This is a guest blog by Mike Holliday.
The SEC at an open meeting on Wednesday, January 22, 2003, adopted new rules in the following four areas, and issued four separate press releases describing the new rules in general terms.
A. Registered Management Investment Companies. The rule would implement the certification requirements of Section 302 of Sarbanes-Oxley for registered management investment companies, and will require disclosure controls and procedures. The Commission also adopted rules to implement Sections 406 and 407 of Sarbanes-Oxley for registered investment management companies requiring disclosure regarding the Code of Ethics for the principal executive officer and senior financial officers, and whether there is a financial expert on the audit committee. The SEC said that these two disclosure requirements were similar to those adopted last week for operating companies.
The SEC’s related press release on investment company rules is at http://www.sec.gov/news/press/2003-8.htm
B. Strengthening Auditor Independence. The SEC adopted rules to implement Section 201 of Sarbanes-Oxley. The rules cover prohibited non-audit services, audit partner rotation, one-year period before an audit engagement team member may accept certain positions with an issuer, compensation based on procuring engagements other than audit, review or attest services, reports to the audit committee, pre-approval of services and disclosure regarding services provided by and fees paid to the auditor. The related press release covers most of the descriptions of the new rules at the meeting. Rotation will be required after 7 consecutive years for the lead and concurring partners on the engagement team, and after 5 years for certain other partners that play a key role in the audit. There was discussion at the meeting that there are some circumstances where providing certain tax services involving advocacy would impair independence. It will be necessary to check the adopting Release and final rules on this point to see exacatly how this is worded.
The related SEC press release on auditor independence rules is at http://www.sec.gov/news/press/2003-9.htm.
C. Disclosure of Off-Balance Sheet Arrangements and Aggregate Contractual Obligations.The proposed definition of off-balance sheet arrangements has been modified and will define certain categories by reference to recent FASB interpretations No. 45 on guarantees and No. 46 on consolidation of variable interest entities.The proposed disclosure threshold has been changed to the existing “reasonably likely” standard. There will be some more flexible, principle-based disclosure required. In addition, the proposed disclosure of “Contingent Liabilities or Commitments” has been eliminated. The SEC will continue to consider that possible area of disclosure.
The SEC press release on the off-balance sheet arrangements and contractual obligations rules is at http://www.sec.gov/news/press/2003-10.htm
D. Retention of Records Relevant to Audits and Reviews. The proposed rule would have required retention for 5 years. The rule as adopted will require retention for 7 years.
The SEC’s press release on rules for retention of records by auditors is at http://www.sec.gov/news/press/2003-11.htm