Putting The
Sarbanes-Oxley Pieces
Together — What You Need to
Know Now
Brian Lane
Ronald O. Mueller
Amy L. Goodman
Stephen I. Glover
Gregory T. Davidson
Gibson, Dunn & Crutcher LLP©
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Confirmation # 1464
Brian Lane
A corporate partner in the Washington, D.C. office,
Mr. Lane focuses his practice on securities
regulation and disclosure issues. He served from
1996 to 2000 as Director of the Division of
Corporation Finance of the SEC, where he was the
principal architect of important regulatory
developments involving financial reporting and
accounting issues as well as many other areas.
During his 16 years with the SEC, he also served as
counsel to Chairman Arthur Levitt, counsel to
Commissioner Richard Roberts, and staff attorney
with the Corporation Finance and Market Regulation
Divisions.
Contact Information:
(202) 887-3646 — direct dial
blane@gibsondunn.com
Ronald O. Mueller
A corporate partner in Gibson Dunn’s Washington,
D.C. Office, Mr. Mueller has extensive experience in
the corporate securities area with an emphasis on
proxy and disclosure issues, corporate governance,
executive compensation and corporate transactions.
Mr. Mueller served as legal counsel to SEC
Commissioner Edward H. Fleischman from 1989 to
1991, during which time the SEC comprehensively
revised the section 16 reporting rules. He is a
member of the ABA's Committee on Federal
Regulation of Securities, and has written numerous
articles and spoken extensively on executive
compensation issues and the SEC’s reporting and
disclosure requirements.
Contact Information:
(202) 955-8671 — direct dial
rmueller@gibsondunn.com
Amy L. Goodman
Based in Washington, D.C., Ms. Goodman previously
served with the SEC for 11 years, holding several
positions with the Division of Corporation Finance,
including Associate Director (EDGAR), Deputy Associate
Director, Assistant Chief of the Office of Disclosure Policy,
and Chief of the Task Force on Corporate Accountability.
She also served as Legal Assistant and Special Counsel
to SEC Chairman Harold Williams and as a staff attorney
in the SEC's Division of Investment Management. Ms.
Goodman has been an editor and author of books and
newsletters on securities and corporate law topics,
including Editor-in-Chief of Insights: The Corporate and
Securities Law Advisor, The Investment Lawyer, and The
Corporate Governance Advisor.
Contact Information:
(202) 955-8653 — direct dial
agoodman@gibsondunn.com
Stephen I. Glover
A corporate partner in Washington, D.C., Mr. Glover is a
former member and has served as co-chair of the
Steering Committee for the D.C. Bar Association's
Corporation, Finance and Securities Law Section. He is
a D.C. representative to the New York Tribar Opinion
Committee, a member of the advisory board of BNA's
Mergers & Acquisitions Law Report and a member of
the editorial boards of The M&A Lawyer and The StartUp and Emerging Companies Strategist. He is a
member of the Securities Regulation Committee, the
Negotiated Acquisitions Committee and the Venture
Capital Committee of the American Bar Association's
Business Law Section. He is chair of the Venture
Capital Committee's Government Relations Task Force.
Contact Information:
(202) 955-8593 — direct dial
siglover@gibsondunn.com
Gregory T. Davidson
A corporate partner in the firm’s Palo Alto office, Mr.
Davidson's practice includes extensive experience in
advising public companies regarding securities laws
matters, including disclosure and periodic reporting
obligations, issues relating to securities offerings
and interactions with the SEC. Mr. Davidson also
has extensive experience in corporate governance
matters and mergers and acquisitions on behalf of
public and private companies. He is a member of
the Committee on Federal Regulation of Securities
of the American Bar Association Section of Business
Law.
Contact Information:
(650) 849-5350 — direct dial
gdavidson@gibsondunn.com
Overview of Presentation
Copies of the slides will be emailed to attendees after the presentation
I. Disclosure
 Earnings Releases
 Non-GAAP Financial Measures
 MD&A
 Certification/Disclosure Controls & Procedures/Item 307 Disclosure
II. Relationship with Outside Auditor
 Retaining, Supervising and Managing Relationship with Outside Auditor
 Non-audit Services — Procedures For Pre-approval and Disclosure
III. Boards and Committees
IV. Other Governance Issues
 Codes of Ethics
 Lawyer Professional Responsibility
I. Disclosure
 Earnings Release
Earnings Release
 New Earnings Release Filing Requirement.
 Earnings releases regarding a completed fiscal quarter or a
completed fiscal year must be furnished on Form 8-K.
 Timing: must be furnished to the SEC within five business days
after release is disseminated.
 Requirement is set forth in new Item 12 on Form 8-K.
 Requirement effective beginning March 23, 2003.
Filing Information vs. Furnishing Information:
Liability and Incorporation by Reference

Information provided under Item 12 of Form 8-K will be treated as
“furnished” rather than “filed” for Exchange Act and Securities Act
purposes.

This means that the company will not have liability for the information
under Section 18 of the Exchange Act.

But the company will still have liability under Rule 10b-5.

The fact that the information is “furnished” rather than “filed” also
means that the earnings release will not be automatically incorporated
by reference in a registration statement, proxy statement or other
report, unless the company expressly so states. This means you don't
have automatic Securities Act liability.
What Is and Isn’t
Covered by Item 12?

You must furnish if you make a public announcement or release of
material non-public information regarding results of operations or
financial condition for a completed quarterly or annual fiscal period.

You don’t have to furnish again if you repeat the same information in
subsequent announcements. For example, if you mail quarterly reports
to stockholders that contain the same information, you don’t need to file
the report.

You do need to furnish again if you amend or supplement the previous
announcement in material ways.

You don’t have to furnish announcements of earnings estimates for
future or ongoing fiscal periods, unless these estimates are included as
part of the earnings release.
What Does the Rule Say About Earnings
Calls and Similar Announcements
of Earnings Information?
If you disclose the information orally, telephonically, or by broadcast or
webcast, you don't need to furnish if:

the disclosure occurs within 48 hours after related written
release that has already been furnished on Form 8-K;

the presentation is broadly accessible to the public;

the financial and statistical information is made available on the
registrant's website; and

the presentation was announced by a widely disseminated
press release that included information on how to access the
information.
What Does This Mean?
If you are doing an earnings call, you should file an 8-K in advance, and
make sure that the other requirements regarding announcement and
availability of the information are satisfied.
Good news: many companies are already doing this as part of their
regular procedures.
Relationship of New Filing
Requirement to Regulation FD

Regulation FD provides that if you disclose material nonpublic
information to specified persons, you must simultaneously disclose to
the public generally.

Companies can satisfy the Regulation FD disclosure requirement by
filing a Form 8-K. The rules provide that you can furnish the
information under Item 9. This is not the only way, however. Other
forms of public dissemination also work.
Regulation FD, Cont.

Principal differences between Regulation FD and new earnings release
filing requirements relate to timing and form of disclosure. Earnings
release rules require filing in 5 business days; Regulation FD requires
immediate disclosure. Earnings release rules require filing on 8-K;
Regulation FD permits other forms of disclosure.

Suggestion for earnings call procedures: file furnish earnings release
on Form 8-K in advance of call. Satisfy other earnings release rules
regarding telephonic announcements. Then you are OK under both
rules.
I. Disclosure
 Earnings Release
 Non-GAAP Financial Measures
Non-GAAP
Financial Measures

New Regulation G

Pro-forma is defined as including or excluding amounts from comparable
GAAP Measures (e.g. EBITA, “core earnings”)

Press Releases




In a Filing


Must include GAAP number
Prominence
Reconcile
Must include reason why Non-GAAP measure is useful
Prohibited




No Non-GAAP in financials or notes
Omitting items identified as “non-recurring” when there was a similar item
within the two previous years or is likely to be within the succeeding two
years
Liquidity measures that exclude cash settled charges
Giving non-GAAP items titles that make them sound like GAAP
I. Disclosure
 Earnings Release
 Non-GAAP Financial Measures
 MD&A
Recent Guidance on MD&A
 Both before and after SOX, the SEC has focused extensively on
MD&A
 January 2002 interpretive release focuses on MD&A discussion
of liquidity and capital resources, including off-balance sheet
financing, trading activities involving non-exchange traded
contracts accounted for at fair value, and transactions with
related parties
 December 2001 release on “critical accounting policies,”
followed by May 2002 release proposing rules requiring a new
section in MD&A discussing “critical accounting estimates”
 January 2003 final rules on off-balance sheet financing
Recent Guidance
On MD&A, Continued

Preparing MD&A that will satisfy the rules and SEC staff is more difficult
than ever

The rulemaking is not yet over—the staff is still working on the final
critical accounting estimates rules

Some commissioners have recently expressed concern about making
MD&A disclosure too voluminous and burdensome
New Rules on Off-Balance
Sheet Arrangements

Companies must expand discussion of off-balance sheet
arrangements. The final rule defines these arrangements more
narrowly than the proposed rule.

The company must discuss the transaction if it is “reasonably likely” to
have a material effect on the company. The staff did not adopt the
“more than highly remote” standard it originally proposed, which would
have been more demanding.

MD&A must include tabular disclosure of contractual obligations. The
table must disclose the nature and the amount of the obligation.

The rules apply to filings that include financial statements for fiscal
years ending on or after June 15, 2003.
What Is Covered
Covered Off-balance Sheet Arrangements




Guarantee contracts
Retained interest in assets transferred to an unconsolidated entity
Obligations under certain derivative instruments
Obligations arising out of variable interests
Contractual Obligations Table Must Identify:





Long term debt obligations
Capital lease obligations
Operating lease obligations
Purchase obligations
Other long term liabilities on balance sheet
Other Liquidity and
Capital Resources Issues

Discuss short-term liquidity needs.

How will short-term liquidity needs be satisfied? Identify the sources of
short term liquidity.

What are the circumstances that are reasonably likely to affect sources
of short term funding?

Remember that the SEC staff takes the view that “reasonably likely” is
a lower threshold than “more likely than not.”
Related Party Transactions
 The January 2002 interpretive release discussed these
transactions. The focus has only intensified since then.
 The release makes the point that discussion of related party
transactions may be appropriate even if transaction is not
covered by Item 404 of Regulation S-K.
 Does a party have a relationship with the company that enables
the company to negotiate transactions that would not be
available in true arms' length negotiations?
Critical Accounting Estimates
 Proposal: companies must identify “critical accounting
estimates.”
 A critical accounting estimate is an accounting estimate that is
highly uncertain at the time made, and different estimates that
the company reasonably could have used would have had a
material impact on the financial statements.
 The proposed rules would require a discussion of the critical
estimates, and a quantitative sensitivity analysis showing how
financial statements and financial performance would have
changed if the estimates had changed. They would also require
a discussion of any changes in the estimates.
I. Disclosure




Earnings Release
Non-GAAP Financial Measures
MD&A
Certification/Disclosure Controls
& Procedures/Item 307
Disclosures
CEO/CFO Certification Under
Section 302 Of The Act

He/She has reviewed the report.

Based on his or her knowledge, the report does not contain any untrue statement of
material fact or omit to state a material fact necessary in order to the statement made,
in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by the report.

Based on his or her 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 as of, and for, the
periods presented in the report. (emphasis added.)

He or she and the other certifying officers: (a) are responsible for establishing and
maintaining disclosure controls and procedures; (b) have designed such disclosure
controls and procedures to ensure that material information is made know to them,
particularly during the period in which the periodic report is being prepared; (c) have
evaluated the effectiveness of the disclosure controls and procedures as of a date
within 90 days prior to the filing date of the report; and (d) have presented i the report
their conclusions about the effectiveness of the disclosure controls and procedures
based on the required evaluation as of the date.
CEO/CFO Certification Under
Section 302 Of The Act, Cont.

He or she and the other certifying officers have disclosed to the auditors and the audit
committee: (a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the company’s ability to record, process, summarize and
report financial data and have identified for the auditors any material weaknesses in
internal controls; and (b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the internal controls.

He or she and the other certifying officers have indicated in the report whether or not there
were significant changes in internal controls or in other factors that could significantly affect
internal controls subsequent to the date of their evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.
CEO/CFO Certifications Under
Section 906 of the Act
 Requires the CEO/CFO of public companies to submit a
statement with certain filings certifying that the filing “fully
complies” with the Exchange Act reporting requirements and
“fairly presents” in all materials respects the company’s financial
condition and results of operations.
 Applies to each Form 10-K and Form 10-Q filed by a company
subject to Section 13(a) or 15(d) of the Exchange Act, as well as
to Forms 20-F filed by foreign issuers or any 11-K filed by an
employee benefit plan.
 Section 906 certifications are not required to be included with
8-K and 6-K or with proxy statements.
Certification/Disclosure
Controls & Procedures
 You already have procedures
 Create disclosure committee
 Review and document Your disclosure controls and
procedures
 Flow down certification
Procedural Steps
 Complete a documentation file
 Involve GC to protect privilege
 Discuss the disclosure committee’s findings with the principal
officers
 Meet with the outside auditors
 Meet with the audit committee and the board
 Complete final evaluation of disclosure controls and procedures
 Sign-off on disclosure in the periodic report and execute
principal officer certifications
II. Relationship
with Outside Auditors
Relationship with
Outside Auditors
Intent of SOX and rules is clear:

Make sure auditors act independently and don't align themselves too
closely with management

Audit committee plays a critical role in serving as the check and
balance on a company's financial reporting system
Retention of Outside
Auditors, Etc.
Section 301 of SOX requires audit committees to:
 Have independent members
 Be “directly responsible,” in its capacity as a committee of the
board, for the appointment, compensation and oversight of the work
of the outside auditor
 Put in place procedures for the submission of complaints and
concerns about auditing and accounting matters
 Have the authority to engage outside advisors and to compensate
both the advisors and the outside auditor
 Be appropriately funded by the issuer
Rules direct the national securities exchanges/associations to refuse listing
of issuers whose audit committees don't comply with the requirements
Proposed rules – not yet adopted; comment period still open (Feb. 18)
Retention and Oversight
of Outside Auditors
The audit committee must be directly responsible for the appointment,
compensation, retention and oversight of the work of any outside auditor
engaged (including resolution of disagreements between management and
the auditor regarding financial reporting) for the purpose of preparing or
issuing an audit report or related work or performing other audit, review or
attest services for the issuer, and each such outside auditor must report
directly to the audit committee

Includes power not to retain, or to terminate, the outside auditor

Includes authority to approve all engagement fees and terms

Not in conflict with any charter document or statutory (e.g., state
or foreign) provisions, such as shareholder selection of the auditor
Engagement of
Advisors and Funding
Each audit committee must have the authority to engage
independent counsel and other advisors, as it determines
necessary to carry out its duties
 Needed to perform its role effectively
Each issuer must provide appropriate funding for the
audit committee
 Don't want management to have discretion regarding
funding
Non-Audit Services
Prohibited Activities
 Section 201 of SOX prohibited accountants who audit an issuer
from contemporaneously providing 9 specific types of non-audit
services, plus any other service that the Accounting Oversight
Board determines is impermissible
 Any other non-audit service can be provided only if
pre-approved by the audit committee
Non-Audit Services
Audit Committee Pre-Approval
The audit committee must pre-approve all allowable services by the
company's auditors
May establish policies and procedures for pre-approval provided they are:
 Detailed as to the particular service
 The audit committee is informed of each service
 Not a delegation of responsibilities to management
 Designed to safeguard the continued independence of the auditors
Appointment of Designated Representatives
Disclosure of Pre-Approval Procedures in proxy statement/annual report
Limited Exceptions—de minimus; unanticipated connection
Companies should put these in place now if they haven’t already
Non-Audit Services

Bookkeeping or other services related to the accounting records or
financial statements

Financial information systems design and implementation

Appraisal or valuation services, fairness opinions or contribution-in-kind
reports

Actuarial services

Internal audit outsourcing services

Management functions or human resources

Broker or dealer, investment adviser, or investment banking services

Legal services

Expert services unrelated to the audit

Any other service that the Accounting Oversight Board determines is
impermissible
Non-Audit Services
Tax Services

Section 201 specifically states that an “accounting firm may engage in
any non-audit service, including tax services, that is not described
[above]...” after audit committee approval

The SEC’s proposed rule appeared to prohibit tax services

Significant discussion and comment about whether tax services should
be allowed

Under the final rules, accountants will be able to continue to provide tax
compliance, tax planning and tax advice to audit clients, subject to
pre-approval requirements

However, the rules prohibit auditors from representing an audit client in
tax court or other situations involving public advocacy

Close scrutiny by audit committees
Disclosure of Audit
and Non-Audit Services
Have to disclose in periodic reports all non-audit services approved by the
audit committee
Also have to disclose in the proxy statement/annual report fees paid to the
independent accountant during the past 2 fiscal years for:
 Audit services
 Audit-related services
 Tax services
 Other services
Disclosure of the audit committee's pre-approval policies and procedures
and the percent of fees paid pursuant to the de minimus exception by
category
Audit Partner Rotation
Lead partner and concurring/reviewing partner must rotate after 5
years and be subject to a 5-year "time out" period after rotation
Certain other significant “audit partners” will have a 7-year rotation
period with a 2-year time out period
“Audit partner”:
 A partner who is a member of the engagement team who has
responsibility for decision-making on significant auditing,
accounting and reporting matters that affect the financial
statements or who maintains regular contact with management and
the audit committee.
 Includes the lead partner on audits of 20% subsidiaries
 Does not include technical or industry-specific partners
Limits on Compensation
Accountant is not independent if, at any time during
the audit and professional engagement period, any
audit partner earns or receives compensation based
on that partner procuring engagements with the client
to provide any services other than audit, review or
attest services.
Cooling Off Period
Section 206 of SOX set a 1-year cooling off period before a
member of the audit engagement team can accept employment
in certain, designated positions with a company.
Under the rules, if a member of management involved in
overseeing financial reporting matters for an issuer was the lead
partner, concurring partner or any other member of the audit
engagement team who provided more than 10 hours of audit
review or attest services (with certain exceptions) within 1 year
preceding the commencement of the audit of the current year’s
financial statements, then the accounting firm is not
independent.
 Calculation of time period – could effectively be 23-month period
Communication
with Audit Committee
Accounting firm has to report, prior to the filing of its audit report with the
SEC, to the audit committee:
 All critical accounting policies and practices used by the issuer
 All material alternative accounting treatments of financial
information within GAAP that have been discussed with
management, including the ramifications of the use of such
alternative treatments and disclosures and the treatment preferred
by the accounting firm
 Other material written communications between the accounting firm
and management
Improper Influence of Auditors
Section 303 of SOX prohibits “any officer or director of an issuer, or any
other person acting under the direction thereof, to take any action to
fraudulently influence, coerce, manipulate, or mislead any...accountant
engaged in the performance of an audit of the financial statements of that
issuer for the purpose of rendering such financial statements materially
misleading.”
 Proposed rules – not final
 Rule mirrors Section 303 but instead of "for the purpose of...” uses
the words “knew or was unreasonable in not knowing that such
action could, if successful, result in rendering financial statements
materially misleading”
 No Scienter/Intent Test?
 Persons acting "at the behest or on behalf of” officers or directors v.
“under the direction”
 Specific examples of improper action or influence
Additional Practical
Considerations — What
You Should Be Doing
 Effective dates
 Review and amend (as necessary) audit committee
charters
 Resolving disputes with auditors
 What if there is an accounting mistake?
III. Boards and Committees
The Regulatory Landscape
SOX
 Corporate governance provisions primarily impact audit committees
New York Stock Exchange and NASDAQ Proposed Listing Standards
 Boards of directors
 Audit committees and auditor independence
 Nominating/corporate governance committees
 Compensation committees
The Board of Directors
NYSE
 Majority of “independent” directors
 “No material relationship” with company
 Five year “cooling-off” period for employees of company and
outside auditor (includes immediate family members)
 Board must determine independence of each director
 Board may adopt categorical independence standards
NASDAQ
 Objective independence standards
 Look back three years
 Greater of 5% or $200,000 for business relationships
Board Committees — NYSE
Structure and responsibilities
 Audit, compensation, nominating/corporate governance committees
required
 Composed entirely of independent directors
Charters — Key committees must have charters that:
 Address purpose and responsibilities enumerated by NYSE
 Provide for annual performance evaluation
Outside advisors
 Audit committee must have authority to retain advisors without
Board approval
 Compensation, nominating/corporate governance committees
should have sole authority to retain advisors
Board Committees — NASDAQ
Structure and responsibilities
 Audit committee required
 Compensation and nominating/corporate governance committees
not required, but
 Director nominations and compensation of Section 16 officers
must be approved by:
 An independent committee or
 “Independent” committee may have 1
non-independent director
 A majority of the independent directors
Charters
 Audit committee must have charter that addresses responsibilities
mandated by SOX
The Audit Committee
Qualifications mandated by SOX:
 Members may not:

Receive fees other than for serving as a director
 Direct and indirect payments
 Also prohibited under NYSE proposals

Be an “affiliated person” of company or its subsidiaries
 Audit committee financial expert

Disclosure

Definition

Safe harbor
The Audit Committee
Responsibilities mandated by SOX:
 Relationship with outside auditor


SOX — “Directly responsible” for appointment,
compensation and oversight
NYSE — Sole authority to hire and fire, including to
approve all audit engagement fees and terms
 Pre-approve all audit and permissible non-audit services
 Authority to engage and compensate outside advisors
 Establish procedures for receiving complaints about auditing
and accounting matters
The Audit Committee
NYSE proposals require that charter address specific responsibilities,
including:
 Discussing financial statements with management and outside
auditor, including MD&A
 Discussing company policies on earnings releases, financial
information and earnings guidance provided to analysts and rating
agencies
 Holding periodic private sessions with management, internal
auditors and outside auditor
 Discussing policies on risk assessment and risk management
 Setting hiring policies for former employees of outside auditor
NASDAQ: Charter must cover items mandated by SOX
The Nominating/Corporate
Governance Committee
NYSE proposals require that charter address:
 Committee’s purpose, which must be to:


Identify individuals qualified to become Board members, and
select (or recommend that Board select) director nominees
Develop and recommend corporate governance principles to
Board
 Committee’s responsibilities, which must reflect:

Board criteria for selecting new directors

Oversight of Board and management evaluations
The Nominating/Corporate
Governance Committee
Optional responsibilities that many companies are including in their charters:
 Make recommendations to the Board regarding the structure, composition
and functioning of the Board and its committees
 Review and recommend retirement and other tenure policies for directors
 Review other public company directorships held by or offered to directors
and senior officers
 Review and assess the channels through which the Board receives
information and the quality and timeliness of information received
 Review and recommend changes to director compensation

May be done in whole or in part by compensation committee at some
companies
The Compensation Committee
NYSE proposals require that charter address:
 Committee’s purpose, which must be to:


Discharge Board responsibilities relating to compensation of
executives
Produce annual report on executive compensation for inclusion
in proxy statement
 Committee’s responsibilities, which must be to:


Review and approve corporate goals and objectives relevant to
CEO compensation, evaluate CEO performance in light of
objectives, and set CEO compensation based on evaluation
Make recommendations to Board about incentivecompensation and equity-based plans
The Compensation Committee
Optional responsibilities that many companies are including in their
charters:
 Oversee the company’s overall compensation structure, policies
and programs and assess whether that structure establishes
appropriate incentives for management and employees
 Monitor compliance by officers and directors with the company’s
stock ownership guidelines
 Review and recommend employment agreements and severance
arrangements for executives
 Review succession plans relating to the CEO and other senior
officers

May be done in whole or in part by nominating/corporate
governance committee at some companies
IV. Other Governance Issues
Codes of Ethics
Codes of ethics for senior financial officers (SOX)
 Also covers principal executive officers under SEC rules
 Definition
 Disclosure

Whether company has code

Alternatives
 File a copy of code with 10-K
 Post on website
 Provide copies on request

Changes or waivers on 8-K or website
 Effective Dates

July 15, 2003

December 15, 2003 (smaller issues)
NYSE-listed companies must adopt and post on their websites code(s) of business conduct and
ethics for:
 Employees
 Officers
 Directors
NASDAQ-listed companies must adopt a code of conduct and make it public. It must meet the
SOX and SEC rule requirements and provide for an enforcement mechanism.
Codes of Ethics, Continued
Under the NYSE proposals, a company’s code of conduct must:
 require that any waivers of the code for directors or executive officers be
made only by the board or a board committee and that these waivers be
promptly disclosed to stockholders; and
 contain compliance standards and procedures that provide for prompt and
consistent action against violations
At a minimum, the code of conduct should address:
 conflicts of interest
 corporate opportunities
 confidentiality
 fair dealing
 protection and proper use of company assets
 compliance with laws, rules and regulations, including laws on insider
trading
 encouraging the reporting illegal or unethical behavior
New Standards of Professional
Conduct For Attorneys

Adopted January 23, 2003

Rules implement Section 307 of the SOX

Effective 180 days after publication in the Federal Register (late July or
early August)

Additional 60-day comment period for proposed “noisy withdrawal”
requirements
What Will The Rules
Require Attorneys To Do?
 An attorney must report evidence of a material violation by an
issuer or its agent “up the ladder” to the issuer's chief legal
counsel or the chief legal officer and the CEO (or to the
Qualified Legal Compliance Committee, if the issuer has created
one).
 If the chief counsel or CEO does not “respond appropriately” to
the evidence, the attorney must report the evidence to the audit
committee, another independent committee or the full board of
directors.
What Is A Qualified
Legal Compliance Committee?

Consists of at least one member of the issuer's audit committee and
two or more additional, independent directors

May be created by the issuer as an alternative procedure for reporting
evidence of material violations

Responsible for receiving and reviewing evidence of material violations,
and recommending appropriate issuer responses
What Will The Rules
Permit Attorneys To Do?
An attorney may, without the consent of the issuer-client, reveal
confidential information related to the representation to the extent that
the attorney reasonably believes necessary:
 To prevent the issuer from committing a material violation
likely to cause substantial injury to the financial interests or
property of the issuer or investors;
 To prevent the issuer from committing an illegal act; or
 To rectify the consequences of a material violation or illegal
act in which the attorney's services have been used.
 Note possible conflict with state law obligations.
To Whom
Will The Rules Apply?
 The rules will apply to attorneys “appearing and practicing”
before the SEC in the representation of issuers, but the
proposed definition of “appearing and practicing” has been
narrowed significantly.

Under the final rules, a covered attorney is one who provides
legal services to an issuer and has an attorney-client
relationship with that issuer. This includes the issuer's in-house
attorneys and its outside counsel.

If the representation involves preparing or reviewing documents
to be filed with or submitted to the SEC, the attorney must have
notice that such documents will be filed with or submitted to the
SEC.
What Evidence Will Trigger An
Attorney’s Reporting Obligations?
 The rules contain an objective standard.
 An attorney’s reporting obligation will be triggered only if he or
she has “credible evidence” based upon which it would be
unreasonable for a prudent and competent attorney not to
conclude that it is “reasonably likely” that a material violation has
occurred, is occurring or is about to occur.
What Happened To The Proposed
“Noisy Withdrawal” Requirements?
The proposed rules would have required an attorney to withdraw and
report his or her withdrawal to the SEC if the board failed to respond
appropriately to evidence of a material violation.
 The SEC received numerous comments from attorneys, issuers
and others concerned about the impact these provisions could have
on the attorney-client relationship.
 In response to comments, the SEC has revised the noisy
withdrawal provisions and will extend the comment period for an
additional 60 days.
 The revised proposal still would require attorney withdrawal, but
would require the issuer (rather than the attorney) to disclose
publicly the attorney's withdrawal.
Questions?
Thank You For Attending
Brian Lane
Ronald O. Mueller
Amy L. Goodman
Stephen I. Glover
Gregory T. Davidson