einem breiten Verbot, ein derartiges Guthaben zu quotieren. Der Schaden wird durch die unregulierte Kreditvergabe als selbstverständlich angesehen, auch wenn seine Quelle nur eng mit einem direkt regulierten Broker-Händler verbunden ist. Der Zweck des Darlehensverbots des § 402 ist dagegen der Schutz der Anleger im Unternehmen. Der Bericht des Senatsausschusses über S.2673 9 verwies auf Multimillionen-Dollar-Darlehen an Führungskräfte von Enron, WorldCom, Qwest, Global Crossing und AES Corp. und Milliarden-Dollar-Darlehen an den Gründer von Adelphia. Mehrere dieser Kredite wurden später vom Unternehmen verziehen. Der Ausschuss stellte fest, dass es sich um Quoten, dass die Anleger über Kredite an Insider betroffen sind. Inhärent in Corporate-Darlehen-Transaktionen an verbundenen Parteien ist das Risiko für die Corporation39s Aktionäre durch die Tatsache, dass eine ausreichende Kredit-Analyse nicht durchgeführt werden kann und sogar, dass Kredite können einfach Später vergeben werden, jeweils zum Nachteil der Aktionäre. § 40239s Verbot eines Unternehmens, die Quotenkredite an Führungskräfte zu zertifizieren, sollten in Übereinstimmung mit diesem Zweck analysiert werden. Hier geht es nicht darum, einen Handelsplatz gegen eine erhöhte Kreditversorgung durch Kredite an Führungskräfte zu schützen. Weder ist die Sorge, die Exekutive gegen die Folgen einer übermäßigen Kreditaufnahme zu schützen. Der Fokus liegt auf dem Potenzial des Schadens für das Unternehmen und seine Aktionäre. Soweit die Art der Beteiligung des Unterneh - mens an der Ausübung des Darlehens den Gesellschaftern der Gesell - schaft ein Risiko berührt, sollte das Quotenverbot gelten. Zum Beispiel, wenn durch angegebenes oder unstatiertes Verständnis, wird das Unternehmen einen Kreditvermittler mit einer Art von Geschäftsbeziehung mit dem Unternehmen als Austausch für den Broker begünstigen, die bargeldlose Übungen zu erleichtern, sollte dies als eine quotarrangingquot von der Firma angesehen werden. Um zu vermeiden, dass eine Quotierung von Anteilen auf dieser Basis vorliegt, ist es für ein Unternehmen vorzuziehen, dass es nicht empfehlenswert ist oder verlangt, dass Führungskräfte Brokerfirmen verwenden, mit denen das Unternehmen eine Investmentbanking-Beziehung hat oder deren Investmentanalysten über die Gesellschaft berichten Die das Unternehmen hat eine andere Geschäftsbeziehung. Es kann für eine Firma vorsichtig sein, Führungskräften vorzuschlagen, dass sie Maklerfirmen anders als jene verwenden, mit denen das Unternehmen eine Beziehung hat, oder sogar die Verwendung von Firmen anders als diese zu verlangen, ohne bestimmte Firmen zu verwenden. Innerhalb dieser Einschränkungen sind wir der Auffassung, dass ein bargeldloses Ausübungsprogramm kein unrechtmäßiges quotarrangingquot gemäß Section 402 sein sollte, wenn die Beteiligung der Gesellschaft beschränkt ist auf: (i) Empfehlung einer oder mehrerer Brokerfirmen für die Exekutive für bargeldlose Optionsübung (ii) Genehmigung des gewählten Unternehmens auf der Grundlage von Normen für die Verwaltungskompetenz im Umgang mit bargeldlosen Übungen (iii) Vereinbarung, dem Broker eine Empfangsbestätigung über den Erhalt des Auszahlungsformulars zu übermitteln und die Optionsnehmer Anweisungen, Anteile an den Broker zu liefern, iv) dem Broker mitzuteilen, dass die Ausübung erfolgt (V) die Übermittlung des Optionsbestands an den Broker gegen den Broker, gleichzeitige Zahlung des Optionsausübungspreises und des notwendigen Steuerabzugs. Eine solche Interpretation steht im Einklang mit dem Zweck der Satzung, und wir glauben auch, dass es eine weniger angespannte Lesart des Begriffs "quotarranging. quot" bedeutet. Unter diesem Ansatz würde der Begriff quotto arrangequot mehr als eine schwache Verbindung zwischen den Aktionen der Emittenten und der Erweiterung des Maklers erfordern Von Krediten. "Araningquot durch den Emittenten würde eine aktive Beteiligung an der Inkraftsetzung der Verlängerung der Kredit in Frage bedeuten, und wäre gleichbedeutend mit Quotierung, quotengineeringquot oder quotformulatingquot ein Verfahren für Broker-Erweiterungen von Krediten. 11 Wir empfehlen, mit Ausnahme der nachfolgenden Ausführungen, dass die Emittenten davon absehen, dass ein einziger Broker von allen Führungskräften für bargeldlose Optionsübungen verwendet werden muss. Auch dort, wo nachgewiesen werden konnte, dass dies keine Gefahr für die Gesellschaft oder ihre Anteilseigner darstellt, ist diese Beteiligung so signifikant, dass sie als eine Angleichung angesehen werden könnte, die unter der eindeutigen Bedeutung des Begriffs steht. Ungeachtet dessen kann der Emittent nachweisen, dass er die Pflicht zur Verwendung einer einzigen Maklerfirma für bargeldlose Übungen als Teil eines Gesamtprogramms vorschreibt, in dem alle Vorstände und Direktoren verpflichtet sind, einen einzigen Makler für alle ihre Transaktionen im Aktienbestand zu verwenden, Dass der Zweck der Verpflichtung, die Erfüllung der beschleunigten Meldepflichten für solche Transaktionen, die durch Section 403 von SO auferlegt werden, zu erleichtern, wir glauben, dass dies nicht als eine rechtswidrige quotarranging. quot 12 " , 2002, verbietet es einem Emittenten, für die Verlängerung von creditquot an einen Vorstand oder Regisseur zu stimmen. Wenn ein Emittent, der vor dem 30. Juli eine Tätigkeit ausübt, eine Kreditver - längerung vor dem 30. Juli vornimmt, so würde dies über das Verbot hinausgehen. Engagement in der Tätigkeit nach dem 30. Juli bei der Vermittlung Kredit nach dem 30. Juli verlängert ist verboten. Weniger eindeutig ist die Anwendung der Emittenten-Quote, die vor dem 30. Juli 2002 erfolgt, was zu einer Verlängerung des Kreditgewinns durch eine andere Partei nach dem 30. Juli 2002 führt. § 402 befreit die von der Emittentin nach dem 30. Juli beibehaltenen Deckungsquotenverlängerungen Da sie nicht geändert oder erneuert werden. Im Einklang mit dieser Bestimmung sollten Vorschüsse eines Emittenten nach dem 30. Juli, die aufgrund einer vor dem 30. Juli geschlossenen vertraglichen Verpflichtung getätigt wurden, nicht unter das Statut fallen. Das Statut enthält keine vergleichbare Bestimmung über den Zeitpunkt der Organisation der Tätigkeit. Hinsichtlich der bargeldlosen Ausübungsprogramme ist die Satzung so auszulegen, dass sie, soweit die Beteiligung eines Emittenten als eine Vermittlung von Kreditvermittler-Kreditvereinbarungen gilt, so auszulegen ist, als sei sie aus ihrer Berücksichtigung ausgeschlossen Nach dem wirksamen Zeitpunkt, der aufgrund der vertraglichen Verpflichtungen eingegangen ist, die der Makler vor dem Inkrafttreten eingegangen ist. Dies könnte z. B. in Regel 10b5-1-Plänen der Fall sein, die vor dem Zeitpunkt des Inkrafttretens des Gesetzes verabschiedet wurden, unter dem der Makler verpflichtet ist, bargeldlose Übungen im Rahmen des Plans zu erleichtern. Notwendigkeit der Interpretationsberatung Das Darlehensverbot von Section 402 wurde von vielen Praktikern interpretiert, um weit über den Umfang der missbräuchlichen persönlichen Darlehen für Insider zu gelangen, auf die es anscheinend gerichtet gewesen zu sein scheint. Zwar ist eine interpretative Führung eindeutig erforderlich, aber es ist unklar, wann und von wem sie interpretiert werden. Wir glauben, dass die Emittenten, bis eine interpretative Beratung vorliegt, keine Wahl haben, sich aber mit Ratschlägen zu beraten und ein vernünftiges Urteil über die Interpretation dieser schwierigen Frage zu stellen. Während einige Emittenten beschließen können, alle brokerunterstützten bargeldlosen Übungen für leitende Offiziersdirektoren auszusetzen, glauben wir, dass es für Emittenten wichtig ist, dass eine alternative Interpretation von Abschnitt 402 existiert. Reed Smith, eine weltweit führende Anwaltskanzlei mit mehr als 700 Anwälten in 11 US - und zwei US-Städten, repräsentiert Fortune 100 sowie mittelständische und aufstrebende Unternehmen. Zu den Kunden gehören Technologieunternehmen und Unternehmer, Finanzdienstleister, Gesundheitsdienstleister und Versicherer, Kommunikationsunternehmen, Hersteller, Universitäten, gemeinnützige Organisationen, Immobilienentwickler und Kommunen in den USA und in 40 Ländern. Für weitere Informationen, besuchen Sie bitte Schilf. Wenn Sie zukünftige Client-Bulletins per E-Mail erhalten möchten, melden Sie sich bitte auf unserer Website unter reedsmithadmincontact. asp an. Wenn Sie Fragen haben oder zusätzliche Informationen über das in diesem Bulletin enthaltene Material erhalten möchten, wenden Sie sich bitte an einen der Autoren: oder den Rechtsanwalt Reed Smith, mit dem Sie regelmäßig arbeiten. 1 Vorstandsmitglieder müssen in Punkt 10 des Emittenten Form 10-K identifiziert werden. 2 Wir glauben, dass es schwierig ist, ein Argument zu konstruieren, dass dieses Verfahren eine Kreditausweitung direkt durch das Unternehmen beinhaltet, wobei die Aktie nicht von der Gesellschaft ausgegeben wird, bis das Unternehmen eine Zahlung dafür erhält. Häufig enthalten Aktienoptionspläne Bestimmungen, die besagen, dass der Zeitpunkt der Ausübung der Aktienoption der Zeitpunkt ist, zu dem das Unternehmen die Ausübungserklärung des Optionsnehmers erhält. Diese werden bei der Festsetzung der Steuerpflicht des Optionskreises an diesem Tag berücksichtigt. Wenn die tatsächlichen Verfahren bei der Emission von Aktien nicht die Emission vor der Zahlung beinhalten, sollten diese Arten von Bestimmungen, die allein stehen, nicht dazu führen, dass die bargeldlose Option Ausübung als eine Verlängerung des Kredits durch das Unternehmen betrachtet werden. 3 Es gibt keine Erwähnung von Aktienoptionsübungen in der Gesetzgebungsgeschichte des Darlehensverbots. Das Fehlen einer solchen Erwähnung kann jedoch vermutlich nicht als Hinweis auf eine bejahende Gesetzesabsicht angeführt werden, dass bargeldlose Optionsübungen von der Deckung des Verbots ausgeschlossen werden. Die Verwendung der breiten Begriffsquotextension von Krediten in Form eines persönlichen Darlehenszinssatzes sollte vermutlich mehr Arten von Vereinbarungen abdecken, als jener Kongress, der speziell in der schnellen Überlegung des Statuts berücksichtigt wurde. 4 Die Tatsache, dass es sich bei der Rückzahlungsquelle um eine vom Options - platz bezeichnete Quelle und nicht um den Optionsnehmer selbst handelt, wird wahrscheinlich nicht für die Schlussfolgerung sorgen, dass dem Optionsnehmer kein Darlehen vorliegt. Viele Darlehensvereinbarungen sind so konstruiert, dass sie die Rückzahlung durch einen Beauftragten des Schuldners und nicht den Schuldner selbst in Erwägung ziehen. 5 Regulation T was adopted pursuant to the Section 7 of the Securities Exchange Act of 1934, which makes it unlawful for any broker or dealer to directly or indirectly quotextend or maintain creditquot in violation of rules promulgated by the Federal Reserve Board. 6 See discussion of the policy basis of Regulation T and Section 402 in connection with the term quotarrangingquot below. 7 See generally cases cited in Rechlin, Securities Credit Regulation (West Group 2002), 397:2 (quotArranging of creditquot) 397:6 (quotIntroduction of customer to lenderquot) 397:9 (quotDelivery of collateral and receipt of funds from lenderquot). 8 The House Report accompanying the Exchange Act stated: quotThe main purpose of these margin provisions. is not to increase the safety of security loans for lenders. Banks and brokers normally require sufficient collateral to make themselves safe without the help of the law. quot 9 Neither this bill nor House bill 3763 contained a prohibition on loans to executives. The Senate bill required enhanced disclosure of such loans, while the House bill required the SEC to adopt regulations on enhanced disclosure of insider transactions generally. The loan prohibition appeared after deliberations of the conference committee on the House and Senate bills. 10 The AES loan was made to executives to prevent them from being forced to sell company shares due to margin calls. 11 The Oxford English Dictionary (2d edition) defines quotarrangequot (entry 8) as: quotTo come to, or make, a settlement with other persons as to a matter to be done, so that all concerned in it shall do their part. quot Cited literary examples include Burke, quotThat the acts done should be arranged with the Rajah. quot (1786) and Macauley, quotThe details of a butchery were frequently discussed, if not definitely arranged. quot (1849). Webster39s Third New International Dictionary defines quotarrangequot (v. i. entry 1) as: quotto come to an agreement, understanding or settlement (arranged with the travel agent for a June passage).quot Each of these carries a connotation of substantial involvement in bringing an event to pass. 12 This assumes no other business relationships with the broker as discussed above. Testimony Concerning Implementation of the Sarbanes-Oxley Act of 2002 Before the Senate Committee on Banking, Housing and Urban Affairs September 9, 2003 Chairman Shelby, Ranking Member Sarbanes, and Members of the Committee: Thank you for inviting me to testify today on behalf of the Securities and Exchange Commission concerning implementation of the Sarbanes-Oxley Act of 2002. I appreciate having the opportunity to discuss this important matter with you. I. Introduction It has been just over a year since Congress passed and President Bush signed the Sarbanes-Oxley Act into law. Sparked by dramatic corporate and accounting scandals, the Act represents the most important securities legislation since the original federal securities laws of the 1930s. The Act effects dramatic change across the corporate landscape to re-establish investor confidence in the integrity of corporate disclosures and financial reporting. Your backing of the Act and the efforts to implement its sweeping reforms, along with the strong support of your counterparts in the House and our authorizing committees, demonstrates convincingly that the Congress is dedicated to ensuring the financial integrity and vitality of our markets. The first year of the Sarbanes-Oxley Act has produced an impressive record of accomplishments in an incredibly short period of time. The Act set ambitious deadlines for more than 15 separate rulemaking projects by the Commission to implement many of the Acts provisions. The Commission provided a number of opportunities for public input on its proposals, and we carefully studied thousands of letters of public comment in crafting final rules. The bulk of the required rulemaking was required by January 26, 2003, and this past January was the busiest month of rulemaking in Commission history. The Act also called for several mandated studies on particular aspects of the capital markets. 1 Because of the dedicated efforts of the Commission and the select corps of professionals who work at the SEC, I am pleased to say we have met all of the mandates and challenges set out by the Act, and in record time. Moreover, we met these deadlines without sacrificing our other work or obligations 151 including our robust enforcement program and numerous regulatory initiatives unrelated to Sarbanes-Oxley. The Act also provided welcome new enforcement tools to combat corporate fraud, punish corporate wrongdoers and deter fraud with the threat of stiffer penalties. The Commission, both on its own and in conjunction with the Presidents inter-agency Corporate Fraud Task Force, is moving decisively to utilize these new tools to expose and punish acts of corruption, improve corporate responsibility and protect Americas investors. For the fiscal year through August 20, 2003, the Commission has filed 543 enforcement actions, 147 of which involve financial fraud or reporting violations. During this period, the Commission has sought to bar 144 offending corporate executives and directors from holding such positions with publicly traded companies. Further, we are holding accountable not just the companies who engage in fraud, but also the other participants. For example, recent actions signify the Commissions willingness to pursue directors who are reckless in their oversight of management. And we have increasingly designed strategies that take advantage of the creative provisions of the Act to return funds to investors who have suffered losses rather than merely collect those funds for the government. I am pleased to report that the Public Company Accounting Oversight Board, a cornerstone of the Act, is up and running under the strong leadership of its new Chairman, William McDonough. We will continue to crack down on malfeasance, and thanks to the Sarbanes-Oxley Act we have the tools and resources we need to tackle this task. The rules mandated by the Act are in place and companies, their boards and executives, and other quotgatekeepersquot to our capital markets are proceeding to implementation. These are landmark rules. They will require hard work and significant expenditures in the short run. But the short-term costs of compliance, particularly efforts to improve internal control over financial reporting, should be viewed as an investment. In the long-term, the reforms realized from the Act will result in sounder corporate practices and more reliable financial reporting. Moreover, the spirit of the Act and its requirements are sinking into corporate America. Companies should, as I have said before, make the approach of doing the right thing 151 in disclosure, in governance and otherwise in their businesses 151 part of their companies DNA. The Commission has been and will remain vigilant in the implementation of these and other provisions of the Act and will consider further action as appropriate in furtherance of its objectives. And beyond Sarbanes-Oxley, we will continue pressing ahead on multiple fronts in the months ahead, including addressing such critical areas as shareholder access to the director nomination process, the mutual fund and hedge fund industries, the structure of our securities markets and the many issues embedded in the need for improved corporate governance. In these and other endeavors, I look forward to continuing and building on the strong and cooperative relationship that our agency has developed with you in the past as we move forward with fulfilling the promise of the Act. This is a critical time for our capital markets and the agency, and the way we address the challenges before us will determine not only where we go tomorrow, but for years to come. Before reporting in more detail on the Commissions achievements in implementing the Sarbanes-Oxley Act to date, I would first briefly put the Act in perspective. II. Events Leading to Sarbanes-Oxley The specific events leading to passage of the Act are now well documented. The mid-1990s saw the beginning of the full flourish of the so-called quotnew economyquot in America. The stock market reflected the enormity of the changes taking place in the economy. Stock averages rose at increasing rates from the mid-1990s through early 2000. New entrants undertaking IPOs in the market were among the biggest gainers, especially those that symbolized the quotdotquot sector of the economy. Communications, the explosion of information technology and changes in the culture of equity investing, including the shift to more self-directed retirement accounts, brought millions of individuals with their savings into our stock markets for the first time. Starting in the second quarter of 2000, the bubble burst. Stock prices plummeted. Investors fled the markets. The IPO market disappeared. As happened after the crash of 1929, the falling market that began in 2000 led to other revelations. Starting with the unfolding of the Enron story in October 2001, it became apparent that the boom years had been accompanied by fraud, other misconduct and a serious erosion in business principles. The low points in this story are now household names 151 not just Enron, but also WorldCom, Tyco, Adelphia and others. There was other serious misconduct as well, including in the once-celebrated IPO market, which in too many cases lacked both fairness and integrity. The cost of this corner-cutting to investors has been enormous. While thankfully we have not witnessed the same intensity of human suffering that came with the depression of the 1930s, the most recent downturn in the market directly affected many more investors than the 1929 market crash, because many more individuals had much more of their savings invested in the stock market. In addition to the grossest displays of greed and malfeasance, there were other more subtle but still pernicious developments. During the boom years, corporate America increasingly emphasized a short-term focus, fueled by an obsession with quarter-to-quarter earnings. In some cases this focus was sharpened by the temptation that inherently resulted from massive amounts of stock options granted to corporate insiders. Analysts, some tainted by conflicts of interest, became cheerleaders for the game of quothitting the numbers. quot Winning that game, rather than creating the conditions for sound, long-term strength and performance, became the primary goal. Finally, the perception that uninterrupted earnings growth was the hallmark of sound corporate progress caused too many managers to adjust financial results with the purpose of meeting projected results 151 in ways that were sometimes large and sometimes small, but, especially given the purpose, in all cases unacceptable. To address the widespread collapse of investor confidence and the recognition that something had gone seriously awry in segments of corporate America, Congress approved and the President signed into law the Sarbanes-Oxley Act. At the East Room signing ceremony, the President promised, quotto use the full authority of the Government to expose corruption, punish wrongdoers, and defend the rights and interests of American workers and investors. quot III. Implementation of Sarbanes-Oxley The sweeping reforms in the Sarbanes-Oxley Act address nearly every aspect and actor in our nations capital markets. The Act affects every reporting company, both domestic and foreign, as well as their officers and directors. The Act also affects those that play a role in ensuring the integrity of our capital markets, such as accounting firms, research analysts and attorneys. The over-arching goals of the Act are far-reaching and include restoring investor confidence and assuring the integrity of our markets. Within these goals, the principal objectives addressed in the Act can be grouped into the following themes: To strengthen and restore confidence in the accounting profession To strengthen enforcement of the federal securities laws To improve the quottone at the topquot and executive responsibility To improve disclosure and financial reporting and To improve the performance of quotgatekeepers. quot A. Restoring Confidence in the Accounting Profession A strong central focus of the Sarbanes-Oxley Act is to enhance the integrity of the audit process and the reliability of audit reports on issuers financial statements. As discussed below, the Commission has taken the actions directed by the Act and, when appropriate, pursued additional measures with the goal of restoring public confidence in the independence and performance of auditors of public companies financial statements. 1. Public Company Accounting Oversight Board A centerpiece of the Act is the creation of the Public Company Accounting Oversight Board, or PCAOB. In one year, the joint efforts of the Commission and PCAOB turned what was an outline on paper into a proactive organization that already is accepting accounting firm registrations, operating an independent funding mechanism, actively developing inspection and disciplinary programs and writing new auditing and attestation standards, starting with those related to auditors reports on companies internal controls over financial reporting. Under the Sarbanes-Oxley Act, the Commission, among other things, appoints PCAOB members, approves all of the PCAOBs rules and professional standards and the PCAOB annual budget and support fee, acts as an appellate authority for PCAOB disciplinary actions and disputes related to PCAOB inspection reports and generally oversees the PCAOBs operations. Accordingly, the Commission has appointed the PCAOB, approved the PCAOBs bylaws, registration system for public accounting firms, funding rules, interim auditing and other professional standards, annual budget and support fee and has in process a review of the PCAOBs ethics code and various proposed rules related to the PCAOBs standards-setting process and inspection program. We were extremely pleased when William McDonough, formerly the President of the Federal Reserve Bank of New York, assumed the Chair of the PCAOB last June. Prior to his appointment, Charles Niemeier, then the PCAOB Acting Chairman, and PCAOB members Kayla Gillan, Dan Goelzer and William Gradison developed the infrastructure necessary for the Commission to determine in April that the PCAOB was appropriately organized and had the capacity to carry out the requirements of the Sarbanes-Oxley Act. Under Chairman McDonoughs leadership, we expect the PCAOB to continue to grow and to implement reforms that will restore investors confidence in the audit process and in the integrity of the audited financial information that investors use every day to make investment and voting decisions. 2. Auditor Independence Auditor independence is at the heart of the integrity of the audit process. As directed by the Sarbanes-Oxley Act and under the Commissions general rulemaking authority, the Commission strengthened its rules regarding auditor independence last January. The principal thrust of the revisions is to: Expand the non-audit services that, if provided to an audit client, impair an auditors independence Require an issuers audit committee to pre-approve all audit and non-audit services provided to the issuer by the auditor Require that certain partners on the audit engagement team rotate off the engagement after either five or seven years depending on the partners role in the audit Establish a quotcooling offquot period between participation on the team auditing an issuers financial statements and assuming certain functions as a member of that issuers management Require the auditor to report certain matters to the issuers audit committee and Require certain disclosures to investors of information related to audit and non-audit services provided by, and fees paid to, the auditor. The Commission also adopted rules stating that an accounting firm would not be independent with respect to an audit client if certain partners on the audit engagement receive compensation based on their procuring engagements with that client for services other than audit, review or attest services. 2 3. Improper Influence on Auditors On April 24, 2003, the Commission adopted a provision pursuant to Section 303 of the Act prohibiting officers and directors of an issuer, and persons acting under their direction, from taking any action to coerce, manipulate, mislead or fraudulently influence the auditor of the issuers financial statements if that person knew or should have known that such action, if successful, could result in rendering the issuers financial statements materially misleading. These rules, in combination with other Commission rules, prohibit officers and directors from subverting the auditors responsibilities to investors to conduct a diligent audit of the issuers financial statements and to provide a true report of the auditors findings. 4. Retention of Records Relevant to Audits and Reviews of Financial Statements On January 22, 2003, the Commission adopted rules pursuant to Section 802 of the Act that, for the first time, require auditors to retain certain records relevant to their audits and reviews of issuers financial statements. These records, which are to be retained for seven years, include an accounting firms workpapers and certain other documents that contain conclusions, opinions, analyses or financial data related to the audit or review. 5. Recognition of the Financial Accounting Standards Board Section 108 of the Act sets forth criteria that must be met by an accounting standard-setting body in order for that bodys standards to be considered quotgenerally acceptedquot for purposes of the securities laws. 3 In April, the Commission announced its determination that the Financial Accounting Standards Board and its parent organization, the Financial Accounting Foundation, meet the criteria in the Act and that FASBs pronouncements would be considered to be quotgenerally acceptedquot and must continue to be followed in the preparation of financial statements filed with the Commission. 4 Subsequently, as required by Section 109(e) of Act, we reviewed the FASB support fee for 2003 and found that it is consistent with the Act. 6. Study on Principles-based Accounting Standards In enacting the Sarbanes-Oxley Act, Congress recognized that accounting standards that contain too many exceptions, interpretations and bright-line percentage tests might have contributed to efforts by managements and accountants to structure transactions that provide a desired accounting result and yet allow the company to avoid clear disclosure of the economic consequences of those transactions in its financial statements. Congress, therefore, mandated in Section 108(d) of the Act that the Commission study whether a system of quotprinciples-basedquot accounting standards should be adopted in the United States. The Commission staff released its study in July. After considering the issue, our staff found that standards reflecting only a stated principle of accounting (quotprinciple-only standardsquot) would present enforcement difficulties because they would provide little guidance or structure for exercising professional judgment in applying that principle. The staff also found that accounting standards that are too detailed (quotrules-based standardsquot) often provide a vehicle for circumventing the intention of the standard. As a result, the staff indicated that the best approach would be to develop accounting standards that: Are based on a conceptual framework Clearly state the accounting objective of the standard Provide sufficient detail and structure so the standard may be applied on a consistent basis Minimize exceptions from the standard and Avoid the use of percentage tests that allow financial engineers to achieve technical compliance with the standard while evading the intent of the standard. The staffs recommendation is consistent with the approach currently being developed by the Financial Accounting Standards Board. B. Strengthening the Enforcement of the Federal Securities Laws The Act also has helped the Commission to restore investor confidence in the capital markets by strengthening enforcement of the federal securities laws. The Act added a number of new weapons to the Commissions enforcement arsenal to better deter would-be securities wrongdoers and compensate injured investors. It also required the Commission to undertake studies of enforcement actions and report to Congress. These studies contain important recommendations to further strengthen the Commissions enforcement program. 1. New Enforcement Tools With the Act, Congress provided the Commission a number of new tools with which to further our enforcement mission. The Act strengthened the Commissions ability to obtain meaningful remedies and expanded our authority to return funds to harmed investors. Significant new enforcement tools include: Authority, in certain cases, to distribute civil money penalties to harmed investors, under the quotFair Funds provisionquot Authority, during an investigation of a public company or its officers, directors, or others, to seek a temporary order from a federal district court to escrow extraordinary payments A more appropriate standard for the Commission to obtain an officer and director bar in an injunctive action Authority to seek officer and director bars, under the new standard applicable in injunctive actions, in cease-and-desist proceedings Authority to censure or restrict brokers, dealers, investment advisers, and associated persons, who are subject to certain final State, Federal banking agency, or National Credit Union Administration orders Access to audit workpapers of foreign audit firms that issue an audit opinion or perform material services upon which a registered public accounting firm relies in issuing an audit opinion and Authority to seek penny stock bars in injunctive actions. 2. Use of Sarbanes-Oxley Enforcement Tools This fiscal year, the Commission has used the new tools to facilitate maximum return of funds to harmed investors. For example, the Commission has twice invoked Section 1103 of the Act, which provides that during an investigation of a public company or its officers or directors, the Commission may seek a temporary order from a federal court to escrow quotextraordinary paymentsquot if it appears likely that the company will make such quotextraordinary paymentsquot to an officer or director. Section 1103 helps ensure that company insiders do not receive unusual rewards during the course of an SEC investigation that may uncover misconduct by those individuals. This quotpreventive measurequot helps to address one of the toughest challenges facing the Commission 151 finding, recovering, and returning funds to defrauded investors 151 by securing funds before they are provided to alleged securities-law violators. In its most recent use of Section 1103, the Commission successfully petitioned the court to place in escrow for 45 days a 37.64 million payment intended for two former officers of Gemstar-TV Guide International. This allowed our Enforcement staff to advance its investigation, and the Commission to file securities fraud charges against the two former Gemstar officers in federal court, without permitting the officers to receive, and then dissipate, funds that allegedly belong to the company and its investors. Section 308(a) of the Act, the quotFair Fundsquot provision, has also quickly become an important tool. Before the Act, by law, all civil penalties were paid into the U. S. Treasury, and, as a result, kept out of the hands of defrauded investors. Now, however, the Commission has authority, in certain circumstances, to use civil penalties to help make defrauded investors whole. In just over one year, the Commission has used the Fair Funds provision to designate over 1 billion in penalties for distribution to defrauded investors. A significant example of the effectiveness of the Fair Funds provision is in the Commissions case against Worldcom, Inc. where the company has agreed to satisfy its civil penalty obligation by paying 500 million in cash and 250 million in stock to defrauded investors. Thanks to the Fair Funds provision, all of this amount can be made available to harmed investors. 3. Studies and Reports The Act required the Commission to conduct several enforcement-related studies. Section 308(c) directed the Commission to review and analyze its enforcement actions in which disgorgement and penalties were sought to determine how such proceedings may best be utilized to provide recompense to injured investors. The principal findings of the Commissions study were set forth in a report submitted to Congress on January 24, 2003. This enforcement study, along with others conducted pursuant to Sarbanes-Oxley, made several recommendations intended to bolster the Commissions collection program, strengthen its enforcement efforts generally and provide more compensation for defrauded investors. 5 These recommendations included: Permitting the Commission, under the Fair Funds provision, to use penalty moneys for distribution to investors even if no disgorgement is ordered Removal of state law impediments to the Commissions collection of judgments and administrative orders Expressly authorizing the Commission to hire private attorneys to conduct litigation to collect its judgments Expanding the Commissions access to grand jury materials Providing nationwide service of trial subpoenas and Facilitating cooperation by preserving the privilege of information produced voluntarily to the Commission by a person or entity under investigation. These recommendations provided a basis for several provisions of a bill, H. R.2179, now pending in the House of Representatives. C. Improving the quotTone at the Topquot and Executive Responsibility Another critical purpose of the Act was to improve the quottone at the top. quot This important theme dates back to President Bushs ten-point plan of March 2002, even before passage of the Sarbanes-Oxley Act. The tone set by top management is the most important factor contributing to the integrity of the financial reporting process. 1. Executive Certification of Company Reports The Act contains two different executive certification provisions, Sections 302 and 906, each of which requires CEOs and CFOs of reporting companies to certify the financial and other information in their reports filed with the Commission. 6 On August 27, 2002, the Commission adopted rules to implement Section 302 of the Act. Section 906 of the Act, which contains a separate certification requirement subject to specific federal criminal provisions, is self-operative and became effective immediately upon enactment. On May 27, 2003, the Commission adopted amendments to its rules under Section 302 in connection with its implementation of the internal control reporting requirements of Section 404, and also mandated that the certifications under Sections 302 and 906 be submitted as exhibits to Commission reports to aid investors and regulators in locating these statements. These certifications affirm senior executive responsibility for financial reporting. 7 An important aspect of the certifications is the CEOs and CFOs responsibility for establishing and maintaining disclosure controls and procedures. In addition to the required certification regarding these controls and procedures, the Commission included an express requirement in its rules that reporting companies must maintain disclosure controls and procedures. These are controls and other procedures designed to ensure that information required to be disclosed is recorded, processed and accurately reported within the required time frame. The combination of the certification requirements and the requirement to establish and maintain disclosure controls and procedures has been to focus appropriate increased senior executive attention on disclosure responsibilities and has had a very significant impact to date in improving financial reporting and other disclosure. 2. Code of Ethics for Senior Financial Officers To further focus attention on honest and ethical conduct, the Commission adopted rules on January 15, 2003 pursuant to Section 406 of the Act. These rules require a reporting company to disclose annually whether the company has adopted a code of ethics for the companys principal executive officer and senior financial officers. 8 If a company has not adopted such a code, the company is required to explain why. The rules also require a company to disclose on a current basis amendments and waivers relating to the code of ethics for any of those officers. The Act required disclosure only of the applicability of the code of ethics to senior financial officers. Given the role of the CEO in setting the quottone at the top, quot the Commission also included a companys principal executive officer in its final rules. 3. Disclosures of Insider Transactions Section 403 of the Act effected two important changes that will result in earlier public notification of insiders transactions in their companys securities and wider public availability of information about those transactions. First, on August 27, 2002, the Commission adopted rules to implement the accelerated filing deadline applicable to change of beneficial ownership reports. The Act accelerated these deadlines to the second business day following the execution date of such transactions. As provided for in the Act, the Commission provided limited relief for certain transactions only where the two business day period is not feasible. 9 Second, on April 24, 2003, the Commission adopted rules to implement Section 403(a)(4) of the Sarbanes-Oxley Act, which requires electronic filing of insider transaction reports and Internet accessibility of such reports. To facilitate the implementation of this requirement, the Commission created a new on-line filing system for these forms. 10 4. Prohibition on Insider Trading During Pension Fund Blackouts On January 15, 2003, the Commission, after consultation with the Department of Labor, adopted rules implementing Section 306 of the Act. Section 306 prohibits any director or executive officer of a company from purchasing or selling any equity security during a pension plan blackout period that prevents plan participants and beneficiaries from engaging in transactions involving those securities. Section 306 equalizes the treatment of corporate executives and rank-and-file employees with respect to their ability to engage in transactions involving company equity securities during blackout periods. 11 E. Improving Disclosure and Financial Reporting Apart from increasing focus on executive responsibility, the Act takes several important steps toward improving disclosure and the financial reporting process. Accurate and reliable financial reporting lies at the heart of our disclosure-based system of securities regulation and is critical to the integrity of our securities markets. Investors need accurate and reliable information to make informed investment and voting decisions. Investor confidence in the reliability of this information is fundamental to the liquidity and vibrancy of our markets. 1. Internal Control over Financial Reporting The impetus for reform that culminated with the Sarbanes-Oxley Act helped coalesce widespread support for extending internal control reporting requirements to all public companies. 12 On May 27, 2003, the Commission adopted rules to implement Section 404 of the Act, which requires public companies to file an annual internal control report as part of their annual reports. This report will address managements responsibility to establish internal control over financial reporting and will require management to evaluate the effectiveness of internal control over financial reporting. In addition, the Act requires the auditor of the companys financial statements to attest to, and report on, managements assessment of the companys internal control over financial reporting in accordance with standards established by the Public Company Accounting Oversight Board. 13 In this regard, the Commissions Director of the Division of Corporation Finance and our Deputy Chief Accountant recently participated in a PCAOB roundtable on internal control attestations. Roundtable participants included representatives of institutional investors, public companies, federal and state regulators, accounting firms and others. The PCAOB intends to consider the information and views provided at the roundtable as it develops a new standard on auditor attestations of an entitys internal control over financial reporting. There will be an opportunity for public comment before the PCAOB finalizes its standard, and this standard, like all PCAOB rules, will be subject to Commission approval before it becomes effective. For many companies, the new rules on internal control reports will represent the most significant single requirement associated with the Sarbanes-Oxley Act. The establishment and maintenance of internal control over financial reporting has always been an important responsibility of management. 14 An effective system of internal control over financial reporting is necessary to produce reliable financial statements and other financial information used by investors. By requiring a report stating managements responsibility for internal control over financial reporting and managements assessment regarding the effectiveness of such control, investors will be better able to evaluate managements stewardship responsibilities and the reliability of a companys disclosure. The required annual evaluation of internal control over financial reporting will encourage companies to devote adequate resources and attention to the maintenance of such control. Additionally, the evaluation should help to identify potential weaknesses and deficiencies in advance of a system breakdown, and may help companies detect fraudulent financial reporting earlier and perhaps thereby deter financial fraud or minimize its adverse effects. In light of the substantial time and resources needed to properly implement the rules and the corresponding benefit to investors that will result, our final rules provide for a transition period based upon the type of reporting company. 15 The additional time also will permit the PCAOB to develop revised attestation standards. 2. Off-Balance Sheet Transactions One of the revelations of the recent corporate accounting failures was the abuse of off-balance sheet transactions. On January 22, 2003, the Commission adopted amendments to implement Section 401(a) of the Sarbanes-Oxley Act, which requires each annual and quarterly financial report filed with the Commission to disclose all material off-balance sheet transactions, arrangement and obligations. 16 The Acts mandate complements efforts of both the Commission and the FASB in this area, 17 and the Commissions final rules also require most companies to provide an overview of certain known contractual obligations in an easy-to-read tabular format. 3. Non-GAAP Financial Measures On January 15, 2003, the Commission adopted rules implementing Section 401(b) of the Act to require that any public disclosure of a non-GAAP financial measure by a public company (referenced as quotpro forma financial informationquot in the Act) must be presented in a manner that: Does not contain an untrue statement of a material fact or omit to state a material fact necessary in order to make the non-GAAP financial measure, in light of the circumstances under which it is presented, not misleading and Reconciles the non-GAAP financial measure with Generally Accepted Accounting Principles (GAAP). 18 In addition to defining the category of financial information that is subject to the mandate, the Commission took a two-step approach to regulating the use of non-GAAP financial information. First, the Commission adopted new Regulation G, which applies whenever a company publicly discloses or releases material information that includes a non-GAAP financial measure. This regulation prohibits material misstatements or omissions that would make the presentation of the material non-GAAP financial measure misleading and requires a quantitative reconciliation of the measure to GAAP (by schedule or other clearly understandable method). Second, the Commission adopted rules that address the use of non-GAAP financial measures in filings with the Commission. These amendments apply to the same categories of non-GAAP financial measures covered by Regulation G, but contain more detailed requirements than Regulation G. 4. Authorizing a quotReal Timequot Disclosure System Each investor should have prompt access to critical information. Section 409 of the Act obligates public companies to disclose quoton a rapid and current basisquot information concerning material changes in the financial condition or operations of the company as the Commission determines, by rule, is necessary or useful for the protection of investors and the public interest. This authorization is consistent with the Commissions ongoing mission to modernize the public reporting system and improve the usefulness of these reports to investors. For example, on September 5, 2002, the Commission adopted amendments to accelerate the filing deadlines for quarterly and annual reports by nearly one-third for larger, seasoned reporting companies. The deadlines for these reports were last changed over 30 years ago. In part to accommodate the implementation of other provisions of the Sarbanes-Oxley Act, the changes to filing deadlines will be phased in over three years. On January 15, 2003, the Commission adopted amendments to require public companies to furnish to the Commission their earnings releases or other announcements disclosing material non-public information about completed annual or quarterly fiscal periods. 19 These amendments will not require the issuance of earnings releases or similar announcements however issuing such releases and announcements will trigger the new requirement. Bringing these disclosures into the formal reporting system will provide widespread and uniform access of this information to investors. Special accommodations were made to address presentations made orally, telephonically, by Web cast or by similar means. Current Commission proposals to expand dramatically the list of significant events requiring prompt disclosure between reporting periods are also consistent with the mandate of Section 409. These proposals go a long way toward implementing a quotreal timequot disclosure system. Specifically, the proposals would: Require current disclosure of 11 new items or events Move two items that are currently required only on an annual or quarterly basis to disclosure on a current basis Augment several existing items that are required to be disclosed on a current basis and Accelerate the deadline for reporting all of the items required on a current basis. I expect the Commission will revisit these proposals in the coming months. F. Improving the Performance of quotGatekeepersquot In addition to addressing auditors and the accounting profession, as discussed above, the Sarbanes-Oxley Act and our new rules require better focus by other gatekeepers in our capital markets on their proper roles. The effective operation of these gatekeepers is fundamental to preserving the integrity of our markets. Revelations from the recent corporate and accounting scandals revealed that these parties did not always fulfill their proper responsibilities. 1. Audit Committee Listing Standards Recognizing that financial statements, financial reporting and the audit itself is the bedrock upon which full and accurate disclosure is built, and also recognizing the importance of the audit committee in these processes, Congress in Section 301 of the Act called for, and on April 1, 2003 the Commission adopted, rules directing the nations exchanges to prohibit the listing of any security of a company that is not in compliance with the audit committee requirements established by Section 301. Under the new rules, listed companies must meet the following requirements: All audit committee members must be independent The audit committee must be directly responsible for the appointment, compensation, retention and oversight of a companys outside auditors, and the outside auditors must report directly to the audit committee The audit committee must establish procedures for the receipt, retention and treatment of complaints regarding accounting and auditing matters, including procedures for the confidential, anonymous submission of concerns by employees and The company must establish funding for the audit committee, including the means to retain and compensate independent counsel and other advisors, as the audit committee determines necessary to carry out its duties. The new rules apply to both domestic and foreign companies that list in the U. S. Based on significant input from and dialogue with foreign regulators and foreign issuers, several provisions, applicable only to foreign issuers, were included in the final rules to address potential conflicts with foreign legal requirements where consistent with fulfilling the investor protection mandate of the Act. These provisions include accommodating foreign quotco-determinationquot requirements, allowing shareholders to select or ratify the selection of auditors consistent with requirements in many foreign countries and allowing alternative structures, such as boards of auditors, to perform auditor oversight functions where such structures are provided for under local law. We are continuing our work with the nations markets to implement these requirements into their listing rules, and the Commission established ambitious deadlines in its final rules for the nations markets to implement the new listing standards. 20 These efforts complement reform efforts previously instituted by our nations markets at the Commissions request to strengthen corporate governance listing standards for publicly traded companies. In particular, the proposals by the New York Stock Exchange and the Nasdaq, which will both be finalized within the next few weeks, will increase board independence and effectiveness by, among other things, mandating that boards be composed of a majority of independent directors, requiring executive sessions outside the presence of management and requiring strong audit, compensation and nominatinggovernance committees composed of independent directors. We have already approved changes to listing rules to require shareholder approval of equity compensation plans. These are significant changes that should have a lasting impact on improving responsibility and accountability in our markets. They also have focused attention on corporate governance reforms by the private sector. Many companies already are moving to adopt the new requirements. In addition, leading private sector organizations have been hard at work studying ways to increase corporate governance. In May, the Conference Board released its report, Corporate Governance Best Practices: A Blueprint for the Post-Enron Era . in which it suggested numerous corporate governance best practices. Similarly, the Business Roundtable has issued its own Principles of Corporate Governance suggesting further best practices. 2. Research Analysts On July 29, 2003, the Commission approved rules proposed by the NYSE and NASD that satisfy Section 501 of the Act, which directed the Commission to adopt, or to direct the SROs to adopt, rules designed to further address research analyst conflicts of interest. The Commission worked closely with the SROs to conform their rules to meet the directives of the Act. Some of the Acts requirements were satisfied by NASD and NYSE rule provisions existing at the time of enactment. Others necessitated amendments, such as to limit the compensatory evaluation of analysts to officials not engaged in investment banking activities and to further define periods during which a member firm engaged in a public offering of a security as an underwriter or dealer may not publish research on such security. The new rules also require analysts and members to disclose specified conflicts of interest to the extent that the member or analyst knows or has reason to know, including whether the member or any affiliate received any compensation from the issuer that is the subject of the research report and whether that issuer has been a client of the member firm and, if so, the types of services provided. As urged by commenters, to clarify the scope of information about which the analyst or member would be deemed to have reason to know, the SRO rules set forth two mechanisms by which analysts and their firms can satisfy the requirement that they disclose non-investment banking compensation that was received from the issuer by an affiliate of the member. The rules provide that the disclosure requirement will be deemed satisfied if the member, on a quarterly basis, discloses affiliate non-investment banking compensation that it has identified as having been received from the issuer. In the alternative, the rules provide that a member or analyst would be presumed not to have a reason to know of non-investment banking compensation received by an affiliate, if the member has in place informational barriers designed to prevent the analyst or any influential employee from receiving such information from the affiliate. Also of note, in the compensation disclosure provision, the Act explicitly authorized the Commission to permit an exception for material non-public information regarding specific potential future investment banking services transactions of the subject company. The SRO rules also apply that exception to the client disclosure provision. We believe that providing this exception in the client disclosure provision is consistent with the Acts compensation disclosure provision, and fulfills the Acts mandates that rules be adopted that are reasonably designed to provide disclosure of broker-dealers clients and client services, while appropriately addressing concerns related to the potential dissemination of material non-public information. 3. Standards of Conduct for Attorneys On August 5, 2003, the Commissions rule implementing Section 307 of the Sarbanes-Oxley Act became effective, setting quotstandards of professional conduct for attorneys appearing and practicing before the Commission in any way in the representation of issuers. quot The rule, adopted last January, requires an attorney to report evidence of a material violation quotup-the-ladderquot within the issuer to the chief legal officer of the company. It also requires an attorney, if the chief legal officer does not respond appropriately to the evidence, to report the evidence to the issuers audit committee, another committee of independent directors, or the full board of directors. In addition to requiring up-the-ladder reporting, the final rule allows an attorney, without the issuers consent, to reveal confidential information related to his or her representation to the extent the attorney reasonably believes necessary (1) to prevent the issuer from committing a material violation likely to cause substantial financial injury to the financial interests or property of the issuer or investors (2) to prevent the issuer from committing an illegal act or (3) to rectify the consequences of a material violation or illegal act in which the attorneys services have been used. At the same time as the Commission adopted its final rule, it approved an extension of the comment period on the so-called quotnoisy withdrawalquot provisions of the original proposed rule and put out for comment an alternative reporting out rule that would require the issuer to report to the Commission its attorneys withdrawal from representation. The Commission has not decided how it wishes to proceed with respect to quotnoisy withdrawal. quot 4. Rating Agencies On January 24, 2003, the Commission submitted to Congress and the President a report on the role and function of credit rating agencies in the operation of the securities markets in response to the Congressional directive contained in Section 702 of the Act. The report was designed to address each of the topics identified for Commission study in Section 702, including the role of credit rating agencies and their importance to the securities markets, impediments faced by credit rating agencies in performing that role, measures to improve information flow to the market from credit rating agencies, barriers to entry into the credit rating business and conflicts of interest faced by credit rating agencies. The report also addresses certain issues regarding credit rating agencies that go beyond those specifically identified in the Act, such as allegations of anticompetitive or unfair practices, the level of due diligence performed by credit rating agencies when taking rating actions and the extent and manner of Commission oversight of credit rating agencies. In preparing the report, the Commission pursued several approaches, both formal and informal, to conduct a thorough and meaningful study of credit rating agencies. These efforts included informal discussions with credit rating agencies and market participants, formal examinations of credit rating agencies and public hearings where market participants were given the opportunity to offer their views on credit rating agencies and their role in the capital markets. To further address issues raised in the report, the Commission published a concept release on June 4, 2003 seeking comment on a number of issues relating to credit rating agencies, including whether credit ratings should continue to be used for regulatory purposes under the federal securities laws, and, if so, the process of determining whose credit ratings should be used, and the level of oversight to apply to such credit rating agencies. The comment period for the concept release ended on July 28, 2003, and the Commission received 42 comment letters from a wide range of interested persons. The staff is currently preparing an analysis of the comment letters to assist the Commission in determining what further action may be appropriate. 5. Audit Committee Financial Experts On January 15, 2003, the Commission adopted rules pursuant to Section 407 to require a reporting company to disclose annually whether it has at least one quotaudit committee financial expert, quot and if so, the name of such expert and whether the expert is independent of management. A company that does not have an audit committee financial expert will be required to disclose this fact and explain why it has no such expert. These disclosures will improve transparency to investors in evaluating the experience of the audit committees of companies in which they invest. 21 In response to public comment, the final rules broadened the categories of experienced individuals with accounting and financial expertise that could meet the definition of quotfinancial expertquot from our original proposals, while still incorporating all of the considerations for the definition set forth in Section 407. The rules also provide several limited safe harbors to address concerns that being designated as an audit committee financial expert would dissuade qualified candidates from board service. 6. Investment Companies We also have fully implemented the requirements of the Act with respect to mutual funds and other registered investment companies (quotfundsquot). With few exceptions, the Act did not draw any distinctions between operating companies and funds, and the rules that we have adopted generally apply with equal force to both. In some cases, this has required us to adapt the requirements of the Act to address the unique circumstances of funds, such as the fact that, unlike most operating companies, funds are typically externally managed by an investment adviser. For example, in implementing the statutory requirement that an issuers audit committee pre-approve permissible non-audit services provided by its auditing firm, we applied the pre-approval requirements not only to services provided to a fund, but also to certain fund-related services provided to the funds adviser and other entities in a fund complex. The positive effects of our rules under the Act with respect to funds will be reinforced as we continue to vigorously pursue other initiatives to improve the disclosure that funds provide to investors, particularly with respect to fees and expenses. IV. Moving Forward After Sarbanes-Oxley A. Commission Operations Section 601 of the Act authorized substantial additional appropriations for the Commission. I believe that the efficient functioning of the SEC is as much a part of investor protection as ushering in new rules and regulations. I am committed to ensuring that every penny of the new money granted to the Commission is spent wisely. We will bring on the people we need to help us fulfill our mission, and not simply to increase our head-count. I have been working with senior staff of the agency to determine appropriate changes to address both our internal and external needs. As an illustration of the seriousness with which we view this part of our responsibilities, I recently reorganized the Office of the Chairman to include three managing executives, one of whom is the Managing Executive for Operations and works full-time on the SECs efficiency and operational effectiveness. On February 20, 2003, the President signed into law the Consolidated Appropriations Resolution, providing the Commission with a fiscal year 2003 appropriation of 716 million, which is 278 million more than our fiscal 2002 appropriation. A portion of these funds will be used to hire 842 new staff to: Implement the Sarbanes-Oxley Act, including the review of each registrants financial statements every three years Enhance our enforcement program so we can bring more investigations and complete them sooner Review investment advisers and investment companies more frequently, based on risk criteria and Conduct more broker-dealer branch-office examinations. Without the quotAccountant, Compliance, and Enforcement Staffing Act of 2003,quot many of these initiatives would be in jeopardy due to our difficulties hiring additional professional staff in a timely manner. We are extremely grateful for the support of the Congress and the President in quickly addressing our personnel and operational needs. With the addition of a substantial number of accountants to our Division of Corporation Finance, we will strive to achieve the 33 annual review level mandated by Section 408 of the Act. The Division also will continue its focus, also mandated by Section 408, on the largest companies and other companies where review is most important. In addition, the Division has modified its selective review process in a manner that will allow it to focus on companies and on disclosure that appear to be critical to an understanding of each companys financial position and results. The Division will continue to refine this process to allow it to efficiently use its resources and review material disclosure issues in a broad range of companies. Through increased staffing and focused reviews, the Division will strive to complete either a full, financial or other review of the filings of one-third of the reporting companies each year. B. The Agenda Beyond Sarbanes-Oxley Implementing Sarbanes-Oxley has been a tremendous accomplishment in its own right. I also want to touch on some of our other areas of progress, as well as our ongoing priorities, which reflect our desire to restore investor confidence while helping Americas financial markets to continue allocating capital effectively and sparking job creation. For example, we are continuing to build on the July 15 report of our Division of Corporation Finance, which recommends improved disclosure and greater shareholder access to the director nomination process. We have already issued proposals on improved disclosure, and the Commission will consider proposals in the shareholder access area as soon as this month. We are examining the mutual fund industry, and its impact on investors, looking at everything from how fund companies do business to the fees they charge and the information they disclose to their customers. We are also in the process of reviewing the hedge fund industry, given its extraordinary recent growth, to ensure that investor protection remains paramount. Recommendations from the SEC staff in this area are likely to be issued in the near future. We also are taking a comprehensive look at the complex issues involving the structure of our securities markets 151 including their regulation, the balance between competition and fragmentation and the use of market data 151 all in the context of our global marketplace and its impact on investors. These market structure issues are among the thorniest the Commission faces, but also among the most important. Revolutions in technology and communications and the unrelenting pace of globalization make it imperative that we revisit on a comprehensive basis the framework of our system for regulating markets. We will continue to monitor areas that may merit future attention and whether there are particular items, regulatory burdens or unintended consequences that should be addressed. For example, the Commission staff has issued Frequently Asked Questions on implementation of the non-GAAP financial measure rules and the auditor independence rules. In addition, we have attempted to reduce the compliance burdens on smaller public companies where appropriate and permitted by the Act. While initial concerns that the costs of the Act would drive many public companies to go private have not played out, we intend to continue to review the effects of the new requirements on smaller public companies. Similarly, we will continue to pay attention to possible unintended consequences of the Act for foreign issuers. The Commission and its staff have had extensive consultations with foreign regulators and members of the foreign community, and have considered ways to accommodate foreign requirements and regulatory approaches, while safeguarding the investor protection objectives of the Act. This approach should preserve the attractiveness of the U. S. markets to foreign investors. C. Honest Business in the Current Environment Just as the Commission has been moving forward with implementation of the Act, so too must American businesses. Corporate leaders are responding not only to the Acts mandates, but also to the movement toward increased transparency that underlies Sarbanes-Oxley. However, I have become aware that some in the business sector feel that they are under siege from new regulations, and the threat of additional litigation. As I have mentioned before, good, honest companies should fear neither Sarbanes-Oxley nor our enforcement efforts. Rather, they should recognize that the improved standards that the Act mandates and smart and fair enforcement of the laws are the right thing to do and help attract capital and investment. As William O. Douglas, then Commission chairman and future Supreme Court justice, pointed out in a 1938 speech, quotTo satisfy the demands of investors there must be in this great marketplace not only efficient service but also fair play and simple honesty. For none of us can afford to forget that this great market can survive and flourish only by grace of investors. quot Good corporate governance is not primarily about complying with rules. It is about inculcating in a company, and all of its directors, officers and employees, a mindset to do the right thing. As I have said before, the focus on doing the right thing should become part of the DNA of a company and everyone in the company from top to bottom. For companies that take this approach, most of the major concerns about compliance disappear. Moreover, if companies view the new laws as opportunities 151 opportunities to improve internal controls, improve the performance of the board and improve their public reporting 151 they will ultimately be better run, more transparent and therefore more attractive to investors. I believe that this attitude is beginning to take hold in corporate America. During my travels, and in my discussions with company officials, countless people have told me that America cannot afford a return to the lax standards that preceded Sarbanes-Oxley. Many have added that while they initially questioned the merits of the Act, they now see that it can help show the way to a brighter, more competitive era in American business. The success of a new era under the Act must involve a continued measure of the risk-taking and entrepreneurship that are the hallmarks of honest American business. There have been suggestions, including in the press, that the recent crackdowns on corporations and executives by criminal and civil authorities, including the Commission, have discouraged honest risk-taking. I have a different perspective on recent developments. I believe the Act and the other steps that have accompanied it will lead to an environment where honest business and honest risk-taking will be encouraged and rewarded. What should be discouraged, and what we are committed to stamp out, are the activities that some have sought to disguise as honest business but that, in reality, are no such thing. Transactions with no substance that are designed solely to assure increased earnings or cash flow in financial reports involve no risk and are not honest business. Neither are transactions that are disguised as rewards for entrepreneurship or superior management but that in fact provide risk-free excessive compensation or facilitate self-dealing for the benefit of insiders. I hope we have learned some lessons from the era just passed 151 and I believe we have. I also hope that Americas corporate leaders will not use Sarbanes-Oxley as an excuse for putting off innovation and investment. Looking back one year, and also looking forward, nothing in the law, its implementation or in the Commissions agenda should make business fearful. Indeed, a new period marked by the responsibility and realism Ive just discussed can provide the foundation for a new era of long-term growth and prosperity. V. Conclusion In conclusion, let me again thank you for your important leadership and support in the initiative to re-establish and strengthen investor confidence and integrity in our nations capital markets. Throughout the massive directed rule-making project under Sarbanes-Oxley, the goals of the Commission and its staff have been to protect investors and restore confidence in our securities markets. While it may be a bit too early to judge the impact of all of the various provisions of the Act, the Commission will monitor carefully the implementation and effects of the new rules and requirements, and we will take actions as appropriate to ensure that the objectives of the Act are achieved. We will continue our strong tradition of cracking down on corporate wrongdoing. And thanks to the Act and your efforts, we have the tools and resources we need to carry out these important objectives. Thank you again for inviting me to speak on behalf of the Commission. I would be happy to answer any questions that you may have. 1 The Commission has issued five studies as required by the Act. The Commission is preparing one remaining study and report required by Section 401(c) of the Act on special purpose entities. The Act also mandated other studies, such as those to be conducted by the General Accounting Office on consolidation of public accounting firms (Section 701), mandatory rotation of accounting firms (Section 207) and investment banks (Section 705). The Act also called for reviews of Federal Sentencing Guidelines by the United States Sentencing Commission (Sections 805, 905 and 1104). 2 In addition, to assist companies and the auditors of their financial statements in implementing the auditor independence rules, the Commission staff recently published on the Commissions website a list of Frequently Asked Questions about those rules. The FAQs clarify the application of certain rules related to non-audit services, partner rotation, audit committee pre-approval of services, auditor communications with an issuers audit committee, the disclosure by an issuer of fees paid to the auditor of its financial statements and other matters. 3 The criteria include, among other things, being a private entity having, for administrative and operational purposes, a board of trustees that serves the public interest being funded as provided in the Act having procedures to ensure prompt consideration, by majority vote of its members, of changes to accounting standards to reflect emerging issues and changing business practices and considering the extent to which international convergence of accounting standards is necessary or appropriate in the public interest. 4 The Commissions determination was premised on an expectation that the FASB would address certain issues announced by the Commission and that the FASB would continue to serve the public interest and protect investors. 5 Section 703 of the Act directed the Commission to study securities professionals who violated the federal securities laws, and Section 704 of the Act directed the Commission to study enforcement actions to identify areas of issuer financial reporting that are most susceptible to fraud, manipulation and inappropriate earnings management. Both studies were submitted to Congress on January 24, 2003. 6 The Acts provisions complement previous actions by the Commission regarding executive certifications. Before enactment of Sarbanes-Oxley, the Commission had previously published proposals to require CEO and CFO certifications for Exchange Act reports. See Release No. 34-46079 (June 17, 2002). In addition, the Commission required written statements, under oath, from the CEOs and CFOs of the 947 largest public companies regarding the accuracy of their companies financial statements and their consultation with the companies audit committees. See File No. 4-460: Order Requiring the Filing of Sworn Statements Pursuant to Section 21(a)(1) of the Securities Exchange Act of 1934 (June 27, 2002). 7 For example, the rules adopted by the Commission pursuant to Section 302 require a companys CEO and CFO each to certify that: They have reviewed the report The report does not contain an untrue statement or fail to state a material fact The financial statements fairly present in all material respects the financial condition and results of operations of the company They are responsible for establishing and maintaining disclosure controls and procedures and internal control over financial reporting for the company and have: Designed such disclosure controls and procedures to ensure that material information relating to the company is made known to them Designed such internal control over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements Evaluated and reported on their companys disclosure controls and procedures and Disclosed any material change in the companys internal control over financial reporting and They have disclosed to the auditors and audit committee: All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting and Any fraud, whether or not material, that involves management or other employees who have a significant role in internal control over financial reporting. 8 Companies are required to provide the new disclosures regarding codes of ethics in annual reports for fiscal years ending on or after July 15, 2003. 9 This limited relief focuses on limited categories of transactions where the insider does not select the date of execution. For these transactions, the reports must be filed within two business days after the insider receives notice of the transaction, but the notification date may be no later than the third business day after the transaction is executed. 10 These changes became effective on June 30, 2003, one month ahead of the statutory deadline. 11 The Commissions rules, which implement both the trading restrictions and the black-out notice requirements of Section 306, became effective on January 26, 2003. 12 Since 1993, larger depositary institutions or their bank holding companies have been subject to similar requirements under the FDIC Improvement Act of 1991 (FDICIA). In addition, the Commission has twice in the past proposed an internal control report requirement. A mandated internal control reporting requirement also was one of the recommendations of the National Commission on Fraudulent Financial Reporting, also known as the Treadway Commission, in its landmark 1987 report. 13 Section 404(b) of the Act. See also Section 103(a)(2)(A)(iii) of the Act, which directs the PCAOB to write an auditing standard that requires an auditor to describe in the audit report the scope of the auditors testing of the companys internal control structure, as required by Section 404(b), and to present (in such report or in a separate report): (1) the findings from such testing, (2) an evaluation of whether the companys internal control structure (a) includes maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of assets of the company, and (b) provides reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only as authorized by management or the board of directors, and (3) describes material weaknesses in, and material noncompliance with, those controls. 14 As the Commission emphasized in its release implementing Section 404, the design, implementation, documentation and testing of internal control over financial reporting, as well as documentation of that testing, are responsibilities of management. See Release No. 33-8238 (June 5, 2003). 15 Larger companies subject to our accelerated filing deadlines must comply with the new rules as of the end of their first fiscal year ending after June 15, 2004. All other companies, including small business and foreign issuers, must comply beginning with their first fiscal year ending after April 15, 2005. 16 Companies are required to comply with these new disclosure requirements in Commission filings that include financial statements for fiscal years ending on or after June 15, 2003. 17 See, e. g. Release 33-8056 (Jan 22, 2002) (Commission cautionary advice on off-balance sheet transactions) Financial Accounting Standards Board Interpretation No. 45 (Nov. 2002) and Financial Accounting Standards Board Interpretation No. 46 (Jan. 2003). 18 The Commissions rules on this topic became effective on March 28, 2003. Like Congress, the Commission also had been concerned with the use of non-GAAP financial information. Most recently, in December 2001, the Commission issued cautionary advice regarding the use of such information. See Release No. 33-8039 (Dec. 4, 2002). See also In the Matter of Trump Hotels amp Casino Resorts, Inc. . Release No. 34-45287 (Jan. 16, 2002). 19 These rules became effective March 28, 2003. 20 The affected markets were required to submit proposed listing rules by July 15, 2003, and all of them met that deadline. Final listing rules must be approved by the Commission by December 1, 2003. The vast majority of listed companies must comply with the new rules by the earlier of their first annual shareholders meeting after January 15, 2004, or October 31, 2004. This time frame was selected to coincide with a companys next annual shareholders meeting to facilitate any elections for new audit committee members that may be necessary to meet the rules independence requirements. Given that foreign issuers and small business issuers were previously not subject to rules of this type, they were given additional time (until July 31, 2005) to comply. 21 Companies are required to provide the new disclosure in annual reports for fiscal years ending on or after July 15, 2003. Small business issuers will be required to provide the new disclosure in annual reports for fiscal years ending on or after December 15, 2003. Modified: 09092003