Searching for transparency: corporate responsibilities in the wake of the Sarbanes-Oxley Act

California CPA, Oct, 2002 by Horace L. Nash, Scott J. Leichtner, Nicole A. Black

The two-day deadline will, in reality, be a one-day deadline for paper filings, since a day will generally be required for transmitting the report by mail or courier to the SEC. Consequently, companies must implement procedures to help ensure compliance with the accelerated deadline.

For example, companies should consider revising their insider trading policies to require transactions by insiders to be pre-cleared. Given the shortened deadline for filing Form 4s, many insiders will grant limited powers of attorney to enable individuals, such as members of the legal department or stock administrative staff, to sign Form 4s on their behalf if they are unavailable.

By July 30, 2003, all Sec. 16 reports must be filed electronically via EDGAR and companies will be required to make Sec. 16 filings available on their websites. The SEC has encouraged early adoption of these provisions. Insiders and the companies assisting them with their filings should consider obtaining EDGAR filing numbers. Enabling filings by EDGAR generally will enhance the likelihood of timely reporting.

PROHIBITION ON PERSONAL LOANS TO INSIDERS

The Act prohibits public companies from making or arranging personal loans to their executive officers or directors, which has raised many interesting interpretive questions. For example, the Act may be interpreted to prohibit cashless exercises of stock options, in which the payment to the company of the option exercise price, including any withholding tax, is deferred until a few days after exercise when funds become available from a simultaneous sale of the exercised shares.

Until Congress or the SEC clarifies this provision, many companies will require directors and executive officers to pay the purchase price immediately upon exercise, personally or by arranging a broker's margin loan.

Loans outstanding as of July 30, 2002, are not subject to this prohibition, provided there is no material modification of the loan, or any renewal of the loan, after July 30, 2002. It's unclear whether this grandfather provision would include a commitment to make an extension of credit entered into before July 30, 2002, even if funds are not transferred until after such date.

Another difficult situation may arise for existing loans to directors or executive officers that were overdue July 30, 2002, or later become due. It seems clear that the Act prohibits a company from forgiving the outstanding loan because that would be a "material modification" of the loan. Consequently, companies must take immediate steps to ensure collection of such loans when they come due.

RELATED ARTICLE: PROHIBITED NON-AUDIT SERVICES INCLUDE

* Services related to the company's accounting records or financial statements;

* Financial information systems design and implementation services;

* Appraisal or valuation services and fairness opinions;

* Internal audit outsourcing services; and

* Legal and expert services unrelated to the audit.

Horace L. Nash is a partner and Scott J. Leichtner and Nicole A. Black are associates in the Palo Alto office of Fenwick & West LLP. Nash can be reached at hnash@fenwick.com, Leichtner can be reached at sleichtner@fenwick.com and Black can be reached at nblack@fenwick.com.