Securities News

SEC Requires Exchange Listing Standards for Audit Committees

Washington, D.C., April 1, 2003 — The Securities and Exchange Commission today voted to adopt rules directing the national securities exchanges and national securities associations to prohibit the listing of any security of an issuer that is not in compliance with the audit committee requirements established by the Sarbanes-Oxley Act of 2002. The new rules and amendments implement the requirements of Section 10A(m)(1) of the Securities Exchange Act of 1934, as added by Section 301 of the Sarbanes-Oxley Act of 2002.

Under the new rules, national securities exchanges and national securities associations will be prohibited from listing any security of an issuer that is not in compliance with the following requirements.

• Each member of the audit committee of the issuer must be independent according to the specified criteria in Section 10A(m).
   
• The audit committee must be directly responsible for the appointment, compensation, retention and oversight of the work of any registered public accounting firm engaged for the purpose of preparing or issuing an audit report or performing other audit, review or attest services for the issuer, and the registered public accounting firm must report directly to the audit committee.
   
• The audit committee must establish procedures for the receipt, retention and treatment of complaints regarding accounting, internal accounting controls or auditing matters, including procedures for the confidential, anonymous submission by employees of concerns regarding questionable accounting or auditing matters.
   
• The audit committee must have the authority to engage independent counsel and other advisors, as it determines necessary to carry out its duties.
   
• The issuer must provide appropriate funding for the audit committee.

The new rules will establish Section 10A(m)'s two criteria for audit committee member independence.

• Audit committee members must be barred from accepting any consulting, advisory or compensatory fee from the issuer or any subsidiary, other than in the member's capacity as a member of the board or any board committee.
   
• An audit committee member must not be an affiliated person of the issuer or any subsidiary apart from capacity as a member of the board or any board committee.

The new rules will apply to both domestic and foreign listed issuers. It is important to note that, based on significant input from and dialogue with foreign regulators and foreign issuers and their advisers, several provisions, applicable only to foreign private issuers, have been included that seek to address the special circumstances of particular foreign jurisdictions. These provisions include

• allowing non-management employees to serve as audit committee members, consistent with "co-determination" and similar requirements in some countries;
   
• allowing shareholders to select or ratify the selection of auditors, also consistent with requirements in many foreign countries;
   
• allowing alternative structures such as boards of auditors to perform auditor oversight functions where such structures are provided for under local law; and
   
• addressing the issue of foreign government shareholder representation on audit committees.

The new rules also will make several updates to the Commission's disclosure requirements regarding audit committees, including updates to the audit committee financial expert disclosure requirements for foreign private issuers.

The Commission voted to establish two sets of implementation dates for listed issuers. Generally, listed issuers will be required to comply with the new listing rules by the date of their first annual shareholders meetings after Jan. 15, 2004, but in any event no later than Oct. 31, 2004. Foreign private issuers and small business issuers will be required to comply by July 31, 2005.

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	Did You Know?
	Transfer Trades: Entries made upon the books of Futures Commission Merchants Transfer Trades: Entries made upon the books of Futures Commission Merchants for the purpose of: (1) transferring existing trades from one account to another within the same firm where no change in ownership is involved; (2) transferring existing trades from the books of one FCM to the books of another FCM where no change in ownership is involved. Also called Ex-Pit Transactions.