Remember looking through a kaleidoscope as a child? Each time you turned the lens at the end of the tube, new images came into focus, familiar shapes went blurry and suddenly you were rewarded with a whole new and exciting landscape. Trying to follow the US Sarbanes-Oxley Act of 2002 is a bit like that, albeit less amusing.
Companies, lawyers and accountants are struggling to come to grips with a law President George W Bush termed “the most far-reaching reform of American business practice since the time of Franklin Delano Roosevelt”.
Each week brings new issues to consider and problems to solve. The legislative pace is quickening: the act's 66 pages of text have spawned hundreds of pages of detailed proposals by the US Securities and Exchange Commission (SEC) to implement the act, with much more to come.
Recent twists of the Sarbanes-Oxley kaleidoscope have focused attention on a key question – will the SEC exempt those outside the US from some or all of the act's provisions? At the moment, the act does not distinguish between US and non-US issuers, instead it applies to all companies that are required to file reports with the SEC, regardless of where they are incorporated. However, the SEC has broad exemptive authority under US securities laws and has used that authority in the past to provide special treatment for non-US companies. Non-US issuers are not required to provide quarterly reports to the SEC, unlike their US counterparts.
In addition to this general authority, the act also gives the SEC specific exemptive authority for certain of its provisions. SEC chairman Harvey Pitt, who has now resigned, recently made it clear that the SEC will be cautious in using its general exemptive authority when it comes to the act. “No one should believe that similar latitude exists to use exemptive authority broadly in the case of [the act]” he warned. “We intend to implement [the act] fully for all companies, foreign and domestic, and foreign companies can expect that many of the new rules will apply to them.”
But Pitt went on to say that the SEC is aware that certain provisions of the act conflict with, or cause problems under, non-US law and he invited non-US issuers to provide the SEC with comments so that it can evaluate and understand these conflicts.
So where does this leave European-based lawyers? Non-US companies should not expect broad-gauge exemptions from the act's core provisions, especially on disclosure issues. Nevertheless, relief may well be available in two areas. First, there may be substantive issues of corporate governance where there is a direct and demonstrable clash between the act and local law. And second, aspects of the act, such as its bonus forfeiture provisions, that cut across areas already intensively regulated by local law.
The SEC is likely to be most comfortable granting exemptions on those provisions of the act where US Congress has already given the SEC licence to kill – that is, specific exemptive authority.
Pitt's speech did not address, however, another important question – whether attorneys outside the US would be exempt from the act's regulation of lawyers appearing and practising before the SEC in any way in the representation of issuers.
The act requires the SEC to issue new rules for attorneys by 26 January 2003 and that, at a minimum, these rules must require an attorney to “report evidence of a material violation of securities law or breach of fiduciary duty or similar violation” by a company, or any agent of a company, to the chief legal counsel or chief executive officers of the company. It also states that if the legal counsel or the chief executive “does not appropriately respond to the evidence”, the rules must require the attorney to report to the audit committee or other committee of the board of directors comprised solely of independent directors.
It is hard to imagine that non-US lawyers will escape fully from this provision of the act, particularly as no specific exemptive authority was granted to the SEC under this provision.
We expect that the general counsel of a non-US issuer subject to the act will be caught by the new regulations. But the regulations may reach considerably further, as the SEC has historically taken a very broad view of what it means to appear and practice before it. Any attorney, whether in-house or external, who assists in the preparation of an SEC filing may find themselves subject to the attorney conduct rules.
Alex Cohen is a partner and Jamal Qaimmaqami is an associate in the London office of Latham & Watkins
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