United States: Sarbanes-Oxley Act of 2002 Compliance Update

Last Updated: May 20 2003

We have received a number of questions regarding the effective dates of certain rules recently adopted by the SEC under the Sarbanes-Oxley Act of 2002. As a result, we would like to take this opportunity to review the effective dates of these rules with you and provide you with information to assist you in complying with these new rules.1 For your convenience, we have also attached a compliance timeline chart as Appendix A for certain of the SEC’s final rules promulgated pursuant to the Sarbanes-Oxley Act.

I. Non-GAAP Financial Information

As mandated by Section 401(a) of the Sarbanes-Oxley Act, the SEC has adopted new rules, which are contained in Regulation G, that impose disclosure requirements in press releases, earnings releases and other communications by public companies containing a non-GAAP financial measure, whether or not filed with the SEC. Specifically, Regulation G requires that press releases, earnings releases or other public communications include:

  • a presentation of the most comparable GAAP financial measure; and
  • a reconciliation between the non-GAAP and comparable GAAP measures, in the form of a schedule or other clearly understandable method.

In addition, the SEC amended Item 10 of Regulation S-K to adopt similar rules governing the use of non-GAAP financial measures in SEC filings.

What to Do Now: Before publicly disseminating the earnings release for the first quarter of 2003, determine whether the release includes any non-GAAP financial measures. If so, either remove the non-GAAP financial measures or comply with the requirements of Regulation G.

Compliance Dates: Regulation G became effective as of March 28, 2003. The amendments to Regulation S-K apply to any periodic or current report filed with respect to a fiscal period ending after March 28, 2003.

II. Earnings Releases

Under Section 409 of the Sarbanes-Oxley Act, the SEC adopted rules that added new Item 12 of Form 8-K requiring earnings releases for completed fiscal periods (irrespective of whether such earnings releases contain non-GAAP information) to be furnished to the SEC on Form 8-K within five business days of public dissemination. Item 12 of Form 8-K does not affirmatively require a public company to issue an earnings release or similar disclosures.2

However, when made, such disclosures or releases trigger the new Form 8-K reporting requirement. Significantly, the new Form 8-K disclosure item will require earnings and other material non-public information regarding financial results and financial condition that is disclosed orally (i.e., quarterly earnings conference calls or webcasts) to be filed on Form 8-K within five business days unless the following conditions are met:

  • the oral disclosure is part of a presentation that occurs within 48 hours after a related earnings release or announcement that is furnished on Form 8-K;
  • the presentation is accessible to the public via conference call, webcast, or similar method;
  • the "financial or other statistical information" disclosed in the presentation is posted on the company’s website, together with the comparable GAAP information and reconciliation that would be required by Regulation G; and
  • the presentation was announced in a widely disseminated press release describing when and how to access the presentation and the information posted on the website.

Also, the SEC has recently issued interim guidance instructing companies to furnish the information required by new Item 12 of Form 8-K under Item 9 of Form 8-K until it has reconfigured EDGAR to accept an Item 12 Form 8-K filing.

What to Do Now: Establish procedures to ensure that any earnings release for the first quarter of 2003 is furnished to the SEC on Form 8-K within five business days of public dissemination. Importantly, if a company plans on holding a conference call or webcast regarding its financial results for the first quarter of 2003, the Form 8-K must be furnished to the SEC within 48 hours before such conference call or webcast, or the company will be required to furnish the SEC with a Form 8-K regarding such conference call or webcast.

Compliance Date: The requirement to furnish earnings releases to the SEC on Form 8-K became effective as of March 28, 2003.

III. Pre-Approval of Audit and Non-Audit Services

Pursuant to Section 208(a) of the Sarbanes-Oxley Act, the SEC adopted new rules requiring a public company’s audit committee to approve in advance any audit or permitted nonaudit service performed by an auditing firm. The new rules provide two alternative ways in which an audit committee may pre-approve the provision of audit and non-audit services:

  • pre-approval before the auditing firm is engaged to provide the audit or non-audit service; or
  • the engagement is entered into pursuant to detailed pre-approval policies and procedures established by the audit committee, with the audit committee informed on a timely basis of each service.

What to Do Now: To reduce the burden on the audit committee, consider whether it is appropriate to establish detailed pre-approval policies and procedures under which categories of frequently utilized audit and non-audit services are pre-approved by the audit committee and the authority to authorize the auditor to perform such services is delegated to an individual director or executive officer.

Compliance Date: The new pre-approval requirements will become effective on May 6, 2003 for services that are to be performed pursuant to contracts entered into on or after such date. Services that are already being provided and that are covered by contracts dated prior to May 6, 2003 do not require pre-approval by the audit committee and may continue to be provided until May 6, 2004.

IV. Mandated Electronic Filing for Forms 3, 4 and 5

In accordance with Section 403 of the Sarbanes-Oxley Act, the SEC has proposed rules to require officers, directors and 10% shareholders who are subject to Section 16 of the Securities Exchange Act of 1934 to electronically file on EDGAR Forms 3, 4 and 5.

The SEC strongly urges any person or entity subject to Section 16 to submit a Form ID (through which an EDGAR identification number and access codes are obtained) well in advance of the first required electronic filing in order to facilitate electronic filing on a timely basis.

What to Do Now: To avoid the last minute rush to obtain an EDGAR identification number and access codes, companies should facilitate the submission of Form IDs by their officers and directors. The Form ID can be found on the SEC’s website at http://www.sec.gov/divisions/corpfin/forms/id.htm. Also, despite the instructions on the Form ID, the SEC is currently only accepting the Form ID by facsimile at (202) 504-2472 or (703) 914-4240. The SEC will provide you with the EDGAR identification number and access codes by telephone.

Compliance Date: Section 403 of the Sarbanes-Oxley Act requires that the SEC adopt final rules mandating the electronic filing on Forms 3, 4 and 5 on EDGAR no later than July 30, 2003. The SEC has stated that it intends to adopt final rules to implement mandatory electronic filing as soon as reasonably practicable before the July 30, 2003 date mandated by the Sarbanes-Oxley Act.

Appendix A
Compliance Timeline

Final Rules

Compliance Date(s)

Non-GAAP Financial Information

Regulation G will apply to all subject disclosures as of March 28, 2003.

The requirement to furnish earnings releases to the SEC on Form 8-K will apply to earnings releases and similar announcements made after March 28, 2003.

The amendments to Regulation S-K will apply to any annual or quarterly report filed with respect to a fiscal period ending after March 28, 2003.

Audit Committee Financial Experts

Companies must comply with the audit committee financial expert disclosure requirements in their annual reports for fiscal years ending on or after July 15, 2003.

Codes of Ethics

Companies must comply with the code of ethics disclosure requirements in their annual reports for fiscal years ending on or after July 15, 2003.

They also must comply with the requirements regarding disclosure of amendments to, and waivers from, their codes on or after the date on which they file their first annual report in which the code disclosure is required.

Off-Balance Sheet Arrangements and Specified Contractual Obligations

Companies must comply with the disclosure requirements for off-balance sheet arrangements in any SEC filing that requires financial statements for fiscal years ending on or after June 15, 2003.

Companies must comply with the tabular disclosure requirements for contractual obligations in any SEC filing that requires financial statements for fiscal years ending on or after December 15, 2003.

Auditor Independence.

The auditor independence rules will become effective May 6, 2003 with additional transition periods for certain provisions.

The rules governing the pre-approval of audit and permitted non-audit services by the audit committee become effective May 6, 2003. Companies have until May 6, 2004 to exit any such service contracts that existed prior to the effective date

Restrictions on Insider Trading During Pension Fund Blackout Periods

Section 306(a) of Sarbanes-Oxley and Regulation BTR became effective on January 26, 2003.

Rules on Standards of Professional Conduct for Attorneys

The new rules will become effective on August 5, 2003.

Audit Committee Standards for Listed Companies

Generally, listed companies must be in compliance with the new listing rules by the earlier of (1) their first annual shareholders meeting after January 15, 2004, or (2) October 31, 2004. Foreign private issuers and small business issuers that are listed must be in compliance with the new listing rules by July 31, 2005.

1 Please see our Legal Alert, dated January 30, 2003, entitled "The SEC Adopts Final Rules under the Sarbanes-Oxley Act of 2002," available on our website at http://www/sablaw.com/news/alerts.asp, for a more detailed discussion of the rules discussed in this Legal Alert.
2 Please see our Legal Alert, dated April 2003, entitled "Roadmap to the SEC’s New Rules Regarding Earnings Releases," available on our website at http://www/sablaw.com/news/alerts.asp, for a detailed discussion of the procedures that a company can follow to comply with the SEC’s new disclosure requirements in connection the issuance of earnings releases.

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.

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