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Sarbanes-Oxley Act

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The U.S. Sarbanes-OxleyAct of 2002: 2004 Update

for Non-U.S. Issuers

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R E P O R T

September 1, 2004

Sarbanes-Oxley

Introduction....................................................................................................................1Who is Subject to Sarbanes-Oxley?................................................................................1When Does Sarbanes-Oxley Take Effect? ......................................................................1

Key Provisions of Sarbanes-Oxley, and Related SEC Rulemaking ........................1Certification Requirements ..............................................................................................1

• Section 302 ............................................................................................................1• Section 906 ......................................................................................................3• Differences Between Section 906 and Section 302 Certifications ....................3

Section 404—Internal Control Over Financial Reporting ................................................3• Definition of Internal Control Over Financial Reporting....................................4• Management’s Annual Assessment of, and Report on, Internal

Control—Item 15 of Form 20-F ............................................................................4• Internal Control Audits—Auditing Standard No. 2 ............................................7

Non-GAAP Financial Measures ......................................................................................8• Regulation G ..........................................................................................................8• Regulation S-K Item 10(e) ....................................................................................9

Off-Balance Sheet and Other MD&A Disclosure ..........................................................10• Off-Balance Sheet Arrangements ......................................................................10• Table of Contractual Obligations ......................................................................10• Contingent Liabilities and Commitments ..........................................................11

Standards Relating to Listed Company Audit Committees............................................11Audit Committee Financial Expert ................................................................................12Auditor Independence ..................................................................................................13Improper Influence on the Conduct of Audits ................................................................14Auditor Record Retention ..............................................................................................14Material Correcting Adjustments....................................................................................15Attorney Conduct Rules ................................................................................................15Code of Ethics ..............................................................................................................16Blackout Trading Restrictions ........................................................................................17Loans to Executives ......................................................................................................17Forfeiture of Bonuses ....................................................................................................18Reseach Analysts ..........................................................................................................18Liability Issues Relating to Sarbanes-Oxley ..................................................................19

Conclusion and Contacts ..........................................................................................20

Annex A—Effective Dates for Certain Sarbanes-Oxley Sectionsand Related SEC Rulemaking ....................................................................................25

The U.S. Sarbanes-Oxley Act of 2002:2004 Update for Non-U.S. Issuers

Latham & Watkins operates as a limited liability partnership worldwide with an affiliate in the United Kingdom and Italy, where the practice isconducted through an affiliated multinational partnership. © Copyright 2004 Latham & Watkins. All Rights Reserved.

Alexander F. CohenD. Jamal Qaimmaqami

IntroductionThis update summarizes the keyprovisions of the U.S. Sarbanes-OxleyAct of 2002 (the “Sarbanes-OxleyAct,” “Sarbanes-Oxley,” or the “Act”),and the U.S. Securities and ExchangeCommission’s (the “SEC”) rules underthe Act relevant to foreign privateissuers (a term that covers mostnon-U.S. issuers, other than foreigngovernments). It is current throughSeptember 1, 2004.

Who is Subject to Sarbanes-Oxley?The Sarbanes-Oxley Act applies to allissuers—including foreign privateissuers—that:

• have registered securities under theU.S. Securities Exchange Act of 1934,as amended (the “Exchange Act” orthe “1934 Act”);

• are required to file reports underSection 15(d) of the Exchange Act; or

• have filed a registration statementunder the U.S. Securities Act of1933, as amended (the “SecuritiesAct” or the “1933 Act”) that hasnot yet become effective.1

This means, for example, that anyforeign private issuer that has listedits securities in the United States, orissued securities to the public in theUnited States whether or not listed(such as in a registered exchange offerfor high-yield bonds) is subject to theSarbanes-Oxley Act. A foreign privateissuer that has not sold securities tothe public in the United States, orthat is exempt from Exchange Actregistration by virtue of Exchange ActRule 12g3-2(b) is not subject to therequirements of the Sarbanes-OxleyAct. Accordingly, when we refer belowto “issuers” and “foreign privateissuers” we mean those companiesthat are subject to Sarbanes-Oxley.

Although the Sarbanes-Oxley Act doesnot generally distinguish between U.S.domestic and foreign private issuers,the SEC has, in its implementingrules, made various exceptions for thebenefit of foreign private issuers.

When Does Sarbanes-Oxley TakeEffect?The Sarbanes-Oxley Act’s provisionstake effect at different times, rangingfrom immediately upon enactment to

later dates specified in the Act or onwhich the required SEC implementingregulations come into force. Annex Alists the effective dates for certain keyprovisions of Sarbanes-Oxley and therelated SEC rules.

Key Provisions ofSarbanes-Oxley, andRelated SEC RulemakingCertification RequirementsSarbanes-Oxley contains twooverlapping certifications that mustbe provided by an issuer’s principalexecutive officer and principalfinancial officer, or persons performingsimilar functions (respectively, the“CEO” and “CFO”): the Section 302certification, and the Section 906certification. Section 302 amends theExchange Act, whereas Section 906amends the U.S. federal criminal code.

Section 302Section 302(a) of the Sarbanes-OxleyAct directs the SEC to adopt rulesrequiring CEO and CFO certificationof each “annual or quarterly report”filed by issuers. In response, theSEC has issued new 1934 Act Rules13a-14 and 15d-14, and the text ofa certification for annual reports onForm 20-F.2 In addition, the SEC hasadopted new 1934 Act Rules 13a-15and 15d-15, as well as new Item 15 ofForm 20-F, all dealing with “disclosurecontrols and procedures.”3 TheseRules, Item 15 and the certificationtext took effect on August 29, 2002.4

However, these Rules, Item 15 and thecertification text have been furthermodified by the SEC’s “internalcontrol” rules adopted under Section404 of the Sarbanes-Oxley Act.5 As aresult, we have summarized below therevised versions of the Rules, Item 15and the certification text. The revisedversions generally took effect August14, 2003 (with certain exceptions thatwe note below).6

Section 302 Certification Text—1934 ActRules 13a-14, 15d-14; Form 20-F

Rules 13a-14 and 15d-14 require aforeign private issuer’s annual reporton Form 20-F (but not its currentreports on Form 6-K)7 to includeseparate certifications by the issuer’s

Latham & Watkins | Article Update

CEO and CFO.8 The certificationsmust state that:9

• the officer has reviewed the annualreport;

• based on the officer’s knowledge,the annual report does not containany untrue statement of a materialfact or omit to state a material factnecessary to make the statementsmade, in light of the circumstancesunder which such statements weremade, not misleading;

• based on the officer’s knowledge,the financial statements, and otherfinancial information included in theannual report, fairly present in allmaterial respects the financialcondition, results of operations andcash flows of the issuer;

• the CEO and CFO are responsiblefor establishing and maintainingdisclosure controls and procedures[and “internal control over financialreporting”10]11 for the issuer and have:N designed such disclosure controls

and procedures, or caused suchdisclosure controls and proceduresto be designed under theirsupervision, to ensure thatmaterial information relatingto the issuer, including itsconsolidated subsidiaries, ismade known to them by otherswithin those entities;

N [designed such internal controlover financial reporting, orcaused such internal control overfinancial reporting to be designedunder their supervision, to providereasonable assurance regardingthe reliability of financialreporting and the preparation offinancial statements for externalpurposes in accordance withgenerally accepted accountingprinciples;]12

N evaluated the effectiveness of theissuer’s disclosure controls andpresented in the annual reporttheir conclusions about theeffectiveness of the disclosurecontrols and procedures, as of theend of the period covered by thereport based on such evaluation;13

andN disclosed in the report any change

in the issuer’s internal controlover financial reporting thatoccurred during the periodcovered by the report that has

materially affected, or isreasonably likely to materiallyaffect, the issuer’s internal controlover financial reporting; and

• the CEO and CFO have disclosed,based on their most recentevaluation of internal control overfinancial reporting, to the issuer’sauditors and the audit committee:N all significant deficiencies and

material weaknesses in the designor operation of internal controlover financial reporting which arereasonably likely to adverselyaffect the issuer’s ability torecord, process, summarize andreport financial information; and

N any fraud, whether or not material,that involves management orother employees who have asignificant role in the issuer’sinternal control over financialreporting.

These certifications must be includedas an exhibit to the issuer’s annualreport on Form 20-F.14 Except for theportions of the certifications appearingabove in square brackets (which do notcome into effect until July 15, 2005),the wording of the certifications maynot be changed in any respect, evenif the changes would appear to beinconsequential.15

Disclosure Controls and Procedures—1934 Act Rules 13a-15 and 15d-15;Item 15(a) of Form 20-F

Under Rules 13a-15 and 15d-15, aforeign private issuer must maintaindisclosure controls and procedures.16

In addition, as of the end of each fiscalyear, the issuer’s management, withthe participation of the CEO andCFO, must make an evaluation of theeffectiveness of the issuer’s disclosurecontrols and procedures.17 Finally,under Item 15a of Form 20-F, theissuer must disclose the conclusionsof its CEO and CFO regarding theeffectiveness of the disclosure controlsand procedures based on their reviewas of the end of the period to whichthe report relates.18

For the purposes of Rules 13a-15 and15d-15, and Item 15(a) of Form 20-F(as well as the required certifications ofRules 13a-14 and 15d-14), “disclosurecontrols and procedures” meanscontrols and other procedures of an

2 The U.S. Sarbanes-Oxley Act of 2002


issuer that are designed to ensure thatinformation required to be disclosedby the issuer in the reports that it filesor submits under the Exchange Actis (1) timely recorded, processed,summarized and reported and (2)accumulated and communicated tothe issuer’s management, to allow fortimely decisions about disclosure.19

Violations of Section 302

While Section 302 carries no criminalsanctions, false certifications aresubject to SEC enforcement action forviolating the Exchange Act and alsopossibly to both SEC and privatelitigation alleging violations of theanti-fraud provisions of the ExchangeAct (e.g., Section 10(b) of the ExchangeAct and Exchange Act Rule 10b-5).A false certification also may haveliability consequences under Sections11 and 12(a)(2) of the SecuritiesAct if the accompanying report isincorporated by reference into aregistration statement (e.g., onForm F-3) or into a prospectus.

Section 906Section 906, which added new Section1350 to the U.S. federal criminalcode, took effect immediately uponenactment of the Sarbanes-Oxley Acton July 30, 2002. Section 906 requiresthat each “periodic report containingfinancial statements” filed by anissuer must “be accompanied by”a certification by the issuer’s CEOand CFO that:

• the periodic report fully complieswith the requirements of Section13(a) or Section 15(d) of theExchange Act; and

• the information contained in theperiodic report fairly presents, inall material respects, the financialcondition and results of operationsof the issuer.

Although Section 906 is self-implementing, the SEC has adopted1934 Act Rules 13a-14(b) and 15d-14(b) to require that the Section 906certification (which may be a jointcertification of the CEO and CFO)must be provided, and must befurnished as an exhibit to the relevantperiodic report. Because the Section906 certification is not considered“filed” as a technical matter, it would

not attract liability under Section 18 ofthe Exchange Act or be incorporatedby reference into the issuer’ssubsequent Securities Act registrationstatements (unless specificallyincorporated by the issuer).20 As withthe Section 302 certification, theSection 906 certification is not requiredfor current reports on Form 6-K.21

Violations of Section 906

Under Section 906, an officer whocertifies a statement “knowing thatthe periodic report accompanyingthe statement” does not meet thecertification can be fined not morethan $1 million or imprisoned for notmore than 10 years, or both. Bycontrast, an officer who “willfully”certifies his or her written statementwhile “knowing” that the annualreport does not “comport with all therequirements” of Section 906 can befined not more than $5 million orimprisoned not more than 20 years,or both. The distinction between“knowing” and “willful” certificationis not set out in the Sarbanes-OxleyAct, but in other contexts “willfully”normally requires a showing that theperson had specific knowledge of thelaw he or she was violating, whereas“knowingly” does not.22

Differences Between Section 906 andSection 302 CertificationsAlthough the text of the two requiredcertifications overlap, there aresome important differences betweenthem. In contrast to the Section 302certification, the text of the Section906 certification does not explicitlyprovide for the officer to certify asto his or her knowledge. The U.S.Department of Justice has, however,confirmed that an officer may qualifya Section 906 certification to his orher knowledge because knowledgewould, in any event, be a necessaryelement of criminal prosecution.23

Furthermore, whereas the Section 302certification is required for anyamendment to an annual report onForm 20-F, the SEC has stated thatForm 20-F amendments do not requirea new Section 906 certification.24

Section 404—Internal Control OverFinancial ReportingSection 404 of Sarbanes-Oxley directsthe SEC to issue rules requiring an

3 2004 Update for Non-U.S. Issuers


issuer’s annual report to contain aninternal control report (1) statingmanagement’s responsibility forestablishing and maintaining anadequate internal control structureand procedures for financial reportingand (2) containing an assessment, asof the end of the issuer’s most recentfiscal year, of the effectiveness of theissuer’s internal control structure andprocedures for financial reporting.In addition, Section 404 requires anissuer’s independent auditor to attestto, and report on, management’sassessment, in accordance withstandards adopted by the U.S. PublicCompany Accounting Oversight Board(the “PCAOB”). (Section 404 provides,however, that the attestation cannot bea separate engagement of the auditor.)

The SEC has accordingly adopted newRules 13a-15 and 15d-15 under theExchange Act, and new Item 15 ofForm 20-F, and the PCAOB hasadopted Auditing Standard No. 2.25

Rules 13a-15 and 15d-15 requirea foreign private issuer:

• to maintain internal control overfinancial reporting;

• to evaluate (with the participation ofthe CEO and CFO) the effectivenessof internal control as of the end ofeach fiscal year; and

• to evaluate (with the participation ofthe CEO and CFO) any change in itsinternal control that occurred duringthe fiscal year that has materiallyaffected, or is reasonably likely tomaterially affect, the issuer’s internalcontrol over financial reporting.

A foreign private issuer must complywith Rules 13a-15 and 15d-15, asthey pertain to internal control overfinancial reporting, for the first fiscalyear ending on or after July 15, 2005.26

In addition to the requirementsrelating to disclosure controls andprocedures, new Item 15 of Form 20-F(discussed in more detail below)also requires an annual report frommanagement on internal control, an attestation report of the issuer’sindependent auditor and the disclosureof any changes in internal control. Aforeign private issuer must complywith these requirements of new Item15 in connection with its annual report

on Form 20-F for the first fiscal yearending on or after July 15, 2005,except with respect to the disclosureof changes in internal control whichtook effect as of August 14, 2003.

Definition of Internal Control OverFinancial ReportingFor purposes of Rules 13a-15 and 15d-15, and Item 15 of Form 20-F (as wellas the required Section 302 certification),“internal control over financialreporting” is defined as a processdesigned by, or under the supervisionof, the issuer’s CEO and CFO, andeffected by the issuer’s board ofdirectors, management and otherpersonnel, to provide reasonableassurance regarding the reliability offinancial reporting and the preparationof financial statements for externalpurposes in accordance with generallyaccepted accounting principlesand includes those policies andprocedures that:

• pertain to the maintenance ofrecords that in reasonable detailaccurately and fairly reflect thetransactions and dispositions ofthe assets of the issuer;

• provide reasonable assurancethat transactions are recorded asnecessary to permit preparation offinancial statements in accordancewith generally accepted accountingprinciples, and that receipts andexpenditures of the issuer are beingmade only in accordance withauthorizations of managementand directors of the issuer; and

• provide reasonable assuranceregarding prevention or timelydetection of unauthorized acquisition,use or disposition of the issuer’sassets that could have a materialeffect on the financial statements.27

Management’s Annual Assessment of,and Report on, Internal Control—Item 15of Form 20-FIn an issuer’s annual report on Form20-F, management must provide areport on the issuer’s internal controlover financial reporting that contains,among other things:28

• a statement of management’sresponsibility for establishing andmaintaining adequate internalcontrol over financial reporting;



Section 404 ofSarbanes-Oxley dealswith internal controlsover financial reporting.It is one of the mostfar-reaching aspectsof the Act.

• a statement identifying theframework used by managementto evaluate the effectiveness ofthe issuer’s internal control overfinancial reporting;

• management’s assessment of theeffectiveness of the issuer’s internalcontrol over financial reporting asof the end of the most recent fiscalyear, including a statement as towhether or not the issuer’s internalcontrol over financial reporting iseffective. The statement must alsoinclude disclosure of any materialweakness in the issuer’s internalcontrol over financial reportingidentified by management.Management is not permitted toconclude that the issuer’s internalcontrol over financial reporting iseffective if there are one or morematerial weaknesses in internalcontrol;29 and

• a statement that the independentauditor that audited the financialstatements included in the annualreport has issued an attestationreport on management’s assessmentof the issuer’s internal control overfinancial reporting.

In addition, a foreign private issuermust also include:

• an attestation report of theindependent auditor onmanagement’s assessment ofthe issuer’s internal control overfinancial reporting; and

• disclosure of any change in itsinternal control over financialreporting that occurred during thefiscal year that has materiallyaffected, or is reasonably likely tomaterially affect, the issuer’s internalcontrol over financial reporting.30

With the exception of the disclosureof changes in internal control overfinancial reporting, which took effectas of August 14, 2003, a foreignprivate issuer need not comply withthe above requirements of Item 15until its annual report on Form 20-Ffor its first fiscal year ending on orafter July 15, 2005.31

Framework for EvaluationThe SEC has not required the use of aparticular framework. It has, however,specified that management’s evaluationmust be based on a recognized controlframework established by a body orgroup that has followed due-processprocedures, including a broaddistribution of the framework forpublic comment.32 The Committeeof Sponsoring Organizations of theTreadway Commission’s InternalControl—Integrated Framework,the Canadian Institute of CharteredAccountant’s The Guidance onAssessing Control, and the Instituteof Chartered Accountants in Englandand Wales’ Turnbull Report are allapproved frameworks.33

The framework must:34

• be free from bias;• permit reasonably consistent

qualitative and quantitative measuresof an issuer’s internal control;

• be sufficiently complete so thatthose relevant factors that wouldalter a conclusion about theeffectiveness of an issuer’s internalcontrols are not omitted; and

• be relevant to an evaluation ofinternal control over financialreporting.

Auditor Independence

Although management maycoordinate its evaluation of internalcontrols with that of its auditors, itcannot compromise the auditors’independence.35 Auditors may assistmanagement in documenting internalcontrols, but management must beactively involved in the documentationprocess. In addition, managementcannot delegate its responsibilities toassess internal control to the auditor.

Material Weaknesses

Management may not determinethat an issuer’s internal control overfinancial reporting is effective ifit identifies one or more materialweaknesses in the issuer’s internalcontrol. The term “materialweaknesses” for these purposeshas the same meaning as under theauditing standards of the PCAOB.



Method of EvaluationThe SEC has not specified a methodor procedures to be followed in theevaluation. An issuer must, however,maintain “evidential matter, includingdocumentation” to provide reasonablesupport for management’s assessmentof the issuer’s internal control overfinancial reporting.36 The assessmentmust be based on procedures sufficient

both to evaluate design and to testoperating effectiveness. Controls thatare subject to assessment include:

• controls over initiating, recording,processing and reconciling accountbalances, classes of transactions anddisclosure and related assertionsincluded in the financial statements;

• controls related to the initiationand processing of non-routine andnon-systematic transactions;

• controls related to the selectionand application of appropriateaccounting policies; and

• controls related to the prevention,identification and detection of fraud.

The SEC has cautioned that inquiryalone generally will not provide anadequate basis for management’sassessment.

Changes in Internal Control

There is no explicit requirement in therules under Section 404 to disclose thereasons for any changes in internalcontrol (as opposed to the existenceof those changes). The SEC has noted,however, that an issuer must considerwhether the anti-fraud provisionsof the U.S. federal securities lawswould require that disclosure, togetherwith other information about thecircumstances surrounding the change.37

Certain Internal Control IssuesIn June 2004, the SEC issued answersto certain frequently asked questionsregarding management’s report overinternal control (the “2004 FAQ”).38

Under the 2004 FAQ:

• Equity investees: an issuer musthave controls over the recording ofamounts related to its investmentthat are recorded in its consolidatedfinancial statements, although itneed not evaluate the recordingof transactions into the investee’saccounts.39

• Material business combinations: ifan issuer consummates a materialbusiness combination during a fiscalyear and is unable to conduct anassessment of the acquired business’sinternal control during the periodbetween the consummation dateand the date of management’sassessment, it may omit anassessment of the acquired business’sinternal control for not morethan one year from the date ofacquisition (and must make certaindisclosure about the acquiredbusiness and the effect of theacquisition on the issuer’sinternal control).40

• Qualifications: management maynot qualify its conclusion about theeffectiveness of an issuer’s internalcontrol, and may not conclude thatinternal control is effective if amaterial weakness exists. Instead,management may state that controlsare ineffective for specific reasons.41

• Initial internal control report:management need not disclosechanges or improvements made inpreparation for the first internalcontrol report, although the SECcautioned that if the issuer wereto identify a material weakness itshould carefully consider whetherthat fact should be disclosed, aswell as changes made in responseto the material weakness.42

• Subsequent internal control reports:after an issuer’s first managementreport on internal control, it isrequired to identify and disclosematerial changes in internal controlin its annual report on Form 20-F.This would include discussing amaterial change (including animprovement) even if it was not in



Management is not permitted to conclude that the

issuer’s internal control over financial reporting

is effective if there are one or more material

weaknesses in internal control.

response to an identified significantdeficiency or material weakness.43

• Compliance with law: althoughgeneral legal compliance is not partof internal control (as opposed tocompliance with laws relating to thepreparation of financial statements),an issuer must evaluate whether ithas adequate controls to ensure thatthe effect of non-compliance withlaw is recorded in the issuer’sfinancial statements. An evaluationof compliance with law is insteadrequired as part of management’sevaluation of disclosure controlsand procedures. In particular,management must evaluatewhether the issuer adequatelymonitors compliance and hasappropriate disclosure controls andprocedures to ensure that requireddisclosure of legal or regulatorymatters is provided.44

• Disclosure of significant deficiencies:an issuer must identify and publiclydisclose all material weaknesses. Ifmanagement identifies a significantdeficiency, it is not obligated todisclose publicly the existence ornature of the significant deficiency.If, however, management identifiesa significant deficiency that, whencombined with other significantdeficiencies, is determined to be amaterial weakness, managementmust disclose the material weakness(and the significant deficiency tothe extent needed to understandthe material weakness). In addition,if a material change is made toeither internal control or disclosurecontrols and procedures in responseto a significant deficiency, the issuershould disclose the change andconsider whether a discussion of thesignificant deficiency is needed.45

Internal Control Audits—AuditingStandard No. 246

Auditing Standard No. 2 sets out thePCAOB’s rules for the independentauditor’s attestation report onmanagement’s assessment of internalcontrol over financial reporting asrequired by Section 404, Rules 13a-15and 15d-15 and Item 15 of Form 20-F.Under Auditing Standard No. 2, theindependent auditor’s audit (thePCAOB chose to refer to an “audit”rather than an “attestation”)47 takes

the form of an auditor’s reportwhich includes two opinions: oneon management’s assessment ofinternal control and another on theeffectiveness of internal control overfinancial reporting. The PCAOB statedthat the objective of the audit ofinternal control over financial reportingis to form an opinion as to whethermanagement’s assessment of theeffectiveness of the issuer’s internalcontrol over financial reporting isfairly stated in all material respects.48

The auditor’s conclusion will thereforerelate directly to whether the auditorcan agree with management thatinternal control is effective.49 In thisconnection, the auditor needs toevaluate management’s assessmentprocess (to ensure that managementhas an appropriate basis for itsconclusion) and to test theeffectiveness of internal control.50

Significant Deficiencies and MaterialWeaknesses

Under Auditing Standard No. 2, bothmanagement and the auditor mayidentify deficiencies in internal controlover financial reporting.51 A controldeficiency exists “when the designor operation of a control does notallow the company’s management oremployees, in the normal course ofperforming their assigned functions,to prevent or detect misstatementson a timely basis.”52

Auditing Standard No. 2 providesthat a control deficiency should beclassified as a “significant deficiency”if, “by itself or in combination withother control deficiencies, it results inmore than a remote likelihood of amisstatement of the company’s annualor interim financial statements that ismore than inconsequential will not beprevented or detected.”53 In addition,a “significant deficiency should beclassified as a material weakness if,by itself or in combination with othercontrol deficiencies, it results inmore than a remote likelihood that amaterial misstatement in the company’sannual or interim financial statementswill not be prevented or detected.”54

Auditing Standard No. 2 mandatesthat an auditor must communicatein writing to the audit committee all



significant deficiencies and materialweaknesses of which the auditor isaware.55 In addition, the auditor mustcommunicate to management, inwriting, all control deficiencies of whichthe auditor is aware that have notpreviously been communicated inwriting to management and to notifythe audit committee of such acommunication.56

Identifying Significant Deficiencies

Auditing Standard No. 2 identifiesa number of circumstances that,“because of their likely significantnegative effect on internal controlare significant deficiencies as wellas strong indicators that a materialweakness exists.”57 These include:58

• ineffective oversight by the auditcommittee of the issuer’s externalfinancial reporting and internalcontrol. As part of evaluating thecontrol environment, an auditormust assess the effectiveness of theaudit committee’s oversight andmust communicate to the boardof directors if it concludes thatoversight is ineffective;

• material misstatement in thefinancial statements not initiallyidentified by the issuer’s internalcontrol. Failure to detect themisstatement is “a strong indicatorthat the company’s internal control”is ineffective; and

• significant deficiencies that havebeen communicated to managementand the audit committee, but thatremain uncorrected after reasonableperiods of time.

Auditor’s Report

Under Auditing Standard No. 2, theauditor’s report includes two opinions:one on management’s assessment ofinternal control and another on theeffectiveness of internal control.59

An auditor may express an unqualifiedopinion if it has identified nomaterial weaknesses.60 If the auditorcannot perform all of the necessaryprocedures, the auditor may eitherqualify or disclaim an opinion.61 If anoverall opinion cannot be expressed,Auditing Standard No. 2 requires theauditor to explain why.62

The auditor’s report may disclose onlymaterial weaknesses, although if anaggregation of significant deficienciesconstituted a material weakness,then disclosure would be required.63

Auditing Standard No. 2 does notpermit a qualified opinion on theeffectiveness of internal control in theevent of a material weakness; instead,the auditor must express an “adverseopinion.”64 The auditor may express anunqualified opinion on management’sassessment (but not on the effective-ness of internal control) so long asmanagement properly identifies thematerial weakness and concludes thatinternal control was not effective.65 If,however, the auditor and managementdisagree about the existence of thematerial weakness, then the auditorwould render an adverse opinion onmanagement’s assessment.66

Non-GAAP Financial MeasuresSection 401(b) of the Sarbanes-OxleyAct requires the SEC to issue ruleslimiting the use of “pro forma”financial information in various ways.In response, the SEC has adoptedboth a new disclosure regulation,Regulation G, and new rulesapplicable to disclosure in filings withthe SEC under Item 10 of RegulationS-K.67 The SEC has chosen to referin the rules to “non-GAAP financialmeasures” rather than pro formafinancial information, to avoidconfusion with existing SEC rules onpro forma financial information (suchas Article 11 of Regulation S-X).68

Regulation GRegulation G applies wheneveran issuer, or a person acting on itsbehalf, “publicly discloses materialinformation” that includes a non-GAAP financial measure.69 The term“non-GAAP financial measure” isbroadly defined as a numericalmeasure of financial performance thatexcludes (or includes) amounts thatare otherwise included (or excluded)in the comparable measure calculatedand presented in the financialstatements under GAAP.70 For a foreignprivate issuer, “GAAP” means thelocal GAAP under which the financialstatements were prepared, unless themeasure in question is derived fromU.S. GAAP, in which case GAAP meansU.S. GAAP for purposes of applying the



Auditing StandardNo. 2 does not permit aqualified opinion on theeffectiveness of internalcontrol in the event ofa material weakness;instead, the auditormust express an“adverse opinion.”

requirements of Regulation G to thedisclosure of the measure.71

The term non-GAAP financialmeasure does not include:72

• operating or other financialmeasures and ratios or statisticalmeasures calculated usingexclusively one or both of (1)financial measures calculated inaccordance with GAAP and (2)operating measures or othermeasures that are not non-GAAPfinancial measures; or

• financial measures required to bedisclosed by GAAP, SEC rules orother regulations applicable to theissuer.

Regulation G requires that disclosureof this sort be accompanied by themost directly comparable financialmeasure calculated in accordancewith GAAP, and a reconciliation ofthe differences between the two.73 Inaddition, Regulation G prohibits anissuer from making any non-GAAPfinancial measure public if it containsa material misstatement or omitsto include information needed tomake the included measure notmisleading.74 Regulation G tookeffect on March 28, 2003.75

A foreign private issuer is exemptfrom Regulation G if:76

• its securities are listed or quotedoutside the United States;

• the non-GAAP financial measurebeing used is not derived from orbased on a measure calculated andpresented in accordance with U.S.GAAP; and

• the disclosure is made outside theUnited States.

Regulation S-K Item 10(e)Distinct from Regulation G, the SEChas adopted limitations on the use ofnon-GAAP financial measures infilings (whether annual reports onForm 20-F, or registration statementsin connection with offerings in theU.S. or U.S. listings) as new Item 10(e)of Regulation S-K. For purposes ofItem 10(e), the term non-GAAPfinancial measures has the samemeaning as under Regulation G. Item10(e) applies to any SEC filings made

in respect of financial years endedafter March 28, 2003.77

Item 10(e) requires that whenever anissuer includes a non-GAAP financialmeasure in an SEC filing it must alsoinclude:78

• a presentation, with equal or greaterprominence, of the most directlycomparable GAAP financial measure;

• a reconciliation of the differencesbetween the non-GAAP financialmeasure and the most directlycomparable GAAP financialmeasure;

• a statement why managementbelieves the non-GAAP financialmeasure provides useful informationfor investors; and

• to the extent material, a statementof the additional purposes for whichmanagement uses the non-GAAPfinancial measure.

Furthermore, Item 10(e) prohibits inSEC filings, among other things:79

• non-GAAP measures of liquiditythat exclude items requiring cashsettlement, other than EBIT andEBITDA;

• the adjustment of non-GAAPmeasures of performance toeliminate or smooth itemscharacterized as non-recurring,unusual or infrequent when thenature of the charge or gain is suchthat it is reasonably likely to recurwithin two years or there was asimilar charge or gain within theprior two years; and

• the use of titles or descriptions fornon-GAAP financial measures thatare the same as, or confusinglysimilar to, titles or descriptions usedfor GAAP financial measures.

Item 10(e) contains an exemption fromthese prohibitions for a foreign privateissuer if the non-GAAP financialmeasure relates to the local GAAPused in the issuer’s primary financialstatements, is required or expresslypermitted by the standard-setter thatestablishes the local GAAP, and isincluded in the issuer’s annual reportfor its home jurisdiction.80

The SEC has cautioned that inclusionof a non-GAAP financial measure may



be misleading unless accompanied bydisclosure as to:81

• the manner in which managementuses the non-GAAP measure toconduct or evaluate its business;

• the economic substance behindmanagement’s decision to use sucha measure;

• the material limitations associatedwith the use of the non-GAAPfinancial measure as comparedto the use of the most directlycomparable GAAP financial measure;

• the manner in which managementcompensates for these limitationswhen using the non-GAAP financialmeasure; and

• the substantive reasons whymanagement believes the non-GAAPfinancial measure provides usefulinformation to investors.

The SEC has also stated that“earnings” as used in EBIT andEBITDA is intended to mean netincome as presented in the statementof operations under GAAP, andthat measures that are calculateddifferently should not be characterizedas EBIT or EBITDA.82 To the extentEBIT or EBITDA are presented as aperformance measure, the term shouldbe reconciled to net income and notoperating income.83

Off-Balance Sheet and Other MD&ADisclosureSection 401(a) of the Sarbanes-OxleyAct requires the SEC to implementrules requiring issuers to disclosematerial off-balance sheettransactions. The SEC’s rules gobeyond off-balance sheet transactions,however, and also address certaintopics covered in its prior MD&Ainitiatives.84 The rules take the form ofamendments to Item 5 of Form 20-F,and accordingly apply to allregistration statements filed by foreignprivate issuers (whether under theSecurities Act or Exchange Act),as well as annual reports.

Off-Balance Sheet ArrangementsEffective for SEC filings for fiscal yearsending on or after June 15, 2003,85 anissuer must disclose, in a separatelycaptioned section of MD&A, off-balance sheet arrangements thateither have, or are reasonably likelyto have, a current or future material

effect on the issuer’s financialcondition, results of operations, orliquidity.86 To the extent necessaryto understand these arrangements,the disclosure must include:87

• the nature and business purpose ofthe off-balance sheet arrangements;

• the importance to the issuer of theoff-balance sheet arrangements inrespect of liquidity, capitalresources, market risk support,credit support or other benefits;

• the amount of revenues, expensesand cash flows arising from thesearrangements;

• the nature and amounts of anyinterests retained, securities issuedor amounts incurred by the issuerunder these arrangements;

• the nature and amounts of any otherobligations or liabilities (contingentor otherwise) arising from thesearrangements that are reasonablylikely to become material and thetriggering events that could causethem to arise; and

• any known events or trends thatwill, or are reasonably likely to,result in the termination or reductionin availability to the issuer of thesearrangements and the course ofaction the issuer proposes to takein response.

An “off-balance sheet arrangement”is defined to include any transaction,agreement or contractual arrangementto which an entity unconsolidated withthe issuer is a party under which theissuer has certain obligations orinterests.88 Because the definition of“off-balance sheet arrangement”incorporates concepts from U.S.GAAP, foreign private issuers willneed to refer to U.S. GAAP for some ofthe disclosure items.89 However, theMD&A disclosure should focus on theprimary financial statements in thedocument (while taking reconciliationto U.S. GAAP into account).90

Table of Contractual ObligationsFor fiscal years ending on or afterDecember 15, 2003,91 an issuer mustalso include in its SEC filings a tableof contractual obligations as of the endof the latest balance sheet dateshowing the following items:92



Audit committeesare a key area of corporate governanceaddressed bythe Act.

The term “purchase obligations”means an enforceable agreementto purchase goods or services thatis binding on the issuer and thatspecifies key commercial terms (suchas quantity and price).93 With theexception of “purchase obligations,”the classifications of categories shownin the table are defined by referenceto U.S. GAAP. However, an issuer thatprepares financial statements inaccordance with non-U.S. GAAPshould include those items ofcontractual obligations in the tablethat are consistent with theclassifications used in the GAAPunder which its primary financialstatements are prepared.94

Contingent Liabilities and CommitmentsAlthough it issued proposed rules withrespect to disclosure requirements forcontingent liabilities andcommitments, the SEC declined toadopt final rules. In the meantime, theSEC’s existing guidance on thesubject—which suggests a tabularformat of specified categories95—iscontrolling.96

Standards Relating to ListedCompany Audit CommitteesSection 301 of the Sarbanes-OxleyAct adds new Section 10A(m) of theExchange Act. Section 10A(m) chargesthe SEC with creating rules to prohibitthe listing of any security in theUnited States of an issuer that is not incompliance with certain substantivestandards for audit committees. TheSEC has adopted final rules underSection 301 as Exchange Act Rule10A-3. Listed foreign private issuers

must be in compliance with Rule10A-3 by July 31, 2005.97

Under Rule 10A-3, audit committeemembers each have to be a memberof the board of directors and otherwiseindependent.98 To be “independent,”an audit committee member is barredfrom accepting any compensatory feesother than in that member’s capacityas a member of the board99 and maynot be an “affiliated person” of theissuer.100 The definition of affiliatedperson includes a person that, directly,or indirectly through one or moreintermediaries, controls, or is controlledby, or is under common control withthe specified person.101 There is,however, a safe harbor for certainnon-executive officers and otherpersons that are 10% or lessshareholders of the issuer.102

Foreign private issuers are entitledto certain exemptions from theindependence prong of Rule 10A-3.For example, the inclusion of a non-management employee representative,103

a non-management affiliated personwith only observer status,104 or anon-management governmentalrepresentative on the audit committeewill not violate the affiliated personprong of the independence test.105 Inaddition, issuers involved in an IPOare entitled to certain exemptionsduring a transitional period followingtheir public offering.106

Rule 10A-3 also requires that:

• the audit committee must be“directly responsible” for theappointment, compensation,



Contractual Obligations Payments due by Period

Total Less than 1-3 3-5 More than 1 year years years 5 years

Long-Term Debt Obligations

Capital (Finance) Lease Obligations

Operating Lease Obligations

Purchase Obligations

Other Long-Term Liabilities

Reflected on the Issuer’s Balance

Sheet under the GAAP of the

Primary Financial Statements

Total

oversight and retention of theexternal auditors, who must reportdirectly to the audit committee;107

• the audit committee must establishprocedures for the receipt, retentionand treatment of complaintsregarding accounting, internalcontrols or auditing matters, andfor the confidential, anonymoussubmission by employees ofconcerns regarding questionableaccounting or auditing matters;108

• the audit committee must have theauthority to engage independentcounsel and other advisors as itdeems necessary to carry out itsduties;109 and

• the issuer must provide the auditcommittee with appropriate fundingfor payment of external auditors,advisors employed by the auditcommittee and ordinary administrativeexpenses of the audit committee.110

These requirements are not intendedto conflict with local legal or listingprovisions (or requirements under theforeign private issuer’s organizationaldocuments), and instead relate to theallocation of responsibility betweenthe audit committee and the issuer’smanagement.111 Accordingly, theaudit committee may recommendor nominate the appointment orcompensation of the external auditorto shareholders if these matters arewithin shareholder competence underlocal law,112 and it must be grantedthose responsibilities that the board ofdirectors can legally delegate.113

Rule 10A-3 contains a generalexemption for foreign private issuersthat have a statutory board of auditorsor statutory auditors establishedpursuant to home country law orlisting requirements, which in turnmeet various requirements.114

A foreign private issuer relyingon Rule 10A-3’s exemption fromindependence, or the generalexemption noted above, will needto disclose in its annual report itsreliance on the exemptions and anassessment of whether this reliancewill materially adversely affectthe audit committee’s ability to actindependently and to satisfy any of theother requirements of Rule 10A-3.115

Audit Committee Financial ExpertSection 407(a) of the Sarbanes-OxleyAct directs the SEC to issue rulesrequiring an issuer to disclose in itsperiodic reports whether its auditcommittee has at least one “financialexpert” or if not, why not.

The SEC’s final rules implementingSection 407(a) use the term “auditcommittee financial expert” insteadof “financial expert.” The SEC hasimplemented these rules as new Item16A of Form 20-F. Item 16A appliesto annual reports of foreign privateissuers for fiscal years ending on orafter July 15, 2003.116

Under Item 16A, a foreign privateissuer must disclose in its annualreport that the issuer’s board ofdirectors has determined whetheror not it has one audit committeefinancial expert serving on its auditcommittee, or if not, why not.117 Ifthe issuer has a two-tier board ofdirectors, the supervisory or non-management board would make thisdetermination.118 The issuer mustalso disclose the name of the auditcommittee financial expert (if any)119

and, effective as of July 31, 2005,whether that person is “independent”from management.120 An issuer’s boardof directors must make an affirmativedetermination whether or not it hasat least one audit committee financialexpert, and may not simply fail toreach a conclusion.121

In order to qualify as an auditcommittee financial expert, the auditcommittee member must have thefollowing “attributes:”122

• an understanding of GAAP;• the ability to assess the general

application of GAAP in connectionwith the accounting for estimates,accruals and reserves;

• experience preparing, auditing oranalyzing financial statementssimilar to those of the issuer, oractively supervising others engagedin these activities;

• an understanding of internal controlsand procedures for financialreporting; and

• an understanding of audit committeefunctions.



In addition, an audit committeefinancial expert must have gainedthose attributes through:123

• education and experience as aprincipal financial officer, principalaccounting officer, controller, publicaccountant or auditor, or experiencein similar positions;

• experience actively supervisingthese functions;

• experience overseeing or assessingthe performance of companies orpublic accountants with respect tothe preparation, auditing orevaluation of financial statements; or

• other relevant experience.

The term “GAAP” as used in Item16A refers to the body of GAAP usedby the issuer in its primary financialstatements.124 Accordingly, the auditcommittee financial expert of a foreignprivate issuer need only be versedin local GAAP, and not in U.S. GAAPor in reconciliation to U.S. GAAP(although that experience would,of course, be useful).125

Item 16A also contains a liability“safe harbor” for the audit committeefinancial expert, under which:

• a person who is determined to bean audit committee financial expertis not deemed to be an “expert” forany purpose, such as Section 11 ofthe Securities Act; and126

• the designation of a person as anaudit committee financial expertdoes not impose greater duties,obligations or liabilities on theperson than on other audit committeeand board members, and does notaffect the duties, obligations orliabilities of other audit committeeand board members.127

Auditor IndependenceTitle II of the Sarbanes-Oxley Actcreates a series of requirementsrelating to the work of externalauditors, grouped under the heading“auditor independence.” Title IIestablishes new Sections 10A(g) through(l) of the Exchange Act. The SEC hasimplemented Title II by the adoptionof amendments to Regulation S-X(“S-X”) Rule 2-01, new S-X Rule 2-07,new 1934 Act Rule 10A2, and newItem 16C of Form 20-F. S-X Rules 2-01and 2-07, and Rule 10A-2, generally

took effect on May 6, 2003 (althoughmany of the provisions of these ruleshave varying transition periods), whileItem 16C took effect for annual reportsin respect of fiscal years ending afterDecember 15, 2003.128

Rule 10A-2 provides generally that itis unlawful for an auditor not to beindependent under certain provisionsof S-X Rules 2-01 and 2-07. S-X Rules2-01 and 2-07, in turn, track—andin some cases expand upon—therequirements of Sections 10A(g)-(l),and provide (among other things):

• an issuer may not employ a formerpartner, principal, shareholderor professional employee of anaccounting firm in a financialreporting oversight role at the issuerif the individual was a member ofthe audit engagement team duringthe one-year period preceding thedate audit procedures commencedfor the fiscal period that includedthe date of initial employment ofthe audit engagement teammember by the issuer;129

• limitations on the non-audit servicesthat an independent auditor mayprovide;130

• that an audit partner must notact as the lead audit partner orconcurring partner for more thanfive consecutive years, and must notprovide certain other services formore than seven consecutive years;131

• that the audit committee must pre-approve the engagement of theauditor to provide audit and non-audit services to the issuer or itssubsidiaries, or for policies orprocedures for pre-approval of auditand non-audit services (subject tocertain de minimis exceptions);132

• that no audit partner may earncompensation based on thepartner’s procuring engagementswith the issuer to provide anyservices other than audit, reviewor attest services;133 and

• that an auditor must report to theaudit committee on (1) all criticalaccounting policies and practices tobe used, (2) all alternative treatmentsof financial information within GAAPthat have been discussed with theissuer’s management (as well as theimplications of those alternativesand the auditor’s preferred



treatment), and (3) all other materialwritten communications betweenthe auditors and management.134

Under new Item 16C of Form 20-F, aforeign private issuer must disclose inits annual report:

• under the caption “audit fees,”aggregate fees billed by the auditorfor each of the last two fiscal yearsfor audit services (and services inconnection with statutory andregulatory filings);135

• under the caption “audit-relatedfees,” aggregate fees billed by theauditor for each of the last two fiscalyears for certain services “reasonablyrelated” to the audit and review offinancial statements, as well as adescription of these services;136

• under the caption “tax fees,”aggregate fees billed by the auditorfor each of the last two fiscal yearsfor tax services, as well as adescription of these services;137

• under the caption “all other fees,”aggregate fees billed by the auditorfor each of the last two fiscal yearsfor all other products and services,as well as a description of theseservices;138

• the pre-approval policies andprocedures of its audit committee foraudit and non-audit services;139 and

• if greater than 50%, the percentageof hours expended on the auditby persons other than full-timepermanent employees of the auditor.140

Improper Influence on the Conductof AuditsSection 303 of the Sarbanes-OxleyAct directs the SEC to issue rulesprohibiting any officer or directorof an issuer from taking any actionimproperly to influence an auditor forthe purpose of rendering the issuer’sfinancial statements materiallymisleading.

The SEC has adopted 1934 Act Rules13b2-2(a)-(c), largely tracking the textof Section 303. Rules 13b2-2(a)-(c)took effect on June 27, 2003.141 Amongother things, the rules prohibit anofficer or director of an issuer, orany other person acting under thedirection of an officer or issuer,from taking any action to “coerce,manipulate, mislead or fraudulentlyinfluence” an auditor engaged in the

performance of an audit or review offinancial statements of the issuer thatare required to be filed with the SEC ifthat person knew or should haveknown that his or her actions, ifsuccessful, could result in renderingthe issuer’s financial statementsmaterially misleading.142

The reach of the new rules is quitebroad. The phrase “persons actingunder the direction” of an officer ordirector includes the issuer’s employees(even if they are not under thesupervision or control of that officeror director), customers, vendors,and even attorneys or other outsideadvisors who might be in a positionto give out false or misleadinginformation to the auditor.143 Inaddition, the period during which anauditor can be said to be “engaged inthe performance of an audit” has beengiven a wide interpretation by theSEC. It accordingly could encompassnot only the professional engagementperiod but any other time the auditoris called upon to make decisions orjudgments regarding the issuer’sfinancial statements, including, incertain situations, periods prior to andafter the retention of the auditor.144

Rule 13b2-2 also identifies certaintypes of actions which could cause anissuer’s financial statements to bematerially misleading, includingimproperly influencing an auditor:

• to issue or reissue a report on anissuer’s financial statements that isnot warranted in the circumstances(due to material violations ofgenerally accepted accountingprinciples, generally acceptedauditing standards, or otherprofessional or regulatory standards);

• not to perform audit, review or otherprocedures required by generallyaccepted auditing standards orother professional standards;

• not to withdraw an issued report; or• not to communicate matters to an

issuer’s audit committee.145

Auditor Record RetentionSection 802 of the Sarbanes-OxleyAct (which amends the U.S. federalcriminal code) requires any accountantwho conducts an audit of an issuer tomaintain all audit or reviewworkpapers for a period of five years



from the end of the fiscal period inwhich the audit or review wasconcluded. Section 802 also requiresthe SEC to issue rules relating to theretention of relevant records such asworkpapers and other documents thatform the basis of the review. Inresponse, the SEC has added newRule 2-06 to Regulation S-X. Rule 2-06took effect on March 3, 2003.146

Rule 2-06 requires that, for a periodof seven years after an accountantconcludes an audit or review of anissuer’s financial statements, theaccountant must retain recordsrelevant to the audit or review,including workpapers, which:147

• are created, sent or received inconnection with the audit orreview; and

• contain conclusions, opinions,analyses or financial data relatedto the audit or review.

“Workpapers” for these purposesmeans documentation of auditing orreview procedures applied, evidenceobtained, and conclusions reached bythe accountant in the audit or reviewengagement.148

Rule 2-06 also provides thatmemoranda, correspondence,communications and other documentsand records (including electronicrecords) must be retained whetherthey support the auditor’s finalconclusions about the audit orreview, or contain information that isinconsistent with those conclusions.149

Material Correcting AdjustmentsSection 401(a) of the Sarbanes-OxleyAct adds new Section 13(i) to theExchange Act. Under Section 13(i),each financial report containingfinancial statements that is preparedin accordance with (or reconciled to)U.S. GAAP and filed with the SECmust reflect all “material correctingadjustments” that have beenidentified by an issuer’s auditors. Thisprovision took effect on July 30, 2002,and does not require implementingregulations by the SEC.

The SEC has not provided guidanceon the question whether Section 13(i)applies to interim financial statementssubmitted on Form 6-K. We believethe better view of Section 13(i) is that

it applies only to a foreign privateissuer’s annual report on Form 20-F,and not to any interim financialstatements furnished to the SEC underForm 6-K. Submissions on Form 6-Kare not considered “filed” as atechnical matter with the SEC, andare not required to be reconciledto U.S. GAAP. In addition, the SEChas interpreted the Section 302certification requirement—whichalso refers to reports filed with theSEC—as not applying to Form 6-Ksubmissions.150 As a practical matter,however, an issuer would likelyface concerns under the anti-fraudprovisions of the U.S. federal securitieslaws if it failed to reflect a materialcorrecting adjustment in an interimfinancial statement furnished onForm 6-K.

Attorney Conduct RulesSection 307 of the Sarbanes-OxleyAct requires the SEC to issue rulessetting forth “minimum standards ofprofessional conduct for attorneysappearing and practicing before theSEC in any way in the representationof issuers.” Section 307 also directsthe SEC to implement rules requiringan attorney to report “evidence of amaterial violation of securities law orbreach of fiduciary duty or similarviolation” by an issuer or its agent tothe issuer’s CEO or chief legal counsel,and to report the evidence to the auditcommittee, another independentboard committee, or the board ofdirectors as a whole, if the CEOor chief legal counsel “does notappropriately respond to the evidence.”The SEC adopted final rules underSection 307 as new Part 205 Standardsof Professional Conduct for AttorneysAppearing and Practicing Before theCommission in the Representationof an Issuer (the “Attorney ConductRules”).151 The Attorney ConductRules take effect on August 5, 2003.

The term “appearing and practicing”before the SEC is broader than itmight first appear. It potentially coversany lawyer who transacts businesswith the SEC, represents an issuerin SEC proceedings, provides adviceon the U.S. securities laws regardingany document the attorney “hasnotice” will be submitted to the SEC(including in the context of preparing



Section 307 of theSarbanes-Oxley Actrequires the SEC toissue rules setting forth“minimum standardsof professional conductfor attorneys appearingand practicing beforethe SEC in any way inthe representation ofissuers.”


documents to be filed), or advises anissuer whether information must beincluded in or filed with any SECdocument.152 However, the AttorneyConduct Rules contain an exemptionfor “non-appearing foreign attorneys,”153

which is defined as an attorney who(1) is himself or herself admitted topractice law in a jurisdiction outsideof the United States and does not hold

himself or herself out as practicingU.S. federal or state securities or otherlaws, and (2) either:

• conducts activities that wouldconstitute appearing and practicingbefore the SEC only incidentally to,and in the ordinary course of, thepractice of law in a jurisdictionoutside the United States; or

• is appearing and practicing beforethe SEC only in consultation withcounsel, other than a non-appearingforeign attorney, admitted orlicensed to practice in a state orother United States jurisdiction.154

If a covered attorney becomes awareof evidence of a “material violation”—which is defined to include a materialviolation of U.S. securities law or abreach of fiduciary duty or a similarmaterial violation of any U.S. federalor state law155—the Attorney ConductRules create a duty to report thematter to the issuer’s chief legal officer(“CLO”) or to both the CLO and theCEO.156 The CLO must then open aninquiry into the matter and take allreasonable steps to cause the issuerto adopt an appropriate response.157

Unless the attorney reasonablybelieves that the CLO’s response wasadequate, he or she must report thematter “up-the-ladder” to the auditcommittee, to another independentboard committee (if the issuer does

not have an audit committee), or theboard of directors as a whole (if thereis no independent board committee).158

As an alternative to reporting to theCLO or CEO, the attorney may referthe matter to the issuer’s qualifiedlegal compliance committee (“QLCC”),if one has been set up.159 A QLCC—which may also be the auditcommittee—is any committee ofthe issuer that includes at least onemember of the audit committee andtwo or more non-employee membersof the board of directors, and that hasbeen duly established by the board ofdirectors with certain requirements.160

If the attorney reports the matter tothe QLCC, he or she has no furtherobligations under the AttorneyConduct Rules.161 In addition, theCLO may refer a reported matter tothe QLCC in lieu of conducting therequired investigation, in which casethe QLCC will be responsible forresponding.162

The SEC has also proposed, but notyet adopted, a “noisy withdrawal”provision, under which a coveredattorney would be required towithdraw from representing an issuerunder certain circumstances if thereis not an appropriate response tothe up-the-ladder reporting.163 The60-day comment period for the noisywithdrawal proposal has expired, andthe proposal has been the subject ofextensive comment by U.S. lawyers.

Code of EthicsSection 406 of the Sarbanes-OxleyAct directs the SEC to issue rulesrequiring issuers to disclose whetherthey have adopted a code of ethics forsenior financial officers, or if not, whynot. The SEC has accordingly adoptednew Item 16B of Form 20-F, whichtakes effect for annual reports forfiscal years ending on or afterJuly 15, 2003.164

Item 16B requires the issuer todisclose whether it has adopted a codeof ethics that applies to its principalexecutive officers, principal financialofficers, and principal accountingofficer or controller (or personsperforming similar functions), and ifnot, it must explain why it has notdone so.165 The term “code of ethics”means written standards that are


The SEC has also proposed, but not yet adopted, a

“noisy withdrawal” provision, under which a covered

attorney would be required to withdraw from

representing an issuer under certain circumstances if

there is not an appropriate response to the

up-the-ladder reporting.

reasonably designed to deterwrongdoing and to promote a specifiedset of principles, such as honest andethical conduct and full, accurate andtimely disclosure.166 The code mustbe filed as an exhibit to the issuer’sannual report on Form 20-F or postedon the issuer’s website, or the issuermust undertake to provide to anyperson upon request, free of charge,a copy of the code.167 An issuer mustreport any amendment to the coderelating to its covered executiveofficers, as well as the nature anddate, and name of the personinvolved, of any waivers (whetherexplicit or implicit) of the code forits covered executive officers.168

Blackout Trading RestrictionsSection 306 of the Sarbanes-Oxley Actprohibits directors and executiveofficers from acquiring or transferringcompany equity securities duringpension fund “blackout periods.” TheSEC has adopted new RegulationBlackout Trading Restrictions(“Regulation BTR”) to implementSection 306. Regulation BTR tookeffect on January 26, 2003.169

For a foreign private issuer, a blackoutperiod generally means any period ofmore than three consecutive businessdays during which the ability topurchase or sell an interest in theissuer’s equity securities held in an“individual account plan” (such as a401(k) plan)170 is temporarilysuspended with respect to not lessthan 50% of participants orbeneficiaries locatedin the United States and:

• the number of participants andbeneficiaries located in the UnitedStates subject to the temporarysuspension exceeds 15% of the totalnumber of employees of the issuerand its consolidated subsidiaries; or

• more than 50,000 participants orbeneficiaries located in the UnitedStates are subject to the temporarysuspension.171

Regulation BTR prohibits, subject tocertain exceptions, any director orexecutive officer of an issuer frompurchasing, selling or otherwisetransferring the issuer’s equitysecurities during any blackout periodapplicable to the securities, if the

officer acquires or previously acquiredthe securities in connection with hisor her service or employment as adirector or officer.172 Under RegulationBTR, in any case where a directoror officer is subject to a blackouttrading restriction under Section 306of Sarbanes-Oxley, the issuer musttimely notify each director or officerand the SEC of the blackout periodand provide certain additionalinformation (including the reasons forthe blackout period).173 The issuer mustfile any notice of this type as an exhibitto its annual report on Form 20-F.174

Subject to a two-year statute oflimitations,175 profits realized by aninsider in violation of Section 306(regardless of the insider’s intentionupon entering into the transaction)will be recoverable by the issuer.176 Inaddition, if the issuer fails to institutean action to recover such profitswithin 60 days after being requestedto do so by a shareholder, theshareholder can then initiate theaction to recover on behalf of theissuer.177

Loans to ExecutivesSection 402(a) of the Sarbanes-OxleyAct adds new Section 13(k) to theExchange Act. Under Section 13(k),it is illegal for an issuer to “extendor maintain credit, to arrange for theextension of credit, or to renew anextension of credit, in the form of apersonal loan to or for any directoror executive officer (or equivalentthereof)” of that issuer.178 Section 13(k)covers both direct extensions andindirect extensions of credit, includingthrough subsidiaries.179 Section 13(k)took effect on July 30, 2002, anddoes not require implementingSEC regulations.

Section 13(k) contains certainexemptions, including:

• any loan existing on July 30, 2003,unless its terms are materiallymodified or the loan is renewed;180

• consumer credit and extensions ofcredit under a charge card;181 and

• certain bank loans.182

The broad sweep of Section 13(k),coupled with the absence of SECguidance, has raised a number ofthorny questions for issuers. In



response, a group of 25 law firms(including Latham & Watkins) hasissued a paper attempting to interpretSection 13(k) (the “InterpretivePaper”).183 The Interpretive Papercontends that the following shouldgenerally be regarded as permissibleunder Section 13(k):

• cash advances to reimburse traveland similar expenses whileperforming executive duties;184

• personal usage of a companycredit card and company car, andrelocation expenses required to bereimbursed;185

• “stay” and “retention” bonusessubject to repayment if an employeeterminates employment before adesignated date;186

• indemnification advances forlitigation;187

• tax indemnity payments tooverseas-based executive officers;188

• loans by a parent or shareholderthat is a foreign private issuer butnot subject to Sarbanes-Oxley, tothe executive officer of a wholly-owned subsidiary that is subject toSarbanes-Oxley, if the subsidiaryhas not “arranged” the loan and theloan is made by reason of service tothe parent, not the subsidiary;189 and

• most “cashless” option exercises.190

Forfeiture of BonusesSection 304 of the Sarbanes-Oxley Actprovides that if an issuer is required to“prepare an accounting restatementdue to the material noncompliance ofthe issuer, as a result of misconduct”with any financial reportingrequirements under the securitieslaws, the CEO and CFO mustreimburse the issuer for:

• all bonuses or other incentive-basedor equity-based compensationreceived from the issuer during the12-month period following the firstpublic issuance or filing with theSEC (whichever is first) of thefinancial document embodying thefinancial reporting requirement; and

• any profits received from the sale ofthe issuer’s securities during that12-month period.

Section 304 took effect on July 30, 2002and does not require SEC implementingrules. It remains unclear whether,

among other things, the definition of“misconduct” applies to mistakes asopposed to knowing or recklessconduct.191 In the case of foreignprivate issuers, it is also not certainhow Section 304 will work if therequired repayment is in conflict withthe CEO’s or CFO’s rights under localemployment laws.192

Research AnalystsSection 501 of the Sarbanes-Oxley Actadded new Section 15D to the ExchangeAct. Section 15D directs the SEC toadopt rules “reasonably designed toaddress conflicts of interest” involvingsecurities analysts. The SEC hasadopted Regulation Analyst Certification(“Regulation AC”) to implementSection 15D.193 Regulation ACtook effect on April 14, 2003.

Regulation AC requires that anybroker or dealer, or certain personsassociated with brokers or dealers,must include in any research reportsthat they publish or circulate to a U.S.person in the United States, a “clearand prominent” statement from theresearch analyst:194

• attesting that all of the viewsexpressed in the research reportaccurately reflect the researchanalyst’s personal views aboutthe securities or issuers coveredin the report; and

• either that no part of the analyst’scompensation is related to specificrecommendations expressed in thereport, or if it is related, details ofthe source, amount and purpose of the compensation and how thecompensation could influence therecommendations expressed inthe report.

A research analyst is the person“primarily responsible” for thepreparation of the content of theresearch report.195 If more than oneanalyst is primarily responsible, allmust certify.196 Certifications shouldeither appear on the front page ofthe research report or the front pageshould disclose where the certificationis to be found.197 The first certification(as to accuracy) applies both to therating as well as to the analysis inthe research report, and the SEC haswarned that a rating that contradictsthe analysis could both render the



certification false, as well as potentiallyviolate the anti-fraud provisions ofthe U.S. federal securities laws.198

In addition, Regulation AC mandatesthat brokers or dealers that provideresearch reports to U.S. persons in theUnited States prepared by an analystemployed by them must keep certainquarterly records of public appearancesof the analyst containing:199

• a statement by the analyst attestingthat the views expressed in thepublic appearances accuratelyreflected his or her personal viewsabout the securities or issuerscovered in the report; and

• a statement that no part of theanalyst’s compensation is related tospecific recommendations or viewsexpressed in the public appearances.

However, the record-keepingrequirement only applies to publicappearances when the researchanalyst is physically present in theUnited States.200

Regulation AC contains an exclusionto cover foreign research. In particular,“foreign persons” located outside theUnited States who are not associatedwith a U.S. registered broker-dealerare exempt from Regulation AC ifthey:201

• prepare a research reportconcerning a “foreign security;”and

• provide the research report to aU.S. person in the United States inaccordance with the exemptionunder 1934 Act Rule 15a-6(a)(2) fornon-U.S. broker-dealers providingresearch reports to major U.S.institutional investors.

A “foreign person” for these purposesmeans any non-U.S. person, and a“foreign security” means a securityissued by a foreign issuer for whichthe U.S. market is not the principaltrading market.202

Liability Issues Relating toSarbanes-OxleyThe Sarbanes-Oxley Act has a wide-ranging impact on liability under theU.S. federal securities laws. It createsnew U.S. federal criminal offensesrelating to securities, substantiallyincreases the penalties for existing

offenses and increases the SEC’senforcement powers in various ways.203

Among other things, the Sarbanes-Oxley Act:

• adds a new section to the U.S.federal criminal code outlawingthe alteration, destruction orconcealment of records to impedea U.S. federal investigation;204

• amends existing law to providefor fines and imprisonment of upto 20 years for corruptly altering,destroying or concealing documentswith the intent of obstructing anofficial proceeding;205

• amends existing law to provide forfines and imprisonment of up to 10years for anyone who knowinglytakes any action to retaliate againsta person for providing informationto U.S. federal law enforcementofficials relating to violations orpotential violations of U.S. federallaw;206

• creates a new securities fraudcrime (with penalties of up to 25years imprisonment plus fines) ofknowingly executing a scheme orartifice to defraud any person inconnection with any security ofan issuer or to obtain, by means offalse or fraudulent representations,any money in connection with thepurchase or sale of a security;207

• increases the maximum individualpenalty for violations of theExchange Act from $1 million and10 years imprisonment to $5 millionand 20 years imprisonment, andraises the maximum corporate finefrom $2.5 million to $25 million;208

• gives the SEC the ability, afternotice and a hearing, to forcean issuer subject to an SECinvestigation to put “extraordinarypayments” to directors, officers,partners, controlling persons,agents or employees into temporaryescrow;209

• gives the SEC the administrativeauthority to impose a ban on aperson from acting as a director oran officer of an issuer (the so-called“officer and director bar”);210

previously, the SEC could onlyimpose the officer and director barby means of a court order;211

• lowers the standard for judicialimposition of the officer and directorbar to “unfitness” to serve as an



officer and director, from “substantialunfitness;”212

• prohibits an issuer from retaliatingagainst “whistleblowing” employeeswho provide information or assist aninvestigation regarding violationsof U.S. federal securities law, SECregulations or U.S. federal law onshareholder fraud; and213

• amends the U.S. federal bankruptcylaws to prohibit the discharge inbankruptcy of debts resulting fromjudgments, settlements or courtorders in cases involving securitiesfraud.214

Conclusion and ContactsSarbanes-Oxley is a continuouslyevolving area. If you have anyquestions about this Update, or theSarbanes-Oxley Act more generally,please contact:

Alexander F. Cohen+44-20-7710-1014;

John J. Huber+1-202-637-2242; or

D. Jamal Qaimmaqami+44-20-7710-1835.

Also, of course, please feel free to callyour usual Latham & Watkins attorney.

Endnotes1 Sarbanes-Oxley Act Section 2(a)(7).

2 Certification of Disclosure in Companies’Quarterly and Annual Reports, SecuritiesAct Release No. 8124, Exchange ActRelease No. 46427, Investment CompanyAct Release No. 25722 [2002 TransferBinder] Fed. Sec. L. Rep. (CCH) ¶86,720, at86,132, 86,152 (Aug. 28, 2002) [hereinafterCertification Adopting Release].

3 Id. The term “disclosure controls andprocedures” is defined in 1934 Act Rules13a-15(e) and 15d-15(e).

4 Certification Adopting Release, ¶86,720, at86,126.

5 Management’s Reports on Internal ControlOver Financial Reporting and Certificationof Disclosure in Exchange Act PeriodicReports, Securities Act Release No. 8238,Exchange Act Release No. 47986,Investment Company Act Release No. 26068[2003 Transfer Binder] Fed. Sec. L. Rep.(CCH) ¶86,923, at 87,676 (June 5, 2003)[hereinafter Management’s Reports onInternal Control Adopting Release].

6 Id.

7 The SEC has stated that current reportssuch as those on Forms 6-K and 8-K, asopposed to periodic reports (i.e., quarterlyand annual reports), are not covered bySection 302’s certification requirements.Certification Adopting Release, ¶86,720,at 86,130. Foreign private issuers arenevertheless required to design andmaintain disclosure controls and proceduresto ensure full and timely disclosure incurrent reports. Id.

8 1934 Act Rules 13a-14(a), 15d-14(a).

9 Form 20-F, Instructions as to Exhibits,Instruction 12.

10 The term “internal control over financialreporting” is defined in 1934 Act Rule13a-15(f) and 15d-15(f).

11 This portion of the Section 302 certificationdoes not take effect until the annual reporton Form 20-F for the first fiscal year endingon or after July 15, 2005. Management’sReports on Internal Control AdoptingRelease, ¶86,923, at 87,697 and 87,701, asamended by Management’s Report onInternal Control Over Financial Reportingand Certification of Disclosure in ExchangeAct Reports, Securities Act Release No.8392, Exchange Act Release No. 49313,Investment Company Act Release No.26357 [2003-2004 Transfer Binder] Fed.Sec. L. Rep. (CCH) ¶87,144, at 89,123(Feb. 24, 2004).

12 Similarly, this portion of the Section 302certification does not take effect untilJuly 15, 2005. Id.

13 Note, however, that no specific date for theevaluation is specified. Management’sReports on Internal Control AdoptingRelease, ¶86,923, at 87,701.

14 1934 Act Rules 13a-14(a), 15d-14(a) andForm 20-F, Instructions as to Exhibits,Instruction 12.

15 Certification Adopting Release, ¶86,720, at86,132. However, “a company’s certifyingofficers may temporarily modify the contentof their Section 302 certification toeliminate certain references to internalcontrol over financial reporting until thecompliance date.” Management’s Reportson Internal Control Adopting Release,¶86,923, at 87,676.

16 1934 Act Rules 13a-15(a), 15d-15(a).

17 1934 Act Rules 13a-15(b), 15d-15(b).

18 Form 20-F, Item 15(a).

19 1934 Act Rules 13a-15(e), 15d-15(e).

20 Management’s Reports on Internal ControlAdopting Release, ¶86,923, at 87,699. Not“filing” will also limit enforcement of thecertificate to criminal proceedings ratherthan civil litigation. John J. Huber and JulieK. Hoffman, The Sarbanes-Oxley Act of2002 and SEC Rulemaking,




¶II.B.1.c, at 20 (April 2, 2004)(http://www.lw.com/upload/docs/doc84.pdf) [hereinafter Huber Outline].

21 Additional Form 8-K Disclosure Requirementsand Acceleration of Filing Date, SecuritiesAct Release No. 8400, Exchange Act ReleaseNo. 49424 [Transfer Binder 2003-2004]Fed. Sec. L. Rep. (CCH) ¶87,158, at 89,493n.146 (March 16, 2004).

22 Huber Outline, ¶II.B.3.b(1), at 23.

23 Huber Outline, ¶II.B.2.b(3), at 21.

24 Management’s Reports on Internal ControlAdopting Release, ¶86,923, at 87,699.

25 Public Company Accounting OversightBoard, An Audit of Internal ControlOver Financial Reporting Performed inConjunction with an Audit of FinancialStatements, PCAOB Release No. 2004-001,PCAOB Rulemaking Docket Matter No.008 [Transfer Binder 2003-2004] Fed. Sec.L. Rep. (CCH) ¶87,151, at 89,327 (March 9,2004) [hereinafter Auditing Standard No. 2Release].

26 Management’s Reports on Internal ControlAdopting Release, ¶86,923, at 87,697, asamended by Management’s Report onInternal Control Over Financial Reportingand Certification of Disclosure in ExchangeAct Reports, Securities Act Release No.8392, Exchange Act Release No. 49313,Investment Company Act Release No.26357 [2003-2004 Transfer Binder] Fed.Sec. L. Rep. (CCH) ¶87,144, at 89,123(Feb. 24, 2004).

27 1934 Act Rules 13a-15(f); 15d-15(f).

28 Form 20-F, Item 15(b).

29 Even if the evaluation framework used bya foreign private issuer does not requirea statement as to the effectiveness of theissuer’s system of internal control overfinancial reporting, the issuer mustnevertheless state affirmatively whethersuch controls are effective. Management’sReports on Internal Control AdoptingRelease, ¶86,923, at 87,685 n.68.

30 Form 20-F, Items 15(c) and (d).

31 Management’s Report on Internal ControlOver Financial Reporting and Certificationof Disclosure in Exchange Act Reports,Securities Act Release No. 8392, ExchangeAct Release No. 49313, InvestmentCompany Act Release No. 26357 [2003-2004 Transfer Binder] Fed. Sec. L. Rep.(CCH) ¶87,144, at 89,123 (Feb. 24, 2004).See also Management’s Reports on InternalControl Adopting Release, ¶86,923, at¶87,698 regarding the effective date for thedisclosure of certain changes in internalcontrol over financial reporting.


33 Id. at ¶86,923 at 87,685 n.67.

34 Id. ¶86,923 at 87,685.

35 Id.

36 Id. Instruction 1 to Item 15. The SEC hasstated that it believes it is important for theinternal control report to be located nearthe auditor’s attestation report, and that itexpects issuers will place the report andattestation near MD&A disclosure orimmediately preceding the financialstatements. Management’s Reports onInternal Control Adopting Release,¶86,923, at 87,687.


38 SEC Office of the Chief Accountant,Division of Corporation Finance,Management’s Report On InternalControl Over Financial Reporting andDisclosure in Exchange Act PeriodicReports: Frequently Asked Questions(June 22, 2004) (http://www.sec.gov/info/accountants/controlfaq0604.htm).

39 Id. Question 2.

40 Id. Question 3.

41 Id. Question 5.

42 Id. Question 9.

43 Id.

44 Id. Question 10.

45 Id. Question 11.

46 Auditing Standard No. 2 Release, ¶87,151,at 89,329.

47 The PCAOB believed that “attestation”was “insufficient to describe the process ofassessing management’s report on internalcontrols.” Id.

48 Id.

49 Id.

50 Id.

51 Id. ¶87,151, at 89,334.

52 Id.

53 Id.

54 Id.

55 Id.

56 Id.

57 Id.

58 Id. ¶87,151, at 89,334-89,335.

59 Id. ¶87,151, at 89,336.

60 Id. ¶87,151, at 89,335.

61 Id.

62 Id. ¶87,151, at 89,336.

63 Id.

64 Id.

65 Id.

66 Id.

67 Conditions for Use of Non-GAAP FinancialMeasures, Securities Act Release No. 8176,Exchange Act Release No. 47226, Financial



Reporting Release No. 65 [Transfer Binder2002-2003] Fed. Sec. L. Rep. (CCH) ¶86,816,at 86,830 (Jan. 22, 2003) [hereinafter Non-GAAP Financial Measures AdoptingRelease]; see also Latham & WatkinsClient Alert No. 257, SEC Adopts Rules forDisclosure of EBITDA and Other “Non-GAAPFinancial Measures” (http://www.lw.com/resource/publications/_pdf/pub578.pdf).

68 Conditions for Use of Non-GAAP FinancialMeasures, Securities Act Release No. 8145,Exchange Act Release No. 46788 [2002Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶86,737, at 86,444-86,446 (Nov. 4, 2002).

69 Regulation G, Rule 100(a).

70 Id. Rule 101(a)(1). The term does not coveroperating measures. Id. Rule 101(a)(2).

71 Id. Rule 101(b). In addition, if the foreignprivate issuer prepares its primary financialstatements under U.S. GAAP, “GAAP”would mean U.S. GAAP. Id.

72 Id. Rule 101(a).

73 Id.

74 Id. Rule 100(b).

75 Non-GAAP Financial Measures AdoptingRelease, ¶86,816, at 86,830.

76 Regulation G, Rule 100(c).

77 Non-GAAP Financial Measures AdoptingRelease, ¶86,816, at 86,830.

78 Regulation S-K, Item 10(e)(1)(i).

79 Id. Item 10(e)(1)(ii).

80 Id. Item 10, Note to Paragraph (e).

81 SEC Office of the Chief Accountant,Division of Corporate Finance, FrequentlyAsked Questions Regarding the Use ofNon-GAAP Financial Measures, Question 8(June 13, 2003) (http://www.sec.gov/divisions/corpfin/faqs/nongapfaq.htm).

82 Id. Question 14.

83 Id. Question 15.

84 See Disclosure in Management’s Discussionand Analysis about Off-Balance SheetArrangements and Aggregate ContractualObligations, Securities Act Release No.8182, Exchange Act Release No. 47264,Financial Reporting Release No. 67,International Series Release No. 1266[Transfer Binder 2002-2003] Fed. Sec. L. Rep.(CCH) ¶86,821, at 86,969 (Jan. 27, 2003)[hereinafter Off-Balance Sheet AdoptingRelease].

85 Id.

86 Form 20-F, Item 5.E.1.

87 Id. Items 5.E.1.(a)-(d).

88 Id. Item 5.E.2.

89 Off-Balance Sheet Adopting Release,Sections ¶86,821, at 86,973 and 86,977.

90 Id. ¶86,821, at 86,984.

91 Id.

92 Form 20-F, Item 5.F.1.

93 Id. Item 5.F.2.

94 Off-Balance Sheet Adopting Release,¶86,821, at 86,982 and 86,976 n.73.

95 Commission Statement about Management’sDiscussion and Analysis of FinancialCondition and Results of Operations,Securities Act Release No. 8056, ExchangeAct Release No. 45321, Financial ReportingRelease No. 61 [Transfer Binder 2001-2002]Fed. Sec. L. Rep. (CCH) ¶86,617, at 85,152(Jan. 22, 2002).

96 Off-Balance Sheet Adopting Release,¶86,821, at 86,974.

97 1934 Act Rule 10A-3(a)(5)(i)(A); see alsoStandards Relating to Listed CompanyAudit Committees, Securities Act ReleaseNo. 8220, Exchange Act Release No. 47654,Investment Company Act Release No. 26001[Transfer Binder 2003] Fed. Sec. L. Rep.(CCH) ¶86,902, at 87,402 (April 9, 2003)[hereinafter Listed Company AuditCommittee Adopting Release].

98 1934 Act Rule 10A-3(b)(1)(i).

99 1934 Act Rule 10A-3(b)(1)(ii)(A).

100 1934 Act Rule 10A-3(b)(1)(ii)(B).

101 1934 Act Rule 10A-3(e)(1)(i).

102 1934 Act Rule 10A-3(e)(1)(ii)(A).

103 1934 Act Rule 10A-3(b)(1)(iv)(C).

104 1934 Act Rule 10A-3(b)(1)(iv)(D).

105 1934 Act Rule 10A-3(b)(1)(iv)(E).

106 1934 Act Rule 10A-3(b)(1)(iv)(A).

107 1934 Act Rule 10A-3(b)(2).

108 1934 Act Rule 10A-3(b)(3).

109 1934 Act Rule 10A-3(b)(4).

110 1934 Act Rule 10A-3(b)(5).

111 Instruction 1 to 1934 Act Rule 10A-3.

112 Id.

113 Instruction 2 to 1934 Act Rule 10A-3.

114 1934 Act Rule 10A-3(c)(3).

115 1934 Act Rule 10A-3(d) and Form 20-F,Item 16.D.

116 Id.

117 Form 20-F, Items 16A(a)(1) and (3).

118 Id. Instruction 3 to Item 16A.

119 Id. Item 16A(a)(2).

120 Id.; see also, Listed Company AuditCommittee Adopting Release, ¶86,902 at87,433. Note that for listed issuers the auditcommittee financial expert will need tosatisfy the definition of “independence” asset forth under 1934 Act Rule 10A-3. Id.

121 Disclosure Required by Sections 406 and407 of the Sarbanes-Oxley Act of 2002,Securities Act Release No. 8177, ExchangeAct Release No. 47234 [Transfer Binder2002-2003], Fed. Sec. L. Rep. (CCH)¶86,818, at 86,885 (as corrected January 24,


2003 and March 31, 2003) [hereinafterSections 406 and 407 Adopting Release].

122 Form 20-F, Item 16A(b).

123 Id. Item 16A(c).

124 Id. Instruction 3 to Item 16A.

125 Sections 406 and 407 Adopting Release,¶86,818, at 86,883.

126 Form 20-F, Item 16A(d)(1).

127 Id. Items 16A(d)(2)-(3).

128 Strengthening the Commission’sRequirements Regarding AuditorIndependence, Securities Act Release No.8183, Exchange Act Release No. 47265,Investment Company Act Release No.25915, Investment Advisers Act ReleaseNo. 2103 [Transfer Binder 2002-2003] Fed.Sec. L. Rep. (CCH) ¶86,822, at 87,003(Jan. 28, 2003).

129 S-X Rule 2-01(c)(2)(iii)(B); see also 1934 ActSection 10A(l) (auditor may not audit anissuer whose CEO, controller, CFO or chiefaccounting officer was employed by theauditor and participated in the audit duringthe one-year period preceding the dateof the initiation of the audit in question).Generally speaking, persons other than thelead or concurring partner who provided10 or fewer hours of audit, review or attestservices during the relevant period arenot considered to be members of theaudit engagement team. S-X Rule 2-01(c)(2)(iii)(B)(2).

130 S-X Rule 2-01(c)(4); see also 1934 ActSection 10A(g) (substantially identicallimitations).

131 S-X Rule 2-01(c)(6); see also 1934 ActSection 10A(j) (unlawful to act as auditor iflead (or coordinating) audit partner (havingprimary responsibility for the audit) or auditpartner responsible for reviewing the audithas performed audit services for the issuerin the each of the prior five fiscal years ofthe issuer).

132 S-X Rule 2-01(c)(7); see also 1934 ActSections 10A(h)-(i) (all audit and permittednon-audit services must be pre-approvedby the audit committee (subject to certainde minimis exceptions)). The SEC hasstated that an issuer’s audit committee mustfollow three requirements in its use of pre-approval through policies and procedures.First, the policies and procedures must bedetailed as to the particular service to beprovided. Second, the audit committeemust be informed about each service.Third, the policies and procedures cannotresult in the delegation of the auditcommittee’s authority to management.Accordingly, monetary limits cannot bethe only basis for the pre-approval policiesand procedures. SEC Office of the ChiefAccountant, Application of the January2003 Rules on Auditor Independence:

Frequently Asked Questions, Question 22(http://www.sec.gov/info/accountants/ocafaqaudind08703.htm). Note that underAuditing Standard No. 2 of the PCAOB, anissuer’s audit committee cannot pre-approveinternal control services as a category, butmust instead approve each service.

133 S-X Rule 2-01(c)(8).

134 S-X Rule 2-07(a); see also 1934 Act Section10A(k) (substantially identical requirements).

135 Form 20-F, Item 16C(a).

136 Id. Item 16C(b).

137 Id. Item 16C(c).

138 Id. Item 16C(d).

139 Id. Item 16C(e).

140 Id. Item 16C(f).

141 Improper Influence on Conduct of Audits,Exchange Act Release No. 47890,Investment Company Act Release No.26050, Financial Reporting Release No. 71[Transfer Binder 2003] Fed. Sec. L. Rep.(CCH) ¶86,921, at 87,655 (May 20, 2003)[hereinafter Improper Influence AdoptingRelease].

142 1934 Act Rule 13b2-2(b)(1).

143 Improper Influence Adopting Release,¶86,921, at 87,656.

144 Id.

145 1934 Act Rule 13b2-2(b)(2).

146 Retention of Records Relevant to Auditsand Reviews, Securities Act Release No.8180, Exchange Act Release No. 47241,Investment Company Act Release No. 25911,Financial Reporting Release No. 66 [Transfer Binder 2002-2003] Fed. Sec. L. Rep.(CCH) ¶86,819, at 86,916 (Jan. 24, 2003)[hereinafter Retention Release].

147 S-X Rule 2-06(a). The SEC required aseven-year period rather than the five-yearperiod mandated in Section 802, because,among other things, Section 103 of theSarbanes-Oxley Act directs the PublicCompany Accounting Oversight Board torequire auditors to retain audit workpapersand other materials that support theaudit for seven years. Retention Release,¶86,819, at 86,917.

148 S-X Rule 2-06(b).

149 S-X Rule 2-06(c).

150 See Certification Adopting Release,¶86,720, at 86,130.

151 Implementation of Standards of ProfessionalConduct for Attorneys, Securities ActRelease No. 8185, Exchange Act ReleaseNo. 47276, Investment Company ActRelease No. 25919 [Transfer Binder 2002-2003] Fed. Sec. L. Rep. (CCH) ¶86,823, at87,069 (Jan. 29, 2003) [hereinafter AttorneyConduct Adopting Release].

152 Part 205.2(a)(1).





153 Part 205.2(a)(2)(ii).

154 Part 205.2(j).

155 Part 205.2(i).

156 Part 205.3(b)(1).

157 Part 205.3(b)(2).

158 Part 205.3(b)(3).

159 Part 205.3(c)(1).

160 Part 205.2(k).

161 Part 205.3(c)(1).

162 Part 205.3(c)(2).

163 Attorney Conduct Adopting Release¶86,823, at 87,069.

164 Sections 406 and 407 Adopting Release¶86,818, at 86,883.

165 Form 20-F, Item 16B(a).

166 Id. Item 16B(b).

167 Id. Item 16B(c).

168 Id. Items 16B(d) and (e).

169 Insider Trades During Pension FundBlackout Periods, Exchange Act ReleaseNo. 47225, Investment Company ActRelease No. 25909 [Transfer Binder 2002-2003] Fed. Sec. L. Rep. (CCH) ¶86,817, at86,851 (Jan. 22, 2003).

170 The term “individual account plan” isdefined in Regulation BTR, Rule 100(j).

171 Id. Rule 100(b)(2).

172 Id. Rule 101(a).

173 Id. Rule 104.

174 Form 20-F, Instructions as to Exhibits,Instruction 10. Although the issuer need notsubmit the notice under Form 6-K, if it doesso it is not separately required to includethe notice as an exhibit to its annual reporton Form 20-F. Id.

175 Regulation BTR, Rule 103(b).

176 Id. Rule 103(a).

177 Id. Rule 103(b).

178 1934 Act Section 13(k)(1).

179 Id.

180 Id.

181 1934 Act Section 13(k)(2).

182 1934 Act Section 13(k)(3).

183 Sarbanes-Oxley Act: Interpretive Issuesunder Section 402—Prohibition ofCertain Insider Loans (Oct. 15, 2002)(http://www.lw.com/upload/docs/doc29.pdf).

184 Id. at 3-4.

185 Id. at 4.

186 Id.

187 Id. at 4-5.

188 Id. at 6.

189 Id.

190 Id. at 8-11.

191 See Huber Outline, ¶V.C.1.a, at 95.

192 Id. ¶V.C.2, at 97.

193 Regulation Analyst Certification, SecuritiesAct Release No. 8193, Exchange ActRelease No. 47384 [Transfer Binder 2002-2003] Fed. Sec. L. Rep. (CCH) ¶86,833,at 87,233 (Feb. 20, 2003) [hereinafterRegulation AC Release].

194 Regulation AC, Rule 501(a).

195 Id. Rule 500.

196 Id. Certification is not, however, requiredfrom “junior analysts.” Regulation ACRelease, ¶86,833, at 87,236.

197 Regulation AC Release, ¶86,833, at 87,235n.11.

198 Id. ¶86,833, at 87,234.

199 Regulation AC, Rule 502(a).

200 Id. Rule 502(c).

201 Id. Rule 503.

202 Id. Rule 500. A “foreign issuer” is anyforeign government or foreign privateissuer. 1933 Act Rule 902(e).

203 Huber Outline, ¶X.A, at 172.

204 Sarbanes-Oxley Act Section 802(a) (addingnew Section 1519 of 18 U.S.C.); HuberOutline, ¶X.A.1.a(1), at 172.

205 Sarbanes-Oxley Act Section 1102(amending 18 U.S.C. Section 1512); HuberOutline, ¶X.A.1.b, at 175.

206 Sarbanes-Oxley Act Section 1107(amending 18 U.S.C. Section 1513); HuberOutline, ¶X.A.2, at 175.

207 Sarbanes-Oxley Act Section 807 (addingnew Section 1348 to 18 U.S.C.); HuberOutline, ¶X.A.3, at 175.

208 Sarbanes-Oxley Act Section 1106(amending 1934 Act Section 32(a)); HuberOutline, ¶X.A.4.a(7), at 177.

209 Sarbanes-Oxley Act Section 1103(amending 1934 Act Section 21C(c)); HuberOutline, ¶X.B.1, at 177.

210 Sarbanes-Oxley Act Section 1105(amending 1934 Act Section 21C and 1933Act Section 8A); Huber Outline, ¶X.B.2,at 178.

211 Huber Outline, ¶X.B.2.a, at 178.

212 Sarbanes-Oxley Act Section 305 (amending1934 Act Section 21(d)(2) and 1933 ActSection 20(e)); Huber Outline, ¶X.B.2.c,at 178.

213 Sarbanes-Oxley Act Section 806 (addingnew Section 1514A to 18 U.S.C.); HuberOutline, ¶X.C.2.a, at 179-180.

214 Sarbanes-Oxley Act Section 803 (adding new Section 523(a) to 11 U.S.C.);Huber Outline, ¶X.C.3.a, at 180. !



Provision (Sarbanes-Oxley Section and SEC Rule(s)) Effective as of

Material Correcting Adjustments(Sarbanes-Oxley §401(a); 1934 Act Section 13(i))

July 30, 2002

Section 906 Certification Requirement(Sarbanes-Oxley §906; 1934 Act Rules 13a-14(b) and 15d-14(b))

July 30, 2002, for the requirement to certify; however, therequirement to provide the Section 906 certification as anexhibit took effect on August 14, 2003

Loans to Executives(Sarbanes-Oxley §402(a); 1934 Act Section 13(k))

July 30, 2002

Forfeiture of Bonuses(Sarbanes-Oxley §304)

July 30, 2002

Section 302 Certification Requirements; Disclosure Controls andProcedures (Sarbanes-Oxley §302; 1934 Act Rules 13a-14, 15d-14, 13a-15, 15d-15; Form 20-F, Item 15)

August 29, 2002; however, the text of the Section 302 certifica-tion as modified by the rules adopted under Section 404 gener-ally took effect on August 14, 2003 (except with respect tocertain portions of the certification dealing with internal controlover financial reporting, which take effect on July 15, 2005)

Blackout Trading Restrictions(Sarbanes-Oxley §306; Regulation BTR)

January 26, 2003

Auditor Record Retention(Sarbanes-Oxley §802; Regulation S-X, Rule 2-06)

March 3, 2003

Non-GAAP Financial Measures(Sarbanes-Oxley §401(b); Regulation G; Regulation S-K, Item 10(e))

March 28, 2003

Research Analysts(Sarbanes-Oxley §501; Regulation AC)

April 14, 2003

Auditor Independence(Sarbanes-Oxley Title II; Regulation S-X, Rules 2-01 and2-07; 1934 Act Rule 10A-2; Form 20-F, Item 16C)

May 6, 2003

Off-Balance Sheet and other MD&A Disclosure(Sarbanes-Oxley §401(a); Form 20-F, Item 5)

June 15, 2003, except with respect to inclusion of a tableof contractual obligations in MD&A, which took effecton December 15, 2003

Improper Influence on the Conduct of Audits(Sarbanes-Oxley §303; 1934 Act Rule 13b2-2(a)-(c))

June 27, 2003

Audit Committee Financial Expert(Sarbanes-Oxley §407(a); Form 20-F, Item 16A)

July 15, 2003, except with respect to the disclosure of the“independence” of the audit committee financial expertwhich takes effect as of July 31, 2005

Code of Ethics(Sarbanes-Oxley §406; Form 20-F, Item 16B)

July 15, 2003

Attorney Conduct Rules(Sarbanes-Oxley §307; Part 205)

August 5, 2003

Management Assessment of Internal Controls(Sarbanes-Oxley §404; 1934 Act Rules 13a-15, 15d-15; Form 20-F, Item 15)

July 15, 2005, except with respect to disclosure of certainchanges in internal controls over financial reporting, whichtook effect on August 14, 2003

Standards Relating to Listed Company Audit Committees(Sarbanes-Oxley §301; 1934 Act Rule 10A-3)

July 31, 2005

Annex A—Effective Dates for Certain Sarbanes-Oxley Sections andRelated SEC RulemakingNote: In chronological order of effectiveness; all dates shown are those applicable to foreign private issuers



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