Presentation at State Association of County Retirement Systems SACRS THE SARBANES-OXLEY ACT OF 2002 AND THE IMPACT ON PUBLIC EMPLOYEE RETIREMENT SYSTEMS Presented by Thomas A. Hickey, III Kirkpatrick & Lockhart LLP 75 State Street Boston, Massachusetts 02109 November 8-12, 2004 Anaheim, California
TABLE OF CONTENTS Overview of Sarbanes-Oxley Act of 2002 Chief Executive Officer/Chief Financial Officer s Certification and Code of Ethics Board of Directors Responsibilities Audit Committees and Attorney Conduct Considerations for Public Plans 2
Overview of the Sarbanes-Oxley Act of 2002 Enacted by Congress on July 30, 2002 Most sweeping securities laws reform since the New Deal era Establishing a comprehensive framework to modernize and reform the oversight of public company auditing, improve quality and transparency in financial reporting by public companies and strengthen independence of auditors The law s primary goals are to remedy auditing failures and deficiencies in corporate governance, responsibility and disclosure 3
Establishment of Public Company Accounting Oversight Board ( PCAOB ) supervised by the SEC board powers to set auditing, quality control, and ethics standards for accounting firms that audit public companies accounting firms which prepare or issue audit reports for public companies must register and submit to the PCAOB s authority Extensive reform regarding auditor independence prohibits registered firms from providing certain non-audit services firms need to rotate lead or coordinating partner and their review partner 4
Significant measures to deter and punish misconduct by corporate officers and directors Expand officers responsibility for their company s financial disclosures New limits and reporting requirements regarding insider transactions, harsh new penalties for fraud, obstruction of justice, retaliation against whistleblowers and other misconduct Basic purpose Response to financial fraud at Enron, WorldCom and other corporations Restore investor confidence in capital market Acknowledge importance of shareholder value by strengthening the role of directors as representatives of the shareholders and reinforcing the role of management as stewards of shareholder interests 5
Chief Executive Officer/Chief Financial Officer s Certification and Code of Ethics Chief Executive Officer/Chief Financial Officer certification of specific issues in quarterly and annual reports, e.g., does not contain untrue statement of a material fact or omit to state a material fact, on my knowledge the financial information fairly presents the financial condition, responsible for establishing and maintaining disclosure controls and procedures, etc. Civil and criminal penalties, e.g., $5,000,000-$25,000,000 and up to 20 years in prison Code of Ethics for each public company which is designed to deter wrongdoing and to promote among other things honest and ethical conduct (especially conflicts between personal and professional relationship); full, fair disclosure to SEC and other public communications and prompt internal reporting of violations of the Code Public disclosure Similar certification and Code of Ethics for registered management investment companies 6
Board of Directors Responsibilities Pre-existing fiduciary duties of care and loyalty expanded to confirm company s compliance with the Sarbane-Oxley Act Determine that company has implemented appropriate internal and disclosure controls, and procedures to identify off-balance-sheet transactions SEC, NYSE, Nasdaq and AMEX emphasis on more stringent independence standards and limit amounts and types of compensation to independent directors, e.g. not independent if accepts any consulting or advisory fees, or is an affiliated person Nominating and compensation committees as well as audit committees Independent directors should constitute the majority for most listed companies, e.g., company controlled more than 50% by one individual is exempt 7
Audit Committees and Attorney Conduct A listed company s audit committee consists entirely of independent members of Board of Directors (minimum of three) Various rules on compensation, cooling off periods and auditor relationship Disclosure of audit committee financial experts Responsibilities for auditor oversight and relationship with the company Appropriate funding and outside legal counsel Complaint procedures Pre-approval of audit and non-audit services, e.g., tax preparation is permissible but design of financial systems, actuarial services, etc. may not be permitted 8
Attorney who become aware of creditable evidence of a material violation of law and breach of duty by an officer, director, employee or agent must report that evidence and may proceed up the ladder if no appropriate response Subject to disbarment Applies to registered investment companies 9
THE SARBANES-OXLEY ACT OF 2002 AND THE IMPACT ON PUBLIC Considerations for Public Plans Impact on corporate governance policies and procedures Annual meetings with managers and certification of financial statements Extends time period to file securities class action to three years of discovery of facts relevant to fraud claim and five years after the date of alleged fraud Companies required to make immediate disclosure of material changes, e.g., change in key employees 10