(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.)

Pitt Views Application of Sarbanes-Oxley to Foreign Issuers, Accountants

Noting that the Sarbanes-Oxley Act makes no distinction between U.S. issuers and foreign private issuers listed in the United States, SEC Chairman Harvey L. Pitt vowed to implement the act in a way that is fully consistent with its purpose. While some have urged the Commission to exercise its broad exemptive authority when crafting regulation under the Sarbanes-Oxley Act, said the chairman, the agency has little latitude to use such authority in the case of legislation enacted with unmistakable clarity of purpose less than three months ago. On a separate matter, Chairman Pitt said that the SEC is evaluating a proposal to allow foreign exchanges to operate in the U.S. so long as their securities are offered only to sophisticated investors. Mr. Pitt made his remarks in speeches at a Financial Times seminar in London and a meeting of chartered accountants in Brussels.

In recent speeches, European Union Commissioner for Internal Markets, Frits Bolkestein has expressed concern that the application of the Sarbanes-Oxley Act to European companies with a secondary listing in the United States may create undesirable extraterritorial consequences and unnecessary difficulties. While noting that foreign companies can expect that many of the new Sarbanes-Oxley Act rules will apply to them, Mr. Pitt did promise to conduct rulemaking in a way that accommodates the home country requirements and regulatory approaches of the home jurisdiction of foreign registrants. Accommodation for foreign private issuers is more likely to occur in corporate governance rulemaking than in implementing the act's disclosure and certification requirements. The chairman emphasized that basic disclosure standards have been and will be generally the same for U.S. and foreign issuers that access U.S. markets, including the certification of disclosure or other procedures to ensure the integrity of disclosure.

The Sarbanes-Oxley Act also introduces federal law and the SEC into a number of new areas of corporate governance, however, including requirements for an audit committee of independent directors for listed companies and prohibitions on loans by a company to its officers and directors. The audit committee provisions in particular could have a potentially broad impact on the internal corporate governance practices of reporting companies. For example, the act includes provisions designed to strengthen the role of audit committees. By April 26, 2003, the SEC must adopt rules directing U.S. markets to adopt their own standards prohibiting listing securities of any issuer that is not in compliance with new standards of audit committee responsibility and independence.

Under these standards, an issuer's audit committee must be composed of independent directors and be directly responsible for the appointment, compensation and oversight of the issuer's audit firm. The audit committee also must establish procedures for handling complaints regarding accounting or internal control matters of the issuer, including confidential methods for addressing concerns raised by employees. Many foreign jurisdictions do not require issuers to have audit committees, although some are studying their possible use. Also, countries such as Germany require that employees serve on supervisory boards whose responsibilities include audit oversight functions. Under the Sarbanes-Oxley Act, such employees would not be viewed as independent.

The SEC is aware that some of the requirements for audit committees under Sarbanes-Oxley may go beyond or conflict with foreign private issuers' local requirements. More subtly, some of the abuses addressed by the Sarbanes-Oxley Act may be addressed in other jurisdictions in different ways from those required or mandated by the Act. With these issues in mind, the SEC is conducting a "continuing dialogue." Chairman Pitt also urged foreign companies to actively participate in the SEC's rulemaking process by letting the Commission know when its rule proposals conflict with local law or local stock exchange requirements, or when problems that proposals are intended to address are addressed in alternative ways in other jurisdictions.

The European Union is also concerned that the Sarbanes-Oxley Act requires foreign public accounting firms that audit SEC-registered issuers to register with the new public company accounting oversight board and be subject to its authority. While noting that these concerns will receive careful consideration, the SEC chairman said that many of the U.S. reforms have potential value for Europe and should be adopted and adapted if they can benefit investors. Mr. Pitt also pointed out that the SEC or the new board may exempt any foreign public accounting firm from the Sarbanes-Oxley Act or the rules adopted under the act's authority.

Once the board is operational, promised Mr. Pitt, both it and the SEC will explore the basis and need for exempting foreign audit firms. Ultimately, the SEC must balance the fundamental regulatory objectives of the Sarbanes-Oxley Act with its role as one of many regulators in the community of nations. Mr. Pitt pledged to work closely with EU accountants in making these determinations and to give real credence to the auditor oversight approaches of other nations.

Separately, Mr. Pitt expressed concern about a European Community proposed directive that would establish minimum requirements for group-wide supervision of financial conglomerates and mixed financial holding companies doing business in the EU. While he understands that the proposed directive is designed to achieve effective prudential oversight of cross-sector groups, Mr. Pitt said that its potential extraterritorial reach troubles both the SEC and U.S. securities firms. If, for example, EU authorities charged with making an equivalence determination maintain that the SEC's supervision of securities firms at the holding company level is not equivalent to the EC's standards, the likely result would be to increase the cost to U.S. firms of doing business in Europe and place them at a competitive disadvantage with European-based firms.

To the extent that equivalence signals an effort to move towards an approach based on reciprocity, Mr. Pitt welcomes the effort. But to the extent equivalence is really a means of having a coordinator in the EU evaluate the quality of the U.S. regulatory regime, that approach will be counter-productive and will not add to investor protection. Mr. Pitt believes that the U.S. approach to the supervision of securities firms is as effective as that in the proposed directive.