Securities Futures Exchange Registration Acknowledgements
The Commission decided to authorize publication, as directed by Section 6(g)(3) of the Securities Exchange Act of 1934, of acknowledgements of receipt of the Forms 1-N received from the Chicago Mercantile Exchange Inc., OneChicago LLC and Nasdaq LIFFE Markets LLC. The Commission also voted to delegate authority to the Director of the Division of Market Regulation to publish such acknowledgements of receipt of Forms 1-N filed with the Commission in the future.
Sarbanes-Oxley Disclosure Requirements
The Commission decided to publish for comment proposed rules implementing Sections 404, 406 and 407 of the Sarbanes-Oxley Act. The proposed rules would require companies to include the following new disclosures in their Exchange Act filings.
- Pursuant to Section 407, a company would be required to disclose the number and names of the "financial experts" serving on the company's audit committee and that they are independent of management, as determined by the company's board of directors.
- Pursuant to Section 406, a company would be required to disclose whether the company has adopted a code of ethics for the company's principal executive officer and senior financial officers, or if it has not, why it has not; and to disclose on a current basis amendments to, and waivers from, the code of ethics relating to any of those officers.
- Pursuant to Section 404, a company would be required to file, in its annual report, an internal control report of management stating:
- management's responsibilities for establishing and maintaining adequate internal controls and procedures for financial reporting for the company,
- management's conclusions about the effectiveness of the company's internal controls and procedures for financial reporting as of the end of the company's most recent fiscal year, and
- that the company's registered public accountant has attested to, and reported on, management's evaluation of the company's internal controls and procedures for financial reporting.
The Commission also decided to propose similar rules with respect to registered investment companies under Sections 407 and 406, dealing with financial experts and codes of ethics. Under Section 405 of the Sarbanes-Oxley Act, the internal control report requirements of Section 404 do not apply to investment companies.
Financial Experts
The proposed rules regarding financial experts would define the term "financial expert" by requiring such a person to have all of the attributes listed in Section 407 of the Sarbanes-Oxley Act. They also would provide a list of factors that companies should consider when determining whether a member of the audit committee is a financial expert.
Codes of Ethics
In addition to the previously discussed disclosures, the proposed rules would define a code of ethics as a codification of standards that is reasonably necessary to deter wrongdoing and to promote:
- honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;
- avoidance of conflicts of interest, including disclosure to an appropriate person or persons identified in the code of any material transaction or relationship that reasonably could be expected to give rise to such a conflict;
- full, fair, accurate, timely, and understandable disclosure in reports and documents that a company files with, or submits to, the Commission and in other public communications made by the company;
- compliance with applicable governmental laws, rules and regulations;
- the prompt internal reporting of code violations to an appropriate person or persons identified in the code; and
- accountability for adherence to the code.
A company would be required to disclose in its annual report whether it has a code of ethics. Companies, other than foreign private issuers and registered investment companies, would be required to disclose either on Form 8-K or on their Internet Web sites any changes to, or waivers of, such code of ethics. Foreign private issuers and registered investment companies would be required to disclose changes to, and waivers of, such codes of ethics in their periodic reports or on their Internet Web sites.
Internal Control Reports
The proposed rules would require a company to file an annual internal control report as part of its annual report. This report would address management's responsibility to establish internal controls and procedures for financial reporting and require management to evaluate the effectiveness of those controls and procedures as of the last day of the company's fiscal year. Under Section 404(b) of the Sarbanes-Oxley Act, the company's auditor must attest to, and report on, management's assertions in the internal control report. The company must state this fact and file the auditor's attestation in its annual report.
In addition, recently adopted rules require companies to conduct a quarterly evaluation of their disclosure procedures and controls. The proposed rules would also require companies to conduct quarterly evaluations of their internal controls and procedures for financial reporting. They would also make conforming revisions to recently adopted certifications by a company's principal executive and financial officers regarding the company's quarterly and annual reports, and related rules.
Comments on the rule proposals should be received by the Commission within 30 days of their publication in the Federal Register.
Sarbanes-Oxley Prohibitions of Improperly Influencing Auditors
The Commission voted to propose rule amendments to implement Section 303 of the Sarbanes-Oxley Act of 2002. Section 303(a) prohibits an issuer's officers, directors, and persons acting under the direction of an officer or director, from taking any action to fraudulently influence, coerce, manipulate or mislead the auditor of the issuer's financial statements for the purpose of rendering those financial statements materially misleading. Comments on the proposed amendments should be received by the Commission within 30 days of their publication in the Federal Register.
The full text of detailed releases concerning each of these items will be posted to the SEC Web site as soon as possible. Comments will be collected for 30 days following publication of the proposals in the Federal Register.
