In January, the SEC adopted a number of important rules under the Sarbanes-Oxley Act, several of which are important for IROs. First, companies required to file SEC reports now have to disclose in their annual report to the SEC – the 20F – whether or not (and, if not, why not) their audit committees include what the SEC calls an ‘audit committee financial expert’. This may seem like a ‘comply or explain’ requirement of the type found in the UK’s Combined Code on corporate governance, but the SEC is more likely to emphasize compliance. This will suit investors. Fortunately, the SEC’s definition of ‘audit committee financial expert’ is not as draconian as was originally feared. There’s no need, for example, for this expert to be familiar with the reconciliation of local accounting principles to US Gaap, but of course local Gaap expertise (as well as broader qualifications like integrity) will be key.
Affected companies now have to disclose whether they have adopted a ‘code of ethics’ for their CEO and senior financial officers that meets SEC requirements and again, if not, why. This code of ethics, as well as waivers to and amendments of it, have to be made publicly available. This can be done either on the web (the SEC refers to ‘the web site the company normally uses for its investor relations functions’) or by making it available ‘without charge upon request’, in which case the document will not need to be filed as an exhibit to the company’s 20F. In both cases, however, the availability of the code of ethics will need to be disclosed in the 20F along with the web address. While waivers to and amendments of the code will not have to be disclosed in SEC filings more than once a year, the SEC ‘strongly encourages’ companies to do so promptly on their web sites. Again, most companies will find it easier to comply with these requirements than to explain why they haven’t.
Other rules adopted by the SEC in January turned out to be less worrisome than originally anticipated. Many non-US companies will be required to implement the new ban on directors and executive officers making purchases or sales of specified equity securities during pension fund blackout periods. However, companies that have less than 15 percent of their affected worldwide employees in the US will not have to (as long as there are no more than 50,000 such employees). Notices of proposed blackout periods will need to be given to the SEC and affected directors and executives. The SEC has indicated that it will ‘encourage’ non-US companies to make any such notice public through a form 6K filing.
The SEC also adopted a new rule requiring published non-Gaap financial measures to be reconciled to Gaap, but most non-US companies will not be subject to this requirement either, provided the information is not primarily targeting a US audience.
Although not yet adopted, there are other important rules currently under review by the SEC. These include a requirement that the NYSE, Nasdaq and Amex adopt rules to stop a company listing if it is not in compliance with specified audit committee independence, auditor’s oversight and related Sox requirements.
These requirements caused great concern when they were originally proposed, but the SEC has shown an awareness of most non-US concerns. Thus, when the final rules are adopted, they are likely to specifically permit employee supervisory board representation at German companies and others with two-tier board structures, while controlling shareholder groups (particularly governments) will be given a right to audit committee representation subject to reasonable constraints.
Similarly, the need for audit committee approval and oversight of auditors’ appointments will be tailored to comply with the UK and Irish requirement that shareholders appoint auditors, although any such auditor will need to have been at least nominated or recommended by the audit committee.
It is important that IR departments play a part in any debate within companies concerning Sox. Companies that are relying on exemptions must remember that the extent of each exemption must be one that investors feel comfortable with. Likewise, if a company chooses to explain rather than comply, it must bear in mind the investor relations implications of this decision.
Finally, remember that only those companies listed in the US, or that are required to file reports with the SEC, are subject to Sox and its rules. A Level I ADR program is not enough to trigger them.
Mark Walsh is a New York and London law partner at Sidley Austin Brown & Wood, acting for SEC registrants, audit committees and investment banks
