United States: The U.S. High Yield Bond Market: Opportunities for Foreign Issuers (Part 2)

Credit ratings are issued by U.S. rating agencies²³ with respect to debt securities such as high yield bonds upon the request of the issuer or the underwriter of the securities. A credit rating represents a rating agency’s opinion of the credit risk associated with a particular security, and reflects an assessment of the likelihood that a particular security will be repaid in accordance with its terms under various economic scenarios, including, in most cases, an assessment of the likelihood that payments will be made on time. Ratings generally do not, however, address market risk that may result from changes in interest rates. Furthermore, a credit rating is not a recommendation to purchase, sell or retain a particular security, but instead performs the more limited role of credit risk evaluation.

Ratings are based on a combination of current and historical information furnished by the issuer, its counsel, accountants and other experts, and on an examination of the issuer. In view of the broad acceptance of ratings as the most objective and informed measurement of credit risk, receipt of a favorable rating from at least one of the nationally-recognized rating agencies has become essential to the marketability of high yield bonds issued by means of a public offering, and for many high yield bonds issued by means of a private placement in reliance upon Rule 144A.

A meeting between management of the issuer and the relevant rating agency is an integral part of the rating process. The purpose of such a meeting is to review in detail the company’s key operating and financial plans, management policies, financial projections, and other credit factors that have an impact on the rating. Accordingly, the issuer should be carefully prepared for the meeting so that the rating agency may undertake a balanced evaluation of the issuer’s financial position and prospects.

For the most part, rating agency meetings take place at the offices of the issuer. This affords the rating agency increased exposure to management personnel—particularly at the operating level—and permits it to obtain a first-hand view of facilities, and to achieve a better understanding of the company by conducting a more in-depth review of the issuer’s various business units. Meetings with companies new to the rating process typically do not last more than one day—sometimes longer if the issuer’s operations are particularly complex.

It is essential that adequate time be allocated to the rating agency review process. Ideally, meetings are scheduled at least several weeks in advance to assure mutual availability of the appropriate participants and to allow adequate preparation time for the rating agency analysts. It will generally also be necessary to allow at least three to four weeks following the meeting for the rating agency to complete its review process.

The chief financial officer of the issuer is a key participant in the meeting with the rating agency. The chief executive officer usually participates when strategic issues are reviewed. Operating executives often present detailed information regarding business segments. The rating agency will ordinarily designate a team of professionals that includes an industry analyst and others familiar with the industry.

A substantial portion of the information that will be gathered by the rating agency during the meetings will be of a highly confidential nature. It is standard rating agency policy to maintain the confidentiality of sensitive information. The rating agency is under no legal obligation to disclose any information it learns in the course of its review and, generally, any rationales or other information that the rating agency publishes about the company and, in respect of the assigned rating, should only refer to publicly available corporate information.

The issuer will ordinarily be requested to submit to the rating agency, in advance, certain written information, including:

• several years of audited annual financial statements;

• several recent interim financial statements;

• descriptions of operations and products;

• if available, a draft registration statement or offering memorandum, or equivalent information; and

• relevant industry information.

The following is an outline of the topics that typically will be covered in a rating agency meeting:

• the industry environment and prospects;

• an overview of major business segments with reference to key operating statistics and including comparisons with competitors and industry norms;

• management’s financial policies and financial performance goals;

• distinctive accounting practices;

• management’s projections, including income and cash flow statements and balance sheets, together with the underlying market and operating assumptions. (It should be understood that ratings are not normally based on the issuer’s financial projections or its view of what the future may hold; rather, ratings are based on the rating agency’s own assessment of the issuer’s prospects);

• capital spending plans; and

• financial alternatives and contingency plans.

Corporate ratings on publicly distributed bonds will continue to be monitored after the initial offering. Surveillance is generally performed by the same industry analysts who worked on the initial assignment of the ratings. As a part of the surveillance process, rating agency meetings are routinely scheduled at least annually. The purpose of these meetings is to allow the rating agency to remain informed of management’s view of current developments, discuss businesses that have performed differently from original expectations, and be apprised of changes in plans.

There are two sources of potential liability under the Securities Act for an issuer, and in certain cases its officers and directors, in connection with a U.S. high yield bond offering, depending upon whether or not the bonds include registration rights. Where bonds include registration rights, Section 11 of the Securities Act imposes liability for any material inaccuracies contained in the registration statement filed with the SEC. Where bonds do not include registration rights, the issuer is still subject to potential liability for any material inaccuracies contained in the Offering Circular under Section 12 of the Securities Act.

Section 11 of the Securities Act provides that in case any part of the issuer’s registration statement, when such part became effective under the Securities Act, contained an untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein not misleading, any person acquiring such a security can sue (i) every person who signed the registration statement;²⁴ (ii) every person who was a director of the issuer at the time of the filing of that part of the registration statement; (iii) every expert who, with his consent, has been named in the registration statement as having prepared or certified any portion of the registration statement; and (iv) every underwriter. Liability under Section 11 is virtually absolute against the issuer. However, a director or officer of the issuer may be able to avoid liability for any part of the registration statement not purporting to be made on the authority of any expert if he or she had, after reasonable investigation, reasonable grounds to believe and did believe, at the time such part of the registration statement became effective under the Securities Act, that the registration statement contained no material misstatements or omissions.²⁵ The process by which this "due diligence defense" is established is discussed above.

Section 12 (2) of the Securities Act provides that any person who offers or sells a security by means of a prospectus which includes an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements, in light of the circumstance under which they were made, not misleading may be held liable for the consideration paid plus interest (less the amount of any income) or for damages. The fact that the bonds are exempt from registration does not necessarily relieve the issuer or seller from Section 12 (2) liability, although there are several important judicial decisions that support the conclusion that Section 12 (2) liability does not apply to private placements.²⁶ Like Section 11 of the Securities Act, persons who can prove that they did not know, and in the exercise of reasonable care could not have known, of the untruth or omission will not be held liable. In addition, Section 24 of the Securities Act provides for criminal penalties for willful material misstatements or omissions.

Section 10(b) under the Exchange Act and Exchange Act Rule 10b-5 also subject issuers of securities and other participants in a securities offering to liability, and give rise to a private remedy for injured investors. Rule 10b-5 prohibits (1) fraudulent devices and schemes, (2) misstatements and omissions of material facts, and (3) acts and practices which operate as a fraud or deceit, in each case in connection with the purchase or sale of any security. The disclosure standard for offering documents contained in Rule 10b-5 is identical to that of Section 12 (2): liability is based upon a misstatement or omission of a material fact that makes the statements in the document misleading.

If the person who made the statement proves that he acted in good faith and had no knowledge that the statement was false or misleading, he will have no liability. A plaintiff under this provision may sue for the damages caused by his reliance. Such a lawsuit must be brought within one year of the plaintiff’s discovery of the misstatement or omission and in any event not later than three years after the making of the misleading statement.

In addition, a person who "willfully and knowingly" makes a false or misleading statement with respect to a material fact is subject to a fine of up to $10,000 and criminal penalties.

As discussed in detail below, the Sarbanes-Oxley Act imposes both criminal and civil penalties upon companies and their management for noncompliance with the Act, including knowing or willful violations of the certification and other requirements established under the Act.

As a result of registering its bonds with the SEC, an issuer becomes subject to the periodic reporting, and other requirements, under the Exchange Act.

The annual report to the SEC for foreign issuers, Form 20-F, must be filed with the SEC not later than six months after the end of each fiscal year. Form 20-F will include the same information that is included in Form F-4, updated to reflect changes that have occurred in the preceding year, including an updated MD&A. In addition, Form 20-F will include the audited consolidated financial statements of the issuer and its subsidiaries, together with separate year-end financial statements for subsidiary guarantors that are not wholly-owned.²⁷ Pursuant to the requirements of the Sarbanes-Oxley Act, a foreign issuer’s chief executive officer and chief financial officer must both certify the accuracy of the information contained in the Form 20-F.

Under the terms of U.S. high yield bonds, a foreign issuer will generally be required to file with the SEC, after the end of each of the first three fiscal quarters of each fiscal year, certain information (including unaudited financial statements of the issuer and its consolidated subsidiaries), on Form 6-K, and to provide the trustee with copies of the Form 6-K, as filed, regardless of whether the foreign issuer would actually be required to file a Form 6-K under the Exchange Act. Under the Exchange Act, Form 6-K requires a foreign issuer to furnish the SEC with any significant information (i) required to be disclosed publicly in its country of incorporation or domicile; (ii) filed with and made public by a stock exchange on which the issuer’s securities may be traded; or (iii) distributed by the issuer to its security holders (either directly or by means of a press release). Information in the foregoing categories must be furnished to the SEC promptly after being made public.

The U.S. securities laws subject all foreign private issuers who publicly offer securities to the provisions of the Foreign Corrupt Practices Act (the "FCPA"). The FCPAprohibits registrants and all officers, directors, employees and shareholders acting on behalf of such registrants from using any means of interstate commerce to offer bribes to any foreign official, foreign political party, party official or candidate for political office for the purpose of influencing any act or decision in order to obtain business. The FCPAalso prohibits payments to any person to serve as an agent in an effort to influence the same class of persons. Issuers found to have violated the anti-bribery provisions of the FCPA are subject to a fine of up to $2 million, and officers, directors, employees, agents and shareholders who are convicted of willful violations of the FCPAare subject to a fine of up to $100,000 and imprisonment for up to five years.

The FCPA also imposes accounting and record keeping standards, requiring those who are subject to its provisions (i) to make and keep books, records and accounts that accurately reflect transactions and dispositions of assets of the company, and (ii) to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurance that transactions are executed, and that access to assets is permitted only with management’s authorization, that transactions are properly recorded so as to permit preparation of financial statements and to maintain accountability for assets, and that comparisons are made with actual assets at reasonable intervals and appropriate action taken with respect to any differences discovered. Regulations adopted under the FCPA prohibit any falsification of records that must be kept and also prohibit a company’s officers and directors from making any false or misleading statements or omissions in connection with audits or documents to be filed with the SEC. Willful violations of the record keeping and accounting controls provisions of the FCPA may lead to criminal liability.

The Exchange Act exempts foreign private issuers from some of its requirements. For example, so long as a foreign private issuer is not 50 percent owned, directly or indirectly, by U.S. residents and (i) a majority of its executive officers or directors are not U.S. residents, (ii) more than 50% of its assets are not located in the United States or (iii) the issuer does not administer its business principally from the United States, it is exempt from the requirements concerning solicitation of proxies from shareholders and the insider reporting and trading provisions.

The Sarbanes-Oxley Act of 2002, which was adopted by Congress in response to the collapse of several prominent U.S. companies as a result of financial fraud, applies to both domestic and foreign companies whose securities (including debt securities) are registered with the SEC, and represents a broad expansion of U.S. securities laws in the areas of corporate governance, accounting matters, disclosure, enforcement and other topics. Following adoption of Sarbanes-Oxley in 2002, the SEC has adopted, and will continue to adopt, a number of new regulations that implement the provisions of the Act.

While it is likely that a number of the provisions of the Sarbanes-Oxley Act may conflict with regulations or customary practices in the home jurisdictions of foreign issuers, it is not clear how these conflicts will be addressed or reconciled. However, careful compliance with the new certification and disclosure requirements is an important consideration for any foreign company contemplating the issuance of high yield bonds with registration rights.

The Sarbanes-Oxley Act contains two provisions that require an issuer’s Chief Executive Officer and Chief Financial Officer (or their equivalents, whether or not they hold those titles) to certify the accuracy of their periodic reports filed with the SEC. For purposes of this certification, "periodic reports" include each annual Form 20-F, but do not include reports on Form 6-K, even if they contain quarterly financial information.

Under Section 302 of the Sarbanes-Oxley Act, the SEC adopted rules that require the CEO and CFO to certify that they have reviewed each periodic report and, to their knowledge, it is materially accurate and complete; to their knowledge, the financial statements and other financial information included in the report "fairly present" in all material respects the financial condition, results of operations and cash flows of the company; and as to various matters regarding the existence and adequacy of the issuer’s "disclosure controls and procedures."

For purposes of the new rules and the CEO/CFO certifications, the SEC draws a distinction between "internal controls," which pertain to a company’s financial reporting and control of its assets, and the newly required "disclosure controls and procedures," which pertain to the quality and timeliness of disclosures of all of the information required in periodic reports. The newly required disclosure controls and procedures include, but also go beyond the information that is covered by, a company’s internal controls related to financial reporting. For example, the procedures should ensure timely collection and evaluation of information regarding the company’s insider and affiliate transactions, business, litigation and regulatory developments, not just financial information. It is important to note that the disclosure controls and procedures apply to disclosures required in Form 6-K, even though these reports are not themselves required to include a CEO and CFO certification.

Section 906 of the Sarbanes-Oxley Act requires the CEO and CFO of the issuer to certify in a written statement accompanying each periodic report filed with the SEC that:

• the report complies with the applicable reporting requirements of the Exchange Act; and

• information contained in the report fairly presents, in all material respects, the financial conditions and results of operations of the issuer.

Foreign issuers are required to disclose in their periodic reports whether they have adopted a code of ethics applicable to their principal accounting officer, principal financial officer and comptroller or principal accounting officer meeting specified requirements. If an issuer has not adopted an appropriate code of ethics, the issuer must disclose the reasons for not doing so. The code of ethics must include standards reasonably necessary to promote (i) honest and ethical conduct, including the handling of actual or apparent conflicts of interest between personal and professional relationships; (ii) full, fair, accurate, timely and understandable disclosure in SEC reports and other public communications; (iii) compliance with applicable governmental rules; (iv) prompt internal reporting of violations of the code; and (v) accountability for adherence to the code. A foreign issuer must disclose in its Form 20-F any changes to or waivers of its code of ethics during the year covered by the report. Foreign issuers are strongly encouraged (but are not required) to make more prompt disclosure of changes and waivers on a Form 6-K or on their Internet websites.

Foreign issuers will need to consider, among other things, whether to produce a code of ethics that meets the Sarbanes-Oxley requirements and, if so, whether to produce a stand-alone code or to incorporate it within a preexisting internal code of conduct.

With limited exceptions for some types of loans made in the ordinary course of business by certain types of issuers, such as FDIC-insured banks and brokerage firms, foreign issuers are prohibited from, directly or indirectly, extending, maintaining or arranging for the extension of personal loans or guaranteeing such loans to their directors or executive officers. Personal loans already existing on July 30, 2002 may continue in effect, provided there is no material modification to any term or any renewal of the loan.

If, as a result of misconduct, an issuer must prepare an accounting restatement due to the material non-compliance by the issuer with any financial reporting requirement under the U.S. securities laws, the CEO and CFO are required to reimburse the issuer for: (i) any bonus or other incentive-based or equity-based compensation he or she received from the issuer during the 12-month period following the first public issuance or filing with the SEC of the financial document that did not comply with such financial reporting requirement, and (ii) any profits he or she realized from the sale of securities of the issuer during that same twelvemonth period. The Sarbanes-Oxley Act creates a private right of action for a company’s shareholders to recover the bonuses and profits on behalf of the company.

The Sarbanes-Oxley Act provides that no action may be taken by any director or officer of an issuer (or other person acting under the direction of any of them) to fraudulently influence, coerce, manipulate or mislead any independent auditor of the issuer’s financial statements for the purpose of rendering the financial statements materially misleading.

An individual can be barred by court order, at the request of the SEC, from serving as an officer or director of a public company if he or she has violated the general anti-fraud provisions of the U.S. securities laws and his or her activities are found by the court to show him or her to be "unfit." The Sarbanes-Oxley Act also permits the SEC, in an administrative cease-and-desist proceeding, to bar an individual from serving as a director or officer of a public company if, after notice and hearing, it has found that the individual has violated the general anti-fraud provisions of the U.S. securities laws and that the individual’s conduct demonstrates unfitness to serve as an officer or director.

Independence. Each member of the audit committee must (i) be unaffiliated with the issuer and its subsidiaries and (ii) not accept any compensation, directly or indirectly, from the issuer or any subsidiary thereof (including consulting, advisory or other compensatory fees) other than for service as a member of the board of directors or on any board committee. If an issuer does not have an audit committee, the Sarbanes-Oxley Act imposes these requirements on the entire board of directors.

On April 9, 2003, the SEC published final rules directing the NYSE, the AMEX and NASDAQ to prohibit the listing of any company that is not in compliance with the audit committee requirements mandated by the Sarbanes-Oxley Act. Under these rules, foreign issuers must be in compliance with the new listing rules by July 31, 2005.

Expertise. Foreign issuers are required to disclose in their annual report filed with the SEC whether or not their audit committee includes at least one member who is a "financial expert" (and, if not, the reasons), but are not required to have a financial expert on their audit committees. Foreign issuers must also disclose in their annual report whether or not any financial expert is "independent", as defined by their current applicable listing standards, or if the foreign issuer is not a listed issuer, under another SEC-approved definition. The SEC has defined "financial expert" to mean a person who has (i) an understanding of GAAP and financial statements; (ii) an ability to assess the general application of such principles in connection with accounting for estimates, accruals and reserves; (iii) experience in preparing, auditing, analyzing or evaluating financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of issues that can be reasonably expected to be raised by the issuer’s financial statements, or experience actively supervising one or more persons engaged in such activities; (iv) an understanding of internal accounting controls and procedures for financial reporting; and (v) an understanding of audit committee functions. The SEC’s rules provide that if a foreign issuer’s financial statements are presented in accordance with non-U.S. GAAP, then the experience and familiarity of the financial expert is measured in relation to such non-U.S. GAAP.

Responsibilities. Audit committees are responsible for the appointment, compensation and oversight of the work of the issuer’s independent auditor for the purposes of preparing or issuing any audit report (and any related work). The independent auditor must report directly to the Audit Committee. Pursuant to Rule 10A-3 of the Exchange Act adopted by the SEC under the Sarbanes-Oxley Act, the Audit Committee is responsible for the following:

• Selecting and Overseeing Independent Auditors. The Audit Committee must be directly responsible for the appointment, compensation, retention and oversight of the issuer’s accounting firm, and establishing certain procedures to resolve disagreements between management and the company’s auditor regarding financial reporting.

• Establishing Complaint Procedures. The Audit Committee must establish procedures for the receipt, retention and treatment of complaints that the issuer receives regarding accounting, internal accounting controls or auditing matters, and procedures for the confidential, anonymous submission by employees of concerns regarding questionable accounting or auditing matters.

• Engaging Advisors. The Audit Committee must have the authority to engage independent counsel and other advisors, as it determines necessary to carry out its duties.

• Providing Adequate Funding. The Company must provide appropriate funding, as determined by the Audit Committee, to pay compensation to the independent auditor and any outside advisors so engaged.

Home Country Provisions. Instruction 1 to Rule 10A-3 of the Exchange Act clarifies that the Audit Committee’s responsibilities will not be permitted to conflict with any requirement in a foreign issuer’s home jurisdiction that permits shareholders to ultimately vote on, approve or ratify such requirements. Instruction 1 is not an exemption from compliance with Rule 10A-3; rather it allows a foreign issuer to comply with Rule 10A-3 by affording its independent Audit Committee authority to the extent consistent with home country laws. In addition, Rule 10A-3(c)(3) provides a general exemption for foreign issuers that have a board of auditors or statutory auditors established pursuant to home country laws or listing requirements, which in turn meets various requirements.

Procedures for Handling Accounting Complaints; Protection of "Whistle Blowers." The Audit Committee must establish procedures for the receipt, retention and treatment of complaints received by the issuer regarding accounting, internal accounting controls or auditing matters and for the confidential, anonymous submission by employees of concerns regarding questionable accounting or auditing matters. On April 9, 2003, the SEC published final rules directing the NYSE, the AMEX and NASDAQ to prohibit the listing of any company that is not in compliance with this requirement. Under the rules, foreign issuers must be in compliance with the new listing rules by July 15, 2005. In addition, the Sarbanes-Oxley Act prohibits issuers from discharging, demoting or otherwise discriminating against any employee who lawfully provides information regarding any conduct the employee reasonably believes constitutes a violation of the U.S. securities laws or financial fraud statutes to any governmental authority, by testimony or otherwise, in any proceeding pending or about to be commenced concerning such a violation or to any person with supervisory authority over the employee or authorized by the issuer to investigate such conduct (which apparently includes the Audit Committee and auditors and counsel engaged by the Audit Committee), i.e., so-called "whistle blowers."

The Sarbanes-Oxley Act imposes restrictions on an issuer’s relationship with its auditor in connection with providing audit services.

Employment of Former Personnel of Issuer’s Auditor. An accounting firm is prohibited from providing any audit service to an issuer if the CEO, controller, CFO or chief accounting officer of the issuer was employed by that accounting firm and participated in any capacity in the audit of that issuer during the one-year period preceding the date of the initiation of the audit.

Rotation of Audit Partners. The lead audit partner responsible for the audit of an issuer and the audit partner responsible for reviewing the audit must change every five years.

The Sarbanes-Oxley Act places significant restrictions on audit firms providing non-audit services to their clients.

Restricted Non-Audit Services. The Sarbanes-Oxley Act restricts any accounting firm that provides auditing services for an issuer from also providing non-audit services to that issuer. The SEC has adopted rules clarifying the application of certain of those prohibitions. Under the SEC’s rules, an auditor providing any of the following services to a client would not be considered "independent" with regard to that client: (i) management functions or human resources; (ii) broker or dealer, investment adviser, or investment banking services; or (iii) legal services and expert services unrelated to the audit.

In addition, providing any of the following services will also impair an auditor’s independence, unless it is reasonable to conclude that the results of the services will not be subject to audit procedures during an audit of the client’s financial statements: (i) bookkeeping or other services related to the accounting records or financial statements of the issuer; (ii) financial information systems design and implementation; (iii) appraisal or valuation services, fairness opinions, or contribution-in-kind reports; (iv) actuarial services; or (v) internal audit outsourcing services. The SEC’s rules also provide that an auditor’s independence will be impaired by providing any other services that the new Public Company Accounting Oversight Board (the "Oversight Board") determines, by regulation, is impermissible.

Preapproval Requirements; Non-Audit Services. All audit services (including providing comfort letters in underwritings) and any permissible non-audit services, such as tax services, may only be provided to an issuer if approved in advance by the Audit Committee of the issuer. Consideration of such non-audit services may be delegated to an independent director of that committee. Any such approvals must be publicly disclosed in the issuer’s annual report filed with the SEC. Non-audit services do not need prior approval if the amount paid for such services meets a de minimis standard, the services were not recognized at the time of engagement to be nonaudit services and the provision of the services was promptly brought to the attention of the Audit Committee and were approved prior to the completion of the audit by the Audit Committee or one or more members of the committee with authority to grant such approvals.

Each financial report filed with the SEC that contains financial statements that are required to be prepared in accordance with, or reconciled to, GAAP must reflect all "material correcting adjustments" that have been identified by the issuer’s independent auditor in accordance with GAAP and SEC rules.

Pro forma financial information (i.e., figures that are not prepared in accordance with GAAP, such as "pro forma earnings," "core earnings" or "EBITDA") must be presented in a manner that does not contain an untrue statement of a material fact or omit to state a material fact necessary to render the information not misleading. The presentation of pro forma financial information must include a reconciliation of the pro forma disclosure to the issuer’s financial condition and results of operations as prepared in accordance with GAAP. The new rules apply to all pro forma information regardless of whether the information is contained in an SEC filing, in any press release or in some other public disclosure. The rules generally do not prohibit foreign issuers from disclosing information not prepared in accordance with U.S. GAAP, provided that the foreign issuer is listed on an exchange outside of the United States, the information was released outside of the United States (even if it was simultaneously released in the United States) and the non-GAAP measure is not derived from a number prepared in accordance with U.S. GAAP.

In each annual report on Form 20-F filed with the SEC, foreign issuers must disclose all material off-balance sheet transactions, arrangements, obligations (including contingent obligations), and other relationships with unconsolidated entities or persons that may have a material current or future effect on the issuer’s financial condition, results of operations, liquidity, capital expenditures, capital resources, or significant components of revenues or expenses, in accordance with SEC regulations.

A foreign issuer’s annual report on Form 20-F filed with the SEC must contain an "internal control report" stating that management is responsible for establishing and maintaining an adequate internal control structure and procedures for financial reporting, and assessing the effectiveness of the internal control structure and procedures for financial reporting. Initially the SEC required a foreign issuer filing a Form 20-F to comply with these requirements for its first fiscal year ending on or after July 15, 2005. However, on March 2, 2005 the SEC issued a release allowing foreign issuers to defer compliance with these requirements until preparation of their annual reports for the year ended 2006, due to be filed in 2007.

Criminalization of Misconduct 

The Sarbanes-Oxley Act imposes criminal penalties for the following misconduct (some of which was already subject to criminal provisions of U.S. Federal securities and other laws):

• knowingly or willfully filing a false CEO/CFO certification under Section 906 of the Sarbanes-Oxley Act;

• knowingly and willfully destroying any audit workpapers;

• destroying, altering or falsifying records done with the intent to impede, obstruct or influence any governmental investigation or the administration of any Federal governmental function or any bankruptcy proceeding;

• discriminating in the terms and conditions of employment with respect to employees who provide information or assist in investigations of U.S. securities law violations by U.S. Federal regulatory or law enforcement agencies, the U.S. Congress or company personnel with supervisory or investigatory authority or file, testify, participate in, or otherwise assist in proceedings filed or about to be filed involving alleged violations of the U.S. securities laws or SEC regulations or securities fraud; and

• knowingly executing or attempting to execute a scheme or artifice to defraud any person in connection with any security of a public company or obtaining by means of false or fraudulent pretenses, representations or promises, any money or property in connection with the purchase or sale of any security of a public company.

The Sarbanes-Oxley Act establishes new fines and criminal penalties for securities fraud violations involving accounting irregularities and financial fraud, including sanctions applicable to directors, officers and professionals that have committed, conspired with, or "aided and abetted" the commission of violations. Liabilities for judgments or settlements for violating U.S. securities laws or committing securities fraud will be nondischargeable in bankruptcy. 

The Sarbanes-Oxley Act extends the applicable statute of limitations for private rights of action for securities fraud to the earlier of (i) two years (from the existing one-year period) after discovery of the facts constituting the violation and (ii) five years (from the existing three-year period) after such violation. This extension may resurrect securities fraud cases that were previously cut off by the old statute of limitations but are now within the new statute of limitations.

Attorneys appearing before the SEC in the representation of issuers are required to report "evidence of" a material violation of U.S. securities law or breach of fiduciary duty or similar violation by the issuer or any agent thereof to the issuer’s chief legal officer and chief executive officer. If the report is not properly responded to through adopting appropriate remedial measures or sanctions for the violations, attorneys must report the evidence to the Audit Committee (or another committee comprised solely of non-employees of the issuer, sometimes referred to as a "qualified legal compliance committee") or to the full board.²⁸ The SEC did not adopt a controversial proposal that would have required an attorney to notify the SEC of its withdrawal from representing an issuer over professional reasons, a so-called "noisy withdrawal."

This memorandum is not intended to provide a comprehensive overview of the issues arising in U.S. high yield bond offerings, or of the complex regulatory structure which governs securities transactions in the United States. If you would like to receive additional information concerning the procedure for issuing U.S. high yield bonds, or the issues that arise in connection with such offerings, please contact Peter V. Darrow, Antonio N. Piccirillo, William A. Candelaria or Jeffrey R. Whyte in the New York office of Mayer, Brown, Rowe & Maw LLP.

Footnotes

Copyright © 2007, Mayer, Brown, Rowe & Maw LLP. and/or Mayer Brown International LLP. This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

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