United States: US Securities and Exchange Commission Provides Some Relief to Non-US Issuers in Releasing Final Rules Under the Sarbanes-Oxley Act

Co-authored by Brian Lane

The US Securities and Exchange Commission (the "SEC") has recently published several final rules under The Sarbanes-Oxley Act ("SOX") to comply with the deadlines imposed by SOX for issuing such rules. In response to comments received when the rules were issued in proposed form during the autumn, the SEC has provided some relief to non-US issuers in these rules.

In this first update, we will describe the relief provided by the SEC in adopting rules relating to audit committee financial experts, codes of ethics and auditor independence. We will provide information to you regarding the treatment of non-US issuers in other rules that have been adopted by the SEC under SOX in subsequent updates.

• Rules adopted under Section 407 of SOX require each issuer to disclose whether it has at least one "audit committee financial expert" on its audit committee and whether such financial expert is independent of management. If the issuer does not have at least one such expert on its audit committee, it must disclose that fact and explain why. To qualify as an "audit committee financial expert", a person must, among other things, possess an understanding of generally accepted accounting principles and financial statements.

In recognition of the fact that a non-US issuer's financial statements may be prepared in accordance with the generally accepted accounting principles of its home country or in accordance with internationally accepted accounting standards and then reconciled to US generally accepted accounting principles in SEC filings, the new rule provides that an audit committee financial expert serving on the audit committee of a non-US issuer will be required to have an understanding of the generally accepted accounting principles used by the issuer in its primary financial statements filed with the SEC. In addition, non-US issuers will not be required to disclose whether an audit committee financial expert is independent of management until the SEC issues rules that have been proposed under Section 301 of SOX and amends Form 20-F to require such disclosure.

• Rules adopted under Section 406 of SOX require each issuer to disclose whether it has adopted a code of ethics that applies to the issuer's principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions. If an issuer has not adopted such a code of ethics, it must disclose that fact and why it has not done so. The rules also require an issuer to immediately disclose any amendments that have been made to or waivers that have been granted from its code of ethics. In recognition of the fact that non-US issuers are not required to file current reports with the SEC, non-US issuers will not be required to immediately disclose such amendments to or waivers from the code of ethics. Instead, non-US issuers will be required to report in their annual reports on Form 20-F any amendments to or waivers from the code of ethics that have been made or granted during the past fiscal year. Alternatively, a non-US issuer may elect to provide this information on its website provided that it complies with certain conditions, including disclosing the information within five business days of the occurrence of the amendment or waiver, as is the case with US issuers.
• The SEC has adopted a series of rules intended to implement the auditor independence provisions set forth in Title II of SOX, including rules relating to (i) the prohibition against the provision of certain non-audit services by independent accounting firms to issuers that are audit clients and (ii) mandatory rotation of certain partners on the audit engagement team. The final rules provide the following relief for non-US issuers and accounting firms:

An accounting firm may not provide legal services to an issuer that is an audit client. However, in recognition that in some jurisdictions it is mandatory that tax services be provided by a person who is licensed to practice law, the SEC has stated that non-US accounting firms may provide tax services to audit clients notwithstanding that such services are required by local law to be provided by persons licensed to practice law.

An accounting firm is also prohibited from providing appraisal or valuation services, fairness opinions or contribution-in-kind reports to issuers that are audit clients. In recognition of the fact that laws and regulations in certain other countries require that auditors provide contribution-in-kind reports or valuation services, the SEC has stated that the SEC staff has previously taken, and will continue to take, an ad hoc approach in considering requests for exemptive relief from non-US accounting firms in situations in which the accounting firm and the issuer are able to demonstrate that the accounting firm is not issuing an opinion on the fairness of the transaction in question.

The rules requiring mandatory rotation of partners on an audit team will become effective as of the beginning of the first fiscal year after the effective date of the final rules, which will occur 90 days after the final rules are published in the US Federal Register. In recognition that in many non-US jurisdictions partners in accounting firms were not previously subject to rotation requirements, for partners in non-US accounting firms, that first fiscal year will constitute the first year of service by those partners on the audit engagement team, without regard to the number of years that they previously have served on the audit engagement team.