(The news featured below is a selection from the news covered in the Federal Securities Report Letter, which is distributed to subscribers of the Federal Securities Law Reports.)

Commissioner Atkins Details Sarbanes-Oxley Impact on Foreign Issuers

Pledging that the SEC is interested in finding the common ground between the United States and the European Union approach to corporate governance, SEC Commissioner Peter Atkins examined the Sarbanes-Oxley Act and the recent Commission rulemaking implementing the act in remarks at the University of Cologne, Germany. Broadly, he is hopeful that the Sarbanes-Oxley Act can help company directors navigate the natural tension between their role as business advisors and their role as monitors of management on behalf of the stockholders' ownership interests.

He believes that one effect of the act will be to make board members more inquisitive. Thus, questions that might have seemed to be hostile to management two years ago will now be seen to be in furtherance of a director's function. Since some of the recent problems concerned corporate managers using the corporation as a "personal piggy bank" or other theft by management of corporate assets, he views the act's emphasis on a board's oversight function as a step in the right direction.

Commissioner Atkins said that the SEC will be mindful of the special considerations and needs of non-U.S. issuers, adding that for many years U.S. investors have been seeking opportunities to invest in the securities of foreign issuers, including German issuers. Similarly, he remarked that the SEC has long recognized the importance of the globalization of the securities markets both for investors looking for increased diversification and international entities looking for capital-raising opportunities in different and larger, markets. He noted that over 1,300 non-U.S. corporations from 59 countries file reports with the SEC, as compared with approximately 400 issuers from less than 30 countries in 1990.

More specifically, Commissioner Atkins said that one of the most significant aspects of the Sarbanes-Oxley Act is expanding the role and duties of audit committees. The act requires audit committee to be responsible for the outside auditor relationship, including the responsibility for the appointment, compensation, and oversight of a company's outside auditor. And, the act requires that members of the audit committee be independent from company management. The SEC released proposed audit committee rules last month and the act requires final rules by late April 2003.

The commissioner recognizes that many foreign issuers already have independent audit committees as part of their corporate governance structure. While he has often stated that a one-size-fits-all approach never works, and this is especially true in the non-U.S. issuer context, Mr. Atkins emphasized that there is almost universal support for some form of independent check on company management by a disinterested board. In this regard, he mentioned that the German corporate governance code makes recommendations regarding obtaining more independence of the supervisory board members from company management.

The SEC has incorporated necessary changes to accommodate the German requirement of non-management employees' serving as members of a company's audit or supervisory board, noted Commissioner Atkins, even though these employees would often not meet the definition of independence. The SEC has no interest in creating conflicts with local law, he avowed, especially when these employees actually represent non-management interests. Thus, in its rule proposal, the SEC provided that, under certain circumstances, these individuals would be exempt from the independence requirements.

The Commission has made similar exemptions for the unique needs of other countries' practices. For example, accommodations were made for representation of controlling shareholders on audit committees. Similarly, the SEC has acknowledged the practice where foreign governments sit on audit committees, even if they do not satisfy Commission independence requirements. In keeping with the SEC's disclosure tradition, however, the agency also would require a foreign issuer who uses an exemption to audit committee independence to disclose this information to U.S. investors.

Complying with a Sarbanes-Oxley Act mandate, the SEC recently adopted rules requiring the disclosure of whether a company has a financial expert on its audit committee and defining a financial expert. The rules require every issuer to disclose whether it has a financial expert on its board and whether the financial expert is independent from management. Foreign issuers, however, will not be required to make this disclosure until the final rules regarding audit committees are in place. According to Commissioner Atkins, the SEC decided to delay the disclosure requirement based on a recognition that foreign issuers have never been subject to independent audit committee disclosure and that imposing this financial expert disclosure requirement on them in such a short timeframe would be unfair. The SEC trusts that non-U.S. issuers will be more comfortable with this disclosure requirement by the time the overall audit committee rules are effective.