United States: Code Of Ethics Requirements Under The Sarbanes-Oxley Act

On January 24, 2003, the Securities and Exchange Commission implemented Section 406 of the Sarbanes-Oxley Act of 2002¹, which requires reporting companies to disclose the following information:

• Whether a company has adopted a code of ethics for its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions;
• If a company has not adopted a code of ethics, the reasons therefore; and
• Any changes to, or waivers of any provisions of, the code of ethics.

Section 406 defines "code of ethics" as written standards that are reasonably designed to deter wrongdoing and to promote:

• Honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;
• Full, fair, accurate, timely, and understandable disclosure in reports and documents that a registrant files with, or submits to, the Commission and in other public communications made by the registrant;
• Compliance with applicable governmental laws, rules and regulations;
• The prompt internal reporting to an appropriate person or persons identified in the code of violations of the code; and
• Accountability for adherence to the code.

Companies must comply with the code of ethics disclosure requirements under Section 406 in their annual reports for fiscal years ending on or after July 15, 2003. They must disclose amendments to, and waivers from, their ethics codes on or after the date on which they file their first annual report in which the code of ethics disclosure is required.

A registrant has three options for making its code of ethics publicly available:

(1) Filing a copy as an exhibit to its annual report;
(2) Posting a copy on its Internet website, along with disclosing its Internet address and intention to disclose in its annual report; or
(3) Providing an undertaking in its annual report to provide a copy of its code of ethics to any person without charge upon request.

Section 406(b) requires a company to make immediate disclosure on Form 8-K or via the Internet of the following:

• The nature of any amendment to the company's code of ethics that applies to its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions; and
• The nature of any waiver, including an implicit waiver from a provision of the code of ethics granted by the company to one of these specified officers, the name of the person to whom the company granted the waiver and the date of the waiver.

A company must file a Form 8-K with information about such an amendment or waiver within five business days after the event. Alternative disclosure over the Internet may be made only if the Company has previously disclosed in its most recently filed annual report its intention to disclose these events on its Internet website along with its Internet website address.

"Waiver" is defined as the approval by the company of a material departure from a provision of the code of ethics. "Implicit waiver" is defined as a registrant's failure to take action within a reasonable period of time regarding a material departure from a code of ethics provision that has been made known to an executive officer of the registrant.

The SEC rules do not identify any particular form or contents for the code of ethics, but the following topics may be appropriate, depending on the company:

• Legal Compliance
• Use of Company Computer Equipment
• Environmental Compliance
• Insider Trading
• Conflicts of Interest
• Corporate Opportunities
• Maintenance of Corporate Books and Records
• Fair Dealing
• Gifts and Entertainment
• Antitrust
• Protection of Company Assets
• Confidentiality
• Media/Public Discussions
• Waivers
• Compliance Standards and Procedures

Davis Wright Tremaine LLP offers assistance in preparing a code of ethics along with compliance standards and procedures.

This Corporate Finance Advisory Bulletin is a publication of the Business Transactions/Corporate Finance Group of Davis Wright Tremaine LLP. Our purpose in publishing this Advisory Bulletin is to inform our clients and friends of developments in business, corporate finance and securities laws. It is not intended, nor should it be used, as a substitute for specific legal advice as legal counsel may only be given in response to inquiries regarding particular situations.

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