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12006 Haynes and Boone, LLP
Sarbanes-Oxley Act of 2002
(SOX): An OverviewBy:
W. Bruce Newsome
Robert W. Wilson
Haynes and Boone, LLP
901 Main Street, Suite 3100
Dallas, TX 75202
April 19, 2006
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22006 Haynes and Boone, LLP
SOX
SOX was signed into law July 30, 2002 to protect investorsby improving the reliability and accuracy of disclosures
made pursuant to the securities laws.
SOX provisions include, but are not limited to, the
following issues: Public Company Accounting Oversight Board
Auditor Independence
Corporate Responsibility/Governance
Enhanced Financial Disclosures Enhanced Penalty Provisions
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32006 Haynes and Boone, LLP
To Whom Does SOX Apply?
SOX is generally applicable to all companies, regardless of
size, who are required to file reports with the SEC under
the 1934 Act or that have a registration statement on file
under the 1933 Act. Certain SOX provisions apply only to companies listed on
a national securities exchange.
Small business issuers that file reports on Form 10-QSB
and Form 10-KSB are generally subject to SOX in thesame way as larger companies.
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Public Company AccountingOversight Board (PCAOB)
SOX established the creation of the PCAOB to oversee theaudit of public companies that are subject to the securitieslaws.
PCAOB is charged with several duties including:
Registering public accounting firms that prepare auditreports;
Establishing auditing, quality control, ethics,independence, and other standards relating to the
preparation of audit reports; and
Conducting inspections of registered public accountingfirms and conducting investigations and disciplinary
proceedings, where justified, concerning registeredpublic accounting firms.
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Auditor Independence
Pursuant to SOX, the SEC has auditor independencerequirements that are applicable to all public companies,
regardless of size, and include the following:
Prohibition of certain non-audit services;
Requirement of audit committee pre-approval of allaudit and non-audit services;
Audit partner rotation;
Auditor reports to the audit committee;
Certain prohibited employment relationships; and
Prohibited compensation.
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Auditor Independence
Prohibition of certain non-audit services: SOX Section 201 prohibits a registered accounting firm
from providing the following non-audit servicescontemporaneously with an audit:
Bookkeeping or other services related to the
accounting records or financial statements of the auditclient;
Financial information systems design andimplementation;
Appraisal or valuation services, fairness opinions, orcontribution-in-kind reports;
Actuarial services;
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Auditor Independence
Prohibition of certain non-audit services (cont.): Internal audit outsourcing services;
Management functions or human resources;
Broker or dealer, investment advisor, or investmentbanking services; and
Legal services and expert services unrelated to the
audit.
Registered public accounting firms are not prohibited from
providing tax compliance, tax planning, or tax advice to
audit clients, subject to the normal audit committee pre-
approval requirements.
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Auditor Independence
Pre-approval requirements and audit partner rotation: SOX requires that all audit and non-audit services be pre-
approved by the audit committee of the issuer. A de
minimus exception does apply to this requirement under
certain circumstances. SOX makes it unlawful to provide audit services to an
issuer if the lead (or coordinating) audit partner (having
primary responsibility for the audit), or the audit partner
responsible for reviewing the audit, has performed audit
services for that issuer in each of the 5 previous fiscal
years of that issuer.
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Auditor Independence
Audit reports, prohibited relationships and compensation:
SOX requires all registered public accounting firms to
timely report to the respective audit committee:
All applicable critical accounting policies and practices; All alternative treatments of financial information
within generally accepted accounting principles that
were discussed with management; and
Other material written communications between theaccounting firm and management.
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Auditor IndependenceAudit reports, prohibited relationships and compensation
(cont.):
SOX makes it unlawful for a registered public accountingfirm to perform any audit service for an issuer if the chiefexecutive officer, controller, chief financial officer, chiefaccounting officer, or any person serving in an equivalent
position for the issuer, was employed by that accounting firmand participated in any capacity in the audit of that issuerduring the one year period preceding the date of the initiationof the audit.
SOX provides that an accountant is not independent of an
audit client if, at any time during the engagement, any auditpartner earns or receives compensation based on the auditpartner procuring engagements with that client, other thanaudit or attest services.
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Corporate Responsibility/Governance NASDAQ Stock Market, Inc. (NASDAQ), The American Stock
Exchange (AMEX) and SOX require issuers to have in place several
corporate governance measures, including:
Certain board composition measures;
Independence requirements;
Audit Committee requirements; CEO/CFO certifications;
Improper auditor influence prohibitions;
Reimbursement requirements;
Director & officer bars;
Certain insider trading requirements; and
Enhanced attorney responsibilities.
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Corporate Responsibility/Governance
Board Composition and Independence: NASDAQ and AMEX each require listed companies to
have a majority of independent directors except for (i)
controlled companies, (ii) foreign companies, and (iii)
small business issuers. The board of directors must
affirmatively determine that each director does not have a
material relationship with the listed company, which would
interfere with the exercise of independent judgment.
Independent director means a person other than an
officer or employee of the company or any parent orsubsidiary and also excludes the following:
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Corporate Responsibility/Governance
Board Composition and Independence (cont.)
A director who is, or during the past three years was,
employed by the company or by any parent or subsidiaryof the company, other than prior employment as an
interim Chairman or CEO;
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14142006 Haynes and Boone, LLP
Corporate Responsibility/Governance
Board Composition and Independence (cont.)
A director who accepts or has an immediate familymember who accepts any payments from the company orany parent or subsidiary of the company in excess of$60,000 during the current or any of the past three fiscal
years (does not include compensation for board service,payments from investments, payments to a familymember who is a non-executive employee, compensationreceived for former service as interim Chairman or CEO,
benefits under a tax-qualified retirement plan, non-
discretionary compensation, certain permitted loans, andpayments from a financial institution in connection withthe deposit of funds);
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Corporate Responsibility/Governance
Board Composition and Independence (cont.)
A director who is an immediate family member of an
individual who is, or has been in any of the past three
years, employed by the company or any parent or
subsidiary of the company as an executive officer;
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16162006 Haynes and Boone, LLP
Corporate Responsibility/Governance
Board Composition and Independence (cont.)
A director who is, or has an immediate family member
who is, a partner in, or a controlling shareholder or an
executive officer of, any organization to which the
company made, or from which the company received,
payments (other than those arising solely from investments
in the company's securities or payments under non-
discretionary charitable contribution matching programs)
that exceed 5% of the organization's consolidated grossrevenues for that year, or $200,000, whichever is more, in
any of the most recent three fiscal years;
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17172006 Haynes and Boone, LLP
Corporate Responsibility/Governance
Board Composition and Independence (cont.)
A director of the listed company who is, or has an
immediate family member who is, employed as an
executive officer of another entity where at any time
during the most recent three fiscal years any of the
listed company's executive officers serve on that
entity's compensation committee; and
A director who is, or has an immediate family member
who is, a current partner of the company's outside
auditor, or was a partner or employee of the company's
outside auditor who worked on the company's audit at
any time during any of the past three years.
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18182006 Haynes and Boone, LLP
Corporate Responsibility/Governance
Audit Committee Requirements:
NASDAQ and AMEX require each issuer to have an Audit
Committee of at least three members, each of whom:
Satisfies the independence requirements of boardmembers generally, and satisfies Rule 10A-3 under the
Securities Act of 1934;
Is able to read and understand fundamental financial
statements, including a company's balance sheet,
income statement, and cash flow statement; and
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Corporate Responsibility/Governance
Audit Committee Requirements (cont.):Additionally, each issuer must have at least one
member of the audit committee who is financially
sophisticated, in that he or she has past employment
experience in finance or accounting, requisite
professional certification in accounting, or any other
comparable experience or background which results in
the individual's financial sophistication, including, but
not limited, to being or having been a chief executive
officer, chief financial officer, or other senior officerwith financial oversight responsibilities.
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20202006 Haynes and Boone, LLP
Audit Committee Requirements (cont.): SOX requires all members of the Audit Committee to be
independent.
Independent means audit committee members may not,
directly or indirectly, accept any consulting, advisory orother compensatory fee from the issuer or a subsidiary
of the issuer, other than in the members capacity as a
director or as a member of any board committee.
Independent also means that a member of the audit
committee may not be an affiliated person of the
issuer or any subsidiary of the issuer.
Corporate Responsibility/Governance
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Audit Committee Requirements (cont.):
SOX creates a safe harbor for determining affiliate status.
A person who is not an executive officer, director, or 10%
shareholder of the issuer would be deemed not to controlthe issuer and therefore would fall within the safe harbor.
A person who does not fall within the safe harbor, but
believes they do not control the issuer, can rely on a facts
and circumstances analysis.
Corporate Responsibility/Governance
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Audit Committee Requirements (cont.):
The audit committee has responsibility for the oversight ofthe audit function.
The committee is responsible for the appointment,compensation, retention, and oversight of the work of the
independent auditor. The committee has the responsibility to resolve any
disagreements between management and the auditorregarding financial reporting.
The oversight responsibilities also include hiring and
firing the independent auditor, approving all auditengagement fees and terms, and all significant non-auditengagements of the independent auditor.
Corporate Responsibility/Governance
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Audit Committee Requirements (cont.):
The committee must be given appropriate funding to engage
the independent auditor and outside advisors.
The committee must establish procedures for the receipt,retention, and treatment of complaints received by the listed
issuer regarding accounting, internal accounting controls, or
auditing matters, and the confidential, anonymous submission
by employees of the listed issuer of concerns regarding
questionable accounting or auditing matters.
Corporate Responsibility/Governance
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Corporate Responsibility/Governance
Audit Committee Requirements (cont.):
Issuers must disclose whether a financial expert is amember of the audit committee, and if not, why not.
A financial expert must possess the following attributes:
An understanding of GAAP and financial statements;
The ability to apply GAAP in connection with the
accounting estimates, accruals and reserves; Experience preparing, auditing, analyzing or evaluating
financial statements of a complexity comparable to thatof the companys financial statements, or experience
actively supervising persons engaged in such activities; An understanding of internal controls and proceduresfor financial reporting; and
An understanding of audit committee function.
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Corporate Responsibility/Governance
Audit Committee Requirements (cont.):
A person may qualify as an audit committee financialexpert based upon relevant experience including:
Education and experience as a principal financial oraccounting officer, controller, public accountant or
auditor or experience in one or more positions thatinvolve the performance of similar functions;
Experience actively supervising a person engaged inone of the described activities; or
Experience overseeing or assessing the performance ofcompanies or public accountants with respect to the
preparation, auditing or evaluation of financialstatements.
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Corporate Responsibility/GovernanceAudit Committee Requirements (cont.):
Identification of the Audit Committee in Annual Reports Anissuer subject to the SEC proxy rules is required to disclose inits proxy statement or information statement, if action is to betaken with respect to the election of directors, whether theissuer has a standing audit committee, the names of each audit
committee member, the number of meetings held by the auditcommittee during the last fiscal year, and the functionsperformed by the committee. The members of the auditcommittee must be included, or incorporated by reference intothe annual statement.
A listed issuer is also required to disclose whether themembers of its audit committee are independent using thedefinition of independence for audit committee membersincluded in the applicable listing standards.
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Corporate Responsibility/Governance
CEO/CFO Certifications: As part of the various corporate governance measures
required of issuers, SOX Sections 906 and 302 require
certifications to be made by the chief executive officer and
the chief financial officer of the company. SOX requires the CEO and CFO to furnish a written
certification with each SEC periodic report filed containing
financial statements certifying that the financial statements
and the disclosures therein fairly present, in all materialrespects, the operations and financial condition of the
issuer.
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Corporate Responsibility/Governance
CEO/CFO Certifications (cont.): The criminal penalty for a false 906 certification are up
to (1) 20 years in prison for a willful violation; and (2)
ten years for a reckless and knowing violation.
SOX requires the CEO and CFO of each public companyfiling a form 10-K/10-KSB or 10-Q/10-QSB to certify (i)
that the financial statements filed with the SEC fairly
present, in all material respects, the operations and
financial condition of the issuer, (ii) as to the adequacy ofthe issuers disclosure controls and procedures and
internal controls, and (iii) as to certain other matters.
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Corporate Responsibility/Governance
Improper Auditor Influence Prohibitions:
SOX makes it unlawful for any officer or director of anissuer, or any other person acting under the direction thereof,to take any action to fraudulently influence, coerce,manipulate, or mislead any independent or certified
accountant engaged in the performance of an audit of thefinancial statements of the issuer for the purpose of renderingsuch statements materially misleading.
The types of conduct that could be considered improperinclude, but are not limited to:
Offering or paying bribes or other financial incentives,including offering future employment or contracts fornon-audit services;
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Corporate Responsibility/Governance
Improper Auditor Influence Prohibitions (cont.):
Providing an auditor with inaccurate or misleading
legal analysis;
Blackmailing; Making physical threats; and
Attempting to have a partner removed from the audit
engagement or threatening to cancel existing or future
engagements because the partner objects to the issuersaccounting.
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Corporate Responsibility/Governance
Reimbursement Requirements and D&O Bars: SOX provides that if an issuer is required to restate its
financial statements because of noncompliance with
securities laws, the CEO and CFO must reimburse the
issuer for (1) any bonus or incentive or equity basedcompensation received in the 12 months prior to the
restatement and (2) any profits realized from the sale of
issuer securities within the preceding 12 months.
SOX authorizes a court to prohibit a violator of certain
SEC rules from serving as an officer or director of an
issuer if the persons conduct demonstrates unfitness to
serve.
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Corporate Responsibility/GovernanceInsider Trading Requirements:
In response to certain insider trading transactions that tookplace during the Enron scandal, Congress included aprovision in SOX prohibiting certain insider transactionsduring plan blackout periods.
SOX prohibits any director or executive officer of an
issuer of any equity security from, directly or indirectly,purchasing, selling or otherwise acquiring or transferringany equity security of the issuer during a pension plan
blackout period that temporarily prevents plan participantsor beneficiaries from engaging in equity securities
transactions through their plan accounts, if the director orexecutive officer acquired the security in connection withhis or her service or employment as a director or executiveofficer.
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Corporate Responsibility/Governance
Insider Trading Requirements (cont.):
In 2003, the SEC adopted Regulation Blackout Trading
Restriction (BTR). Under BTR, a transfer of an equity
security of an issuer during a blackout period will be
deemed to be a transfer involving an equity securityacquired in connection with service or employment as a
director or executive officer unless the director or officer
can establish by specific identification of securities that the
transfer did not involve equity securities acquired in
connection with service or employment
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Corporate Responsibility/Governance
Insider Trading Requirements (cont.):
Blackout period generally means any period of more thanthree consecutive business days during which the ability totransfer an interest in any equity security of an issuer held inan individual account plan is temporarily suspended by such
issuer or by a fiduciary of the plan with respect to at least50% of plan participants or beneficiaries under all of theissuers individual account plans that permit participants or
beneficiaries to acquire or hold equity securities of theissuer.
Certain transactions are exempt from the trading restrictions: Acquisitions of equity securities under dividend or
interest reinvestment plans;
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Corporate Responsibility/Governance
Insider Trading Requirements (cont.):
Purchases or sales of equity securities pursuant tocertain tax-conditioned plans, other than discretionary
transactions;
Purchases or sales of equity securities pursuant to a
contract, instruction or written plan that satisfies theaffirmative defense conditions of Rule 10b5-1(c),
unless the plan was entered into or modified during the
blackout period or at a time when the director or
executive officer was aware of the actual orapproximate beginning and ending dates of the blackout
period;
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Corporate Responsibility/Governance
Insider Trading Requirements (cont.):
Increases or decreases in the number of equity
securities held as a result of a stock split or stock
dividend applying equally to all equity securities of that
class, including a stock dividend in which equity
securities of a different issuer are distributed, and
acquisitions of rights, such as shareholder or pre-
emptive rights, pursuant to a pro rata grant to all
holders of the same class of equity securities;
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Corporate Responsibility/Governance
Insider Trading Requirements (cont.):
Compensatory grants and awards of equity securities
pursuant to a plan that, by its terms, permits directors or
executive officers to receive grants or awards, provides
for grants or awards to occur automatically, and specifies
the terms and conditions of the grants or awards; Exercises, conversions, or terminations of derivative
securities that were not written or acquired during the
blackout period and that meet certain other requirements;
Acquisitions or dispositions of equity securities involvinga bona fide gift or a transfer by will or the laws of descent
and distributions;
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Corporate Responsibility/Governance
Insider Trading Requirements (cont.):
Acquisitions or dispositions of equity securities
compelled by the laws or other requirements of an
applicable jurisdiction; and
Acquisitions or dispositions of equity securities in
connection with a merger, acquisition, divestiture, or
similar transaction occurring by operation of law.
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Corporate Responsibility/Governance
Insider Trading Requirements (cont.):
SOX provides for two remedies if the provision is violated:
Under Section 306(a)(1), a violation is treated as a
violation of the 1934 Act and subject to sanctions andSEC enforcement action.
Under Section 306(a)(2), where a director or executive
officer realizes a profit from a prohibited transaction
during a blackout period, the issuer, or a security holder
of the issuer on its behalf, may bring an action to
recover the profit.
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Corporate Responsibility/Governance
Enhanced Attorney Responsibilities:
SOX requires an attorney to report evidence of a material
violation of securities law or breach of fiduciary duty or
similar violation by the company or any agent thereof, tothe chief legal counsel or the chief executive officer of the
company; and
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Corporate Responsibility/Governance
Enhanced Attorney Responsibilities (cont.):
If the counsel or officer does not appropriately respond to
the evidence (adopting, as necessary, appropriate remedial
measures or sanctions with respect to the violation),
requiring the attorney to report the evidence to the audit
committee of the board of directors of the issuer or to
another committee of the board of directors comprised
solely of directors not employed directly or indirectly by
the issuer, or to the board of directors.
Section 307 applies to all attorneys, both in-house andoutside counsel appearing and practicing before the
SEC.
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Corporate Responsibility/GovernanceEnhanced Attorney Responsibilities (cont.):
Appearing and practicing before the SEC includes: Transacting any business with the SEC, includingcommunication in any form;
Representing an issuer in an SEC administrativeproceeding or investigation;
Providing advice on any document that the attorney hasnotice will be filed with the SEC or incorporated into adocument that will be filed; and
Advising an issuer as to whether information or a
statement, opinion, or other writing is required underthe securities laws to be filed with or submitted to, orincorporated into any document that will be filed withthe SEC.
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Corporate Responsibility/GovernanceEnhanced Attorney Responsibilities (cont.):
Section 307 makes it clear that the attorney represents theissuer and not the officers or directors or other individualsthat the attorney regularly communicates with.
The attorney owes his professional and ethical obligationsto the issuer as the organization.
Section 307 is triggered when the attorney becomes awareof evidence of a material violation, which meanscredible evidence, based upon which it would beunreasonable, under the circumstances, for a prudent and
competent attorney not to conclude that it is reasonablylikely that a material violation has occurred, is ongoing, oris about to occur.
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442006 Haynes and Boone, LLP
Enhanced Financial Disclosures
SOX established enhanced financial disclosure obligationsupon issuers, including:
Certain disclosures in periodic reports;
Enhanced conflict of interest provisions;
Disclosures of transactions involving management andprincipal stockholders;
Managements assessment of internal controls;
Code of ethics;
Enhanced review of periodic disclosures; and
Real time issuer disclosures.
E h d Fi i l Di l
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Enhanced Financial DisclosuresDisclosures in periodic reports:
SOX requires each financial report that contains financial
statements and is required to be prepared in accordance withgenerally accepted accounting principles, to reflect allmaterial correcting adjustments that have been identified by aregistered public accounting firm.
SOX also requires that each annual and quarterly financialreport required to be filed with the SEC disclose all materialoff-balance sheet transactions, arrangements, obligations(including contingent obligations), and other relationships ofthe issuer with unconsolidated entities or other persons, that
may have a material current or future effect on financialcondition, changes in financial condition, results ofoperations, liquidity, capital expenditures, capital resources,or significant components of revenues or expenses.
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462006 Haynes and Boone, LLP
Enhanced Financial DisclosuresDisclosures in periodic reports (cont.):
The SEC rules, in part, require disclosure of the followinginformation:
The nature and business purpose of the off-balance sheetarrangements;
The importance of the off-balance sheet arrangements tothe issuer for liquidity, capital resources, market risk orcredit risk support, or other benefits;
The overall magnitude of a registrants off-balance sheetactivities, the specific material impact of the arrangements
on a registrant and the circumstances that could causematerial contingent obligations or liabilities to come tofruition; and
E h d Fi i l Di l
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Enhanced Financial Disclosures Any known event, demand, commitment, trend or
uncertainty that will, or is reasonably likely to, result inthe termination, or material reduction in availability to theregistrant, of its off-balance sheet arrangements that
provide the registrant with material benefits.
Enhanced conflict of interest provisions:
SOX prohibits an issuer, including any subsidiary, fromdirectly or indirectly extending or maintaining credit, or toarrange for the extension of credit, or to renew an extensionof credit, in the form of a personal loan to any director orexecutive officer.
A preexisting extension of credit on the date of enactment ofthis section is excluded, provided there is not a subsequentmaterial modification to the extension of credit.
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482006 Haynes and Boone, LLP
Enhanced Financial Disclosures
Disclosures involving management and principalstockholders:
Every person who is directly or indirectly the beneficial
owner of more than 10 percent of any class of equity
security (other than an exempted security) which isregistered pursuant to Section 12, or who is a director or an
officer of the issuer of such security, is required to file
statements of such ownership with the SEC.
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492006 Haynes and Boone, LLP
Enhanced Financial Disclosures
Disclosures involving management and principal
stockholders (cont.):
The statements must be filed:
At the time of the registration of such security or the
effectiveness of the registration statement;
Within 10 days after such person becomes the
beneficial owner, director, or officer; and
If there has been a change in beneficial ownership
involving such security, by the end of the second
business day following the day on which the subjecttransaction was executed.
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502006 Haynes and Boone, LLP
Enhanced Financial Disclosures
Management assessment of internal controls:
SOX requires management to make an assessment of the
issuers internal controls. The SEC requires each issuer to
include in its internal control report in the annual 10-K:
A statement of managements responsibilities forestablishing and maintaining adequate internal control
over financial reporting of the issuer;
A statement identifying the framework used by
management to conduct the required evaluation of the
effectiveness of the issuers internal control over
financial reporting;
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Enhanced Financial Disclosures
Management assessment of internal controls (cont.):
Managements assessment of the effectiveness of the internal
control over financial reporting as of the end of the issuers
most recent fiscal year, including a statement as to whether
the issuers internal control over financial reporting iseffective; and
A statement that the registered public accounting firm that
audited the financial statements included in the annual report
has issued an attestation report on managements assessmentof the issuers internal control over financial reporting.
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522006 Haynes and Boone, LLP
Enhanced Financial Disclosures
Management assessment of internal controls (cont.): SOX also requires reporting companies to perform
quarterly evaluations of changes that have materially
affected, or are reasonably likely to materially affect, the
companys internal control over financial reporting.
The requirement for implementing managements
assessment of internal controls is not effective until the
first fiscal year ending on or after July 15, 2007 for issuers
that are not accelerated filers.
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532006 Haynes and Boone, LLP
Enhanced Financial Disclosures
Management assessment of internal controls (cont.): An accelerated filer means an issuer that first meets the
following conditions as of the end of its fiscal year:
The aggregate market value of the voting and non-
voting common equity held by non-affiliates of theissuer is $75 million or more, computed by use of the
price at which the common equity was last sold, or the
average of the bid and asked prices of such common
equity, as of the last business day of the issuers most
recently completed second fiscal quarter;
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542006 Haynes and Boone, LLP
Enhanced Financial Disclosures The issuer has been subject to the requirements of
Section 13(a) or 15(d) of the Securities Exchange Actof 1934 for a period of at least twelve calendar months;
The issuer has filed at least one annual report; and
The issuer is not eligible to use Forms 10-KSB and 10-QSB for its annual and quarterly reports.
Code of ethics:
SOX requires issuers on their annual reports to disclosewhether or not they have adopted a code of ethics thatapplies to the principal executive officer, principal
financial officer, principal accounting officer or controller,and if the issuer has not adopted a code of ethics, why ithas not.
E h d Fi i l Di l
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552006 Haynes and Boone, LLP
Enhanced Financial DisclosuresCode of Ethics (cont.):
SOX also requires issuers to report on Form 8-K of anychanges to its code of ethics within four days of such change.
The new Form 8-K item specifically requires disclosure of:
The nature of any amendment to the companys code ofethics that applies to its principal executive officer,
principal financial officer, principal accounting officer orcontroller, or other similar persons; and
The nature of any waiver, including any implicit waiver,from a provision of the code of ethics granted by the
company to one of these specified officers, the name of theperson to whom the company granted the waiver and thedate of the waiver.
E h d Fi i l Di l
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562006 Haynes and Boone, LLP
Enhanced Financial DisclosuresEnhanced review of periodic disclosures and real time disclosures:
SOX requires the SEC to review disclosures on a regular andsystematic basis, and requires the SEC to review at least once
every three years, a public companys disclosures.
The SEC in its reviews will focus on:
Issuers that have made material restatements;Issuers with significant volatility in their stock price; and
Issuers with the largest market capitalization.
SOX requires issuers to disclose on a rapid and current basis
such additional information concerning material changes in thefinancial condition or operations of the issuer, in plain English.
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572006 Haynes and Boone, LLP
Enhanced Penalty Provisions
SOX provides for several corporate accountability and
enhanced penalty provisions, including in part:
Criminal penalties for altering documents;
Changes in the statute of limitations;
Protection for whistleblowers;
Criminal penalties for defrauding shareholders; and
Penalties for false certification.
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582006 Haynes and Boone, LLP
Enhanced Penalty ProvisionsCriminal penalties for altering documents:
SOX provides that whoever knowingly alters, destroys,mutilates, conceals, covers up, falsifies, or makes a falseentry in any record, document, or tangible object with theintent to impede, obstruct, or influence the investigation or
proper administration of any matter within the jurisdiction
of any department or agency of the United States or anycase filed under title 11, or in relation to or contemplationof any such matter or case, shall be fined under this title,imprisoned not more than 20 years, or both.
SOX also requires auditors to retain all audit and review
work papers for at least five years. Failure to comply canresult in both a fine and possible imprisonment of up to 10years.
Enhanced Penalty Provisions
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592006 Haynes and Boone, LLP
Enhanced Penalty ProvisionsStatute of limitations and whistleblower protections:
SOX provides that a private right of action that involves a claim
of fraud, deceit, manipulation, or contrivance in contraventionof a regulatory requirement concerning the securities laws, may
be brought not later than the earlier of (i) 2 years after discoveryof the facts constituting the violation or (ii) 5 years after theviolation.
SOX provides protection for whistleblowers by providing thatno company may discharge, demote, suspend, threaten, harass,or in any other manner discriminate against an employee who
provides information or otherwise assists in any investigationregarding a violation of the securities laws, when the
investigation is conducted by a federal regulatory or lawenforcement agency, a member of Congress or anycongressional committee, or a person with supervisory authorityover the whistleblower.
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602006 Haynes and Boone, LLP
Enhanced Penalty Provisions
Penalties for defrauding shareholders:
SOX provides that anyone who knowingly executes, or
attempts to execute a scheme or artifice to defraud any
person in connection with any security of an issuerregistered pursuant to Section 12 or to obtain, by means of
false or fraudulent pretenses, representations, or promises,
any money or property in connection with the purchase or
sale of any security of an issuer, will be subject to fine or
imprisonment of up to 25 years, or both.
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Enhanced Penalty ProvisionsFalse certification:
SOX requires certification by the chief executive officer andthe chief financial officer. If the chief executive officer or
chief financial officer provide their certification knowing
that the periodic reports do not comply with the
requirements of section 13(a) or 15(d), they will be subject
to:
A fine of not more than $1,000,000 or imprisonment
of up to 10 years, or both; and
If the violation is willful, the fine increases up to a
maximum of $5,000,000 or imprisonment of up to 20
years, or both.