October 16, 2002

As many have heard, a group of law firms has gotten together to draft a white paper on interpretive prohibited loan issues under Section 402 – this paper is at

At the SEC’s open commission meeting today, the Commission proposed rules under Sections 303, 404, 406 and 407 of the Sarbanes-Oxley Act. The related press release is at

Other notable discussions at the meeting include

– the applicability of these rulemakings to non-U.S. issuers and the need for them to send in comments if there are concerns

– 404 regarding internal control report – the SEC intends to let companies tailor these reports to their own circumstances, but noted that this report should have a profound impact on how closely independent auditors pay attention to their client’s internal controls (due to the attestation requirement). This was a primary reason for not accelerating the due date for next year’s 10-K. The SEC staff will be monitoring this disclosure in targeted reviews next year to ensure the “spirit” of the requirement is being followed.

– 406 regarding code of ethics – As one observer remarked, the SEC appears to be getting “code happy.” The Commission talked about requesting comment whether this rulemaking should be broadened to cover more than just CEOs and CFOs (this rulemaking already goes beyond what Sarbanes-Oxley dictated – that Act only mentioned codes that apply to CFOs). The Commission will request comment whether codes applying to directors, investor relations’ professionals, etc. should be swept in – following on model codes adopted by NIRI, FEI and BRT. The code that applies to the CEO and CFO would be filed as an exhibit to the 10-K – and disclosure noted in the 10-K that it exists. They release also will be tweaked to ensure that the 8-K filing requirement applies to “de facto” waivers of the code. Commissioner Campos read a statement to express his view that urges companies to go beyond the letter of the law in ensuring that ethical cultures are formed.

– 404 regarding financial experts – Chairman Pitt expressed an interest regarding changing the label from “financial expert” to “audit committee accounting expert.” There was a lot of discussion regarding state law liability (and that the SEC was not preempting state law) and whether the financial expert would be held to a higher standard (with no definitive statements made). The upshot was to ensure that having a so-called “financial expert” on an audit committee does not relieve other committee members from their duties (i.e. they can’t overly rely on the expert). There was some discussion about whether the rules were too detailed regarding who could qualify – and who would be eligible (with no definitive statements made). There also was some confusing discussion about companies being “encouraged” to identify all directors who would qualify as financial experts – but perhaps that they would not be required to identify these persons if they did not go thru the drill of reviewing each director’s credentials (this being said, the proposed rules would require disclosure of the number – and identity – of each financial expert).

– 303 regarding improper influence – Chairman Pitt wants rule’s language tweaked to ensure it was clear that no scienter would be required for the SEC to bring an action under this section (particularly as it does not create a private right of action). The Commission noted that this rulemaking was fairly superfluous – as Section 20(c) of the 1934 Act already allowed the SEC to bring actions for the type of behavior that was actionable (including “attempts” to improperly influence)