The SEC voted on April 1 to adopt rules that would force the national exchanges and associations to delist any company that is not in compliance with the audit committee requirements established by the Sarbanes-Oxley Act of 2002.
The new rules and amendments implement the requirements of Section 10A(m)(1) of the Securities Exchange Act of 1934, as added by Section 301 of the Sarbanes-Oxley Act of 2002. (See links at right for further details)
Listing Prohibitions
Under the new rules, national securities exchanges and national securities associations will be prohibited from listing any security of an issuer that is not in compliance with the following requirements:
Independence
Each member of the audit committee of the issuer must be independent according to the specified criteria in Section 10A(m).
Regarding independence, the new rules will establish two important criteria for audit committee members:
Fees: Audit committee members must be barred from accepting any consulting, advisory or compensatory fee from the issuer or any subsidiary, other than in the member's capacity as a member of the board or any board committee.
Relations: An audit committee member must not be an affiliated person of the issuer or any subsidiary apart from capacity as a member of the board or any board committee.
Oversight
The audit committee must be directly responsible for the appointment, compensation, retention and oversight of the work of any registered public accounting firm engaged for the purpose of preparing or issuing an audit report or performing other audit, review or attest services for the issuer, and the registered public accounting firm must report directly to the audit committee.
Complaints
The audit committee must establish procedures for the receipt, retention and treatment of complaints regarding accounting, internal accounting controls or auditing matters, including procedures for the confidential, anonymous submission by employees of concerns regarding questionable accounting or auditing matters.
Advisors
The audit committee must have the authority to engage independent counsel and other advisors, as it determines necessary to carry out its duties.
Funding
The issuer must provide appropriate funding for the audit committee.
Other Notes: Foreign Issuers
The new rules will apply to both domestic and foreign listed issuers, though several provisions applicable only to foreign private issues were added to the rule, including:
Non-management employees will be allowed to serve as audit committee members, consistent with "co-determination" and similar requirements in some countries;
Shareholders will be allowed to select or ratify the selection of auditors, also consistent with requirements in many foreign countries;
Alternative structures such as boards of auditors will be allowed to perform auditor oversight functions where such structures are provided for under local law; and
The rule addressed the issue of foreign government shareholder representation on audit committees.
The new rules also will make several updates to the Commission's disclosure requirements regarding audit committees, including updates to the audit committee financial expert disclosure requirements for foreign private issuers.
Compliance Dates
The Commission voted to establish two sets of implementation dates for listed issuers.
Generally, listed issuers will be required to comply with the new listing rules by the date of their first annual shareholders meetings after Jan. 15, 2004, but in any event no later than Oct. 31, 2004.
Foreign private issuers and small business issuers will be required to comply by July 31, 2005.
NOTE: Please note that this is a summary of a proposed SEC rule, and should not be construed to be a complete or final rule, nor should it be construed to be legal guidance. Please refer to the SEC's Web site for updated and final rule information.
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