AN EARLY TAKE ON THE SARBANES-OXLEY ACT

BOARDROOM BOOTCAMP:

SO, YOU’RE THINKING ABOUT A “BOARD PORTAL”?

BOARD REPORTING

LESSONS FROM GOLDILOCKS

KEEPING BOARD FRESH

HIRE A DETECTIVE?

THE BOARD AND BSA

A CLOSER LOOK AT MINUTES

DIRECTOR SUCCESS SKILLS

LENDING ADVICE FROM A VETERAN

MUCH MORE ABOUT MINUTES

AN EARLY TAKE ON THE SARBANES-OXLEY ACT

From the August 2002 Bank Directors Briefing. Copyright Simmons Boardman Publishing. For information or to subscribe, call Steve Cocheo, editor, 212-620-7219, scocheo@sbpub.com

Editor’s note: This item went to press just before President Bush signed the legislation. It has since been signed.

CORPORATE GOVERNANCE: The "Enron bill" will become law.

The Sarbanes-Oxley Act–-named for the Senate and House banking committee chairmen, respectively–-is a wide-ranging revamping of securities, accounting, and corporate fraud laws. Your bank will be affected by the new law, to a greater or lesser extent depending on whether it is subject to Securities and Exchange Commission reporting or not.

In the end, with the business headlines resembling a "corporate scandal of the week," the "Enron bill" became an express train, with nearly all important players determining that something was going to pass and get signed by the White House before Congress recessed for the summer.

Banking did manage to avoid a few attempts to impose regulation that would have increased burdens banks already face–-insider lending issues are the prime example.

"It was clear that the original amendment prohibiting insider loans was aimed at the practices of companies that are not in the business of making loans and not at banks or savings institutions," stated Don Ogilvie, ABA executive vice-president. Legislative language proposed by the Federal Reserve Board, which maintains Regulation O, governing insider lending, resolved things.

In issuing its own summary of the new law, ABA noted that certain provisions don’t affect banks and holding companies that aren’t subject to Securities and Exchange Commission reporting requirements. However, ABA pointed out that, in response to the new law, "the banking regulators could change their rules."

* * *

Here is a brief summary of a very detailed piece of legislation.

(1) Affecting businesses in general:

* Establishes a public company accounting oversight board to regulate accounting firms. The board, made up mostly of non-accountants, will be subject to SEC oversight.

* Establishes toughened penalties for various aspects of corporate fraud, including knowingly shredding records with the intent of obstructing investigations. Also provides protections for whistleblowers.

(2) Affecting banking companies subject to SEC reporting only:

* The same accounting firm can’t provide both audit and nonaudit services to a company, subject to exceptions that must be approved by a company’s audit committee.

* Companies must rotate their accounting firms’ lead audit partner and the firms’ reviewing partner every five years. The government also plans a one-year study of the concept of mandatory rotation of audit firms.

* Accounting firms report directly to board’s audit committee, which is directly responsible for choosing, compensating, and overseeing the audit firm.

* Audit committee must establish whistleblower procedures.

* If a company has to restate numbers due to "material noncompliance" on its part, the CEO and CFO must give back bonuses and other incentive compensation, as well as profits from related stock sales, received over the previous 12 months.

* Officers and directors would violate the new law if they mislead the audit firm.

* Loans made subject to Regulation O are acceptable. However, loans made by a nonbank subsidiary or a holding company to parties not subject to Regulation O are subject to new, highly restrictive rules on lending by corporations. (For the most part, only corporate loans outstanding as of enactment of the act would be permitted.)

* Principal officers must certify quarterly and annual reports, as of Sept. 30, 2002, filings.

* Firms must disclose if they maintain a code of ethics for senior financial officers, and notify investors whenever there is an amendment made to their code.

* Neither directors nor executive officers may deal in company’s securities during "blackout periods."

* Disclosures of significant events must be made more quickly and clearly.