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The Sarbanes-Oxley Act of 2002 and the corporate governance rulesadopted by the New York Stock Exchange [FOOTNOTE *]have raised the bar for corporateaccountability. In the areas ofcorporate governance, auditing and accounting, executive officer and directorresponsibility, insider trading and financial disclosure, Congress and the NYSEhave imposed wide-ranging new requirements of which all directors and officers,as well as all accountants, consultants, investment bankers and lawyers, shouldbe aware. This memorandum is not acomplete summary of the Sarbanes-Oxley Act or the NYSE rules. It is an overview of the new statutory andregulatory requirements applicable to NYSE-listed companies and a reminder ofthe procedures that should be followed in the current environment. While there is no change in the fundamentallegal principles applicable to the duties and responsibilities of boards ofdirectors, there is a clear change in attitude by investors and the public atlarge that could manifest itself in adverse judicial decisions and furtherlegislation. As a result, boards mustbe vigilant not only in monitoring compliance with the new laws and rules, butalso in following appropriate procedures in performing their duties. It is incumbent upon every board to ensurethat its procedures and the company’s compliance are “state of the art.” THE BOARD OF DIRECTORS Qualifications and Role of IndependentDirectors Majority of Independent Directors. The NYSErule requires that a majority of directors be independent on all listed companyboards except for those of “controlled companies,” i.e., companies of whichmore than 50 percent of the voting power is held by an individual, a group, or anothercorporation. The deadline forcompliance with this requirement is 24 months after the date the SEC approvesthe proposed rule; for companies newly listing on the NYSE, the deadline is 24months after listing. Definition of Independence. �”Independence” means: � The board mustaffirmatively determine that the director has no material relationship with thecompany (directly or as a partner, shareholder or officer of an organizationthat has a relationship with the company). �If a family member of a director is an officerof the company, the director cannot be deemed independent. � There is afive-year cooling-off period for former employees of the company, or of itsindependent auditor; for former employees of any company whose compensationcommittee includes an executive officer of the listed company; and forimmediate family members of the above. � Ownership of asignificant amount of stock, or affiliation with a major shareholder, does notby itself preclude a board of directors from determining that an individual isindependent. However, theSarbanes-Oxley Act requires the SEC to issue rules by April 26, 2003 that willpreclude any “affiliate” of the company from being a member of the auditcommittee. General Standards.� The NYSE provides that a company may adoptand disclose categorical standards to assist it in determining directorindependence, and may make a general disclosure if a director meets thesestandards. Any determination for adirector who does not meet the standards must be specifically explained. Non-ManagementDirectors.The NYSE requires thatthe non-management directors of each listed company meet without management inregularly scheduled executive sessions. �Each company must disclose either the name of the presiding director ateach session or the process by which the presiding director is chosen, and ameans for shareholders to communicate with the non-management directors. This requirement will be effective sixmonths after the date the SEC approves the proposed rule. No Requirement ofa Lead Director.There is norequirement in the NYSE rules or in the Sarbanes-Oxley Act that a company havea nonexecutive chairman of the board or a lead director. CORPORATEGOVERNANCE CommitteeStructure and Responsibilities Compensation andNominating/Governance Committees.�The NYSE rules require that every listed company, other than controlledcompanies, have a compensation committee and a nominating/governance committee,or the equivalents. Companies must establish these committees within six months of the date the SEC approves therules and have at least one independent director on each of these committeeswithin 12 months of SEC approval. Companies must have wholly independent committees within 24 months ofthe date of SEC approval, or within 24 months of newly listing. CommitteeCharters.The nominating/governanceand compensation committees must each have a published charter, which mustaddress the committee’s purpose, duties and responsibilities and provide for anannual performance evaluation of the committee. In addition, each charter should address committee memberqualifications, committee member appointment and removal, committee structureand operations (including authority to delegate to subcommittees) and committeereporting to the board. All listedcompanies must have committee charters in place within six months of SECapproval of the NYSE rules. CommitteeAuthority.The NYSE rule providesthat the nominating/governance committee should have the sole authority toretain and terminate any search firm to be used to identify directorcandidates, including sole authority to approve the search firm’s fees andother retention terms. The compensationcommittee should have the sole authority to retain and terminate a consultingfirm to assist in the evaluation of director, CEO or senior executivecompensation, including sole authority to approve the firm’s fees and otherretention terms. These powers should beset forth in the committee charters. CorporateGovernance Guidelines and Code of Ethics CorporateGovernance Guidelines.The NYSErequires that each listed company adopt and disclose a set of corporategovernance guidelines. These mustaddress director qualification standards, director responsibilities, directoraccess to management and independent advisors, director compensation, directororientation and continuing education, and management succession and provide foran annual performance evaluation of the board of directors. The corporate governance guidelines shouldset the tone for directors, officers and all employees of the company. Listed companies must have these guidelinesin place within six months of SEC approval of this rule. Code of BusinessConduct and Ethics.The NYSErequires that each listed company adopt and disclose a code of business conductand ethics. The code should addressconflicts of interest, corporate opportunities, confidentiality, fair dealing,protection and proper use of company assets, compliance with laws, rules andregulations (including insider trading laws) and the reporting of illegal orunethical behavior. The company mustpromptly disclose any waivers of the code for officers or directors. Listed companies must have this code inplace within six months of SEC approval of this rule. Financial Code ofEthics.The Sarbanes-Oxley Actrequires the SEC to adopt rules by Jan. 26, 2003, requiring companies todisclose whether they have a code of ethics for senior financial officers (andif not, why not). The code must promotehonest and ethical conduct, full, accurate and timely disclosure and compliancewith law. The SEC rules will alsorequire that any change in, or waiver of, the code of ethics will requireprompt disclosure on Form 8-K. ProfessionalResponsibility. The requirementunder the Sarbanes-Oxley Act that each audit committee establish procedures forreceiving complaints and anonymous tips from whistle-blowers ties into therequirements under the Sarbanes-Oxley Act and the NYSE rules that each companyadopt a code of ethics. These requirements will be effective under SEC rules to be adopted no later thanApril 26, 2003, and should raise the level of professional responsibility acrossthe board, from directors and executive officers to rank-and-fileemployees. Chief EthicsOfficer.Some major companies havecreated the new position of Chief Ethics Officer with a view toward helping tomeet their responsibilities under the Sarbanes-Oxley Act and the NYSE rules. InternalControls and Annual Reviews Internal ControlReport.The Sarbanes-Oxley Actrequires that each Form 10-K contain an internal control report, which willstate the responsibility of management for maintaining an adequate controlstructure and financial reporting procedures, and assess the effectiveness ofthe internal controls. The auditor mustattest to and report on management’s assessment. These requirements will be effective upon adoption ofimplementing rules by the SEC, but no deadline was established in the Sarbanes-OxleyAct. Internal AuditFunction.The NYSE requires eachlisted company to have an internal audit function. This requirement will be effective six months after SEC approvalof the rule. AnnualEvaluations.The NYSE requires thatthe performance of the board and each committee be reviewed annually to ensurethat the board and all committees are functioning effectively. ShareholderApproval of Stock Plans Voting on OptionPlans.The NYSE rule requires thatshareholders be given the opportunity to vote on allstock option plans, except employment-inducement options,option plans acquired through mergers and tax-qualified plans.� This rule will be effective immediately uponSEC approval. Broker-No-Vote.The NYSE rule precludes brokers from votingon stock option plans without customer instructions. This rule will be effective immediately upon SEC approval. Expensing ofOptions.While the Sarbanes-OxleyAct and the NYSE did not address the issue of making FASB 123 applicable to theprofit and loss statement rather than to footnote disclosure only, this issueis still very much alive and many major companies have announced voluntaryadoption. EnhancedPenalties and Enforcement CriminalLiability.The Sarbanes-Oxley Actcreates new criminal offenses and raises penalties for some existingoffenses. The act imposes severecriminal penalties for securities fraud violations, false CEO/CFOcertifications, mail and wire fraud violations and retaliation againstwhistleblowers. Obstruction ofJustice.The Sarbanes-Oxley Actcreates a new criminal offense, punishable by fine and/or imprisonment, ofcorruptly altering, destroying, mutilating or concealing a record, document orother object, or attempting to do so, with the intent of impairing the object’sintegrity or availability for use in an official proceeding. Under the same provision, it is a crime toobstruct, influence or impede any official proceeding, or to attempt to do so. OngoingObligations.The Sarbanes-Oxley Actrequires that public accountants maintain their audit or review workpapers forfive years after the end of the fiscal period in which the audit wasconcluded. The SEC is directed to issuerules to implement this provision by Jan. 26, 2003. This obligation does not arise only in thecontext of a pending proceeding or official investigation, but applies at alltimes and is punishable by fine and/or imprisonment. Equitable Relief.� The Sarbanes-Oxley Act provides that, incivil enforcement actions brought by the SEC, courts may grant any equitablerelief that is appropriate for the protection of investors. This could result in broader and moreintrusive court oversight of (and monetary remedies against) violators of theAct. NYSE ReprimandLetter.The NYSE has the power to issuea public reprimand letter to any listed company that violates the NYSE listingstandards. This will be effectiveimmediately upon SEC approval of the proposed rule. DIRECTORS’ DUTIES AND PROTECTIONS The Sarbanes-Oxley Act and the NYSE rules havenot changed the business judgment rule or the other fundamental tenets ofcorporation law applicable to boards of directors; nor have they weakened thestructures insulating directors from personal liability that have beendeveloped over the years in order to avoid discouraging competent people fromserving as directors. Directors’Duties, Compensation, Indemnification and Insurance GeneralRequirement.The basicresponsibility of directors is to exercise their business judgment to act in amanner they reasonably believe to be in the best interests of the company andits shareholders. In discharging thisobligation, directors are entitled to rely on management and the advice of thecompany’s outside advisors and auditors. In the current environment, directors should take extra care toestablish that they have a reasonable basis for such reliance. For example, directors should establish thatthey have a strong foundation for trusting the integrity, honesty and undividedloyalty of the management team upon whom they are relying and the independenceand expertise of the company’s outside advisors and auditors. DirectorCompensation.Director compensationis one of the more difficult issues on the corporate governance agenda. The form and amount of director compensationshould be determined by the compensation committee with appropriatebenchmarking against peer companies. Perquisite programs and company charitable donations to anyorganizations with which a director is affiliated should also be carefully scrutinizedto make sure that they do not jeopardize any director’s independence or createany potential appearance of impropriety. Any payments to directors for consulting or other services beyond theregular directors’ fees should be carefully considered and fullydisclosed. Note that any such paymentswill disqualify a director from audit committee service. DirectorIndemnification.Directors may beindemnified by the company to the fullest extent permitted by law. Bylaws and indemnification agreements shouldbe reviewed on a regular basis to ensure that they provide the fullest possiblecoverage. Directors can also continueto rely on statutory exculpation from personal liability for breaches of theduty of care under charter provisions put in place pursuant to Section102(b)(7) of the Delaware corporation law and similar statutes in other states. D&OInsurance.D&O coverageprovides a key protection to directors against the risk of personalliability. While such coverage hasbecome substantially more expensive, it is still available in most instances,has not been limited or restricted by the Sarbanes-Oxley Act and remains highlyuseful. It is important to note thatD&O policies are not strictly form documents and can be negotiated. Careful attention should be paid toretentions and exclusions, particularly those that seek to limit coverage basedupon a lack of adequate insurance for other business matters, or based onassertions that a company’s financial statements were inaccurate when the policywas issued. To avoid any ambiguity thatmight exist as to directors’ and officers’ rights to coverage and reimbursementof expenses in the case of a bankruptcy, many companies are purchasing separatesupplemental insurance policies covering only directors and officersand not the company (so-called “side-A” coverage) in addition to their normalpolicies covering both the company and the directors and officers individually. Conductof Board Meetings Time Commitmentand Scheduling.The typical practicefor a meeting of a board with a majority of out-of-town directors — to havemorning committee meetings followed by a full board meeting that ends atlunchtime — is no longer a viable paradigm. Directors are being criticized for not adequately monitoring thecorporations they serve; the legal community, including prominent judges, hasstated that Enron’s short meetings are evidence of failure by the directors tofulfill their fiduciary duties; and the NYSE and the Business Roundtable, aswell as various organizations representing investors, have advocated moreextensive agendas for boards and committees and more extensive discussion andreview by directors. These agendas andduties make it difficult, if not impossible, to properly discharge thedirectors’ obligations in the four-to-five hour timeframe that has becomecustomary. Time Commitmentand Scheduling — A New Paradigm.Inorder to provide the time necessary for board meetings in this environment,committees with extensive agendas, like the audit committee, should considerscheduling their meetings early in the afternoon of the day before the boardmeeting and, to the extent required, continuing them through a workingdinner. This time frame could also beused for regular meetings of only the non-management directors.� The board meeting itself could then startearlier in the morning and continue through a working lunch, with adjournmentplanned for mid-afternoon. This scheduleshould permit the consideration and discussion of all that is necessary todayto satisfy current requirements. Annual Retreat.� Boards should consider the desirability ofan annual two-to-three-day board retreat with the senior executives at whichthere is a full review of the company’s financial statements and disclosurepolicies, strategy and long-range plans, and current developments in corporategovernance. Each retreat may be held ata location close to one of the company’s operations so as to give the directorsan opportunity to become acquainted with a number of the company’s operationsas the annual retreats are rotated among the company’s various locations.� During the retreat, meals and socialactivities can be arranged in a manner that encourages the directors on aone-to-one basis to get to know the senior executives. DirectorParticipation.Directors areexpected to attend on a regular basis board meetings and the meetings of thecommittees on which they serve and to spend the time that is needed to properlydischarge their functions. Directorsshould make sure that they are receiving from management and from the company’sauditors and outside advisors all of the information and data they deem relevantto understanding the issues before them and reaching sound business judgmentswith respect thereto. Perhaps the clearestlesson so far from the accounting and compliance crises making headlines todayis that, too often, boards did not have clear information as to what was goingon at the companies in question. Orientation andContinuing Education.Companiesshould provide comprehensive orientation for new directors (as stronglyencouraged by the NYSE) so as to acquaint them with the company’s strategy,long-range plans, financial statements, properties and operations, corporategovernance guidelines and senior executives. An annual retreat could satisfy a major portion of such an orientation,as well as provide continuing education for current directors.� THEAUDIT COMMITTEE AND THE INDEPENDENT AUDITOR AuditCommittee Membership Sarbanes-OxleyIndependence.The Sarbanes-OxleyAct requires every audit committee member to be “independent,” meaning that nomember may be an “affiliate” of the company or any of its subsidiaries, and nomember may receive any consulting, advisory or other fees from the companyother than director and committee fees. The SEC is required to direct the adoption of listing standards toimplement these requirements no later than April 26, 2003. NYSEIndependence.The NYSE rulesrequire that each member of the audit committee be “independent” within themeaning of the NYSE rules; in addition, the NYSE, like the Sarbanes-Oxley Act,precludes an audit committee member from receiving compensation from thecompany other than director and committee fees. Companies must comply with the rules governing audit committeeindependence within 24 months of the date these rules are approved by theSEC. Existing NYSE rules governingaudit committee independence continue to apply during this transition period. Membership onMultiple Audit Committees.Recognizingthe time commitment necessary to being an effective audit committee member, theNYSE recommends that each prospective audit committee member carefully evaluatethe existing demands on his or her time. If a company does not limit the number of audit committees on which itsaudit committee members serve, and if an audit committee member simultaneouslyserves on the audit committees of three or more public companies, then theboard must affirmatively determine that such simultaneous service would not impairthe ability of the director to serve effectively on the company’s auditcommittee. The determination must bedisclosed in the company’s proxy statement. �This requirement will be effective immediately upon SEC approval of therule. Financial Expert.�The Sarbanes-Oxley Act requires the SECto adopt rules by Jan. 26, 2003 requiring companies to disclose in theirperiodic reports whether at least one member of the audit committee is a”financial expert” and if not, why not. �The SEC will define the term “financial expert” in its rulesimplementing this requirement, but the definition will include: anunderstanding of generally accepted accounting principles and financialstatements; experience in the preparation or auditing of financial statements andthe application of accounting principles in connection with the accounting forestimates, accruals and reserves; experience with internal accounting controls;and an understanding of audit committee functions. The Sarbanes-Oxley Act contemplates that this experience would beacquired through education and experience as a public accountant or auditor ora principal financial officer, comptroller or principal accounting officer of apublic company, or the equivalent. FinancialLiteracy.The NYSE currentlyrequires that each member of the audit committee be “financially literate,” andthat one member have “accounting or related financial management expertise,” asthose terms may be interpreted by the board of directors in its businessjudgment. OtherAudit Committee Requirements Relationship withthe Independent Auditor.The Sarbanes-Oxley Act and the NYSE rules requirethat the audit committee directly oversee and compensate the independentauditors. This requirement will beeffective under Sarbanes-Oxley no later than the end of April 2003 and undernew NYSE rules six months after SEC approval. �The audit committee must resolve any disagreements between the auditorsand management. Whistle-BlowerProcedures.The Sarbanes-Oxley Actrequires the audit committee to establish procedures for receiving complaintsand anonymous employee tips. Thisrequirement will be effective no later than April 26, 2003. Audit CommitteeAutonomy.The Sarbanes-Oxley Actrequires the audit committee to have the ability to engage its own advisors andto have its own funding for paying its advisors. This requirement will beeffective no later than April 26, 2003. Audit CommitteeCharter.The NYSE requires thateach audit committee have a published charter that addresses the committee’spurpose and the duties and responsibilities of the audit committee.� These include retaining and terminating thecompany’s independent auditors; reviewing a report describing the auditor’squality controls and independence; discussing the annual and quarterlyfinancial statements with management and the independent auditor; discussingearnings press releases and earnings guidance provided to analysts and ratingsagencies; overseeing the company’s policies with respect to risk assessment andrisk management; periodically meeting separately with management, the internalauditors and the independent auditors; reviewing with the auditor any auditproblems or difficulties and management’s response; setting clear hiringpolicies for employees or former employees of the independent auditors; andreporting regularly to the board of directors. The charter must state that the committee has the ability to hireoutside advisors as it deems appropriate. �The charter must also provide for an annual performance evaluation ofthe committee. Every listed companymust increase the authority and responsibility of the audit committee asprovided in the NYSE rules and have the requisite charter in place within sixmonths of SEC approval of the rules. Auditor-CompanyRelationship Public CompanyAccounting Oversight Board; Effective Dates.The Sarbanes-Oxley Act creates the PCAOB to oversee the auditingof public companies. The PCAOB will beorganized and effective no later than April 26, 2003, and each public accountingfirm must register with the PCAOB within six months thereafter.� The restrictions described below that applyto registered public accounting firms will become effective upon suchregistration. These restrictions arealso subject to the adoption of rules by the SEC or the PCAOB. Independence ofAuditor.The Sarbanes-Oxley Actprohibits a public accounting firm from auditing a company if, within the yearpreceding the start of the audit, the company’s CEO, CFO, controller or chiefaccounting officer was associated with the auditor and participated in thecompany’s audit. SeparateExecutive Sessions.The NYSErequires that the audit committee periodically meet separately with management,the independent auditors and the internal auditors. This requirement will be effective six months after SEC approvalof the new rule. Rotation of AuditPartners.The Sarbanes-Oxley Actrequires that for each client of a registered public accounting firm, the leadaudit partner and the audit partner responsible for reviewing the audit must berotated at least once every five years. There is no requirement that the auditfirm be rotated, though the NYSE recommends that each audit committee considerwhether, in the interest of assuring continuing auditor independence, thereshould be regular rotation of the audit firm. �Under the Sarbanes-Oxley Act, the Comptroller General of the UnitedStates will conduct a study and review of the potential effects of requiringthe mandatory rotation of accounting firms. �A report will be issued within one year. AuditorReports.The Sarbanes-Oxley Actrequires each registered public accounting firm provide timely reports to theaudit committee regarding all critical accounting policies, alternative GAAPmethods discussed with management, the ramifications and the auditing firm’spreferred alternative, and any other material written communication between theauditor and management. ImproperInfluence.Under the Sarbanes-OxleyAct, it is unlawful for any director or officer, or any person acting undertheir direction, to “fraudulently influence, coerce, manipulate or mislead” anaccountant engaged in an audit to render the financial statements materiallymisleading. The SEC is grantedexclusive authority to enforce this requirement, which will become effectiveupon adoption of SEC rules by April 26, 2003. Limitson Non-Audit Services ProhibitedActivities.�Registered publicaccounting firms are prohibited from performing certain services to clients,including: � bookkeeping or other services related to the accountingrecords or financial statements of the audit client; � financial information systems design andimplementation; � appraisal or valuation services, fairness opinions, orcontribution-in-kind reports; � actuarial services; � internal audit outsourcing services; � management functions or human resources; � broker or dealer, investment adviser, or investmentbanking services; and � legal services and expert services unrelated to theaudit. ExpertServices.The scope of the restriction on “expert services” is not defined and mayinclude other types of consulting services. �The PCAOB is authorized to adopt rules restricting additional non-auditservices. Audit CommitteeApproval.The Sarbanes-Oxley Act provides that registered public accountingfirms may provide non-audit services to their audit clients that are notspecifically prohibited (including tax services), but such services must beapproved in advance by the audit committee (subject to limited exceptions) anddisclosed in the company’s SEC filings. �The audit committee must also approve all audit services inadvance. The SEC is directed to adoptrules by Jan. 26, 2003 to implement these requirements. RESPONSIBILITIESOF EXECUTIVE OFFICERS AND DIRECTORS CEOand CFO Certifications CEO and CFOCertification under Section 906.�There are two separate CEO/CFO certifications in the Sarbanes-OxleyAct. The certification under Section906 is effective immediately and requires that the CEO and CFO certify, as toeach 10-K and 10-Q, that the report complies with SEC regulations and fairlypresents, in all material respects, the financial condition and results ofoperations of the company, withoutqualification as to GAAP. Falsecertifications may result in significant criminal penalties. CEO and CFOCertification under Section 302.OnAug. 29, 2002, the SEC adopted rules implementing Section�302 of theSarbanes-Oxley Act, which also requires CEOs and CFOs to certify thecontents of their companies’ periodic reports. �Under the new rules, a company’s CEO and CFO are required to certify,with respect to each quarterly and annual report (and amendments), that(1)�they have reviewed the report, (2)�based on their knowledge, thereport is not misleading, (3)�based on their knowledge, the financialstatements and other financial information included in the report “fairlypresent” in all material respects the financial condition, results ofoperations and cash flow of the issuer and (4)�they are responsible forestablishing and maintaining, and have performed certain specified tasks withrespect to, the company’s “internal controls” and “disclosure controls andprocedures,” including making disclosures to the issuer’s auditors and auditcommittee regarding all significant deficiencies and material weaknesses in thecompany’s internal controls and presenting in the periodic report theirconclusions about the effectiveness of the disclosure controls and procedures. New “FairlyPresents” Standard.Thecertification as to financial information covers not only financial statementsbut all financial information, including footnotes, selected financial data andMD&A. The release states that thestandard of “fairly presents” with respect to the financial information ismeant to be broader than GAAP requirements. The standard is meant to encompass the selection and proper applicationof accounting policies, the disclosure of financial information that isinformative and reasonably reflects the underlying events and the inclusion ofother information necessary to give investors a materially complete picture ofthe issuer’s financial condition, results of operations and cash flows. Internal Controlsand Procedures.The new rules alsorequire all issuers that file reports under Section�13(a) orSection�15(d) of the Exchange Act, including foreign private issuers, toestablish and maintain an overall system of “disclosure controls andprocedures” (a newly defined term under the Exchange Act) designed to ensurethat issuers are able to timely record, process and report the information(financial and otherwise) required in their periodic and current reports anddefinitive proxy materials, and communicate this information tomanagement. Issuers must evaluate thesecontrols and procedures within the 90-day period preceding the filing date ofeach periodic report under the supervision and with the participation of theissuer’s management, including the CEO and CFO. These rules are intended to complement existing requirements toestablish and maintain “internal controls,” a term that the Exchange Actdefines in relation only tofinancial reporting and control of assets, as well as the new Section�302certification requirements. The SEC isnot requiring any particular procedures under these rules, but expects each issuerto develop a process that is consistent with its business, internal managementand supervisory practice. The SECrecommends that issuers create committees (possibly including the controller,general counsel, head of risk management, head of investor relations andpersons associated with business units) to consider the materiality of information and determine disclosure obligations ona timely basis and to report to senior management. Application ofRules Regarding Certification.Thenew certification rules apply to quarterly and annual reports filed afterAug.�29, 2002 (although the certification requirements regardingcontrols become effective for reports covering periods endingafter Aug.�29, 2002) by any issuer underSection�13(a) or 15(d) of the Exchange Act, including foreign privateissuers filing annual reports on Form�20-F or 40-F.� The certification requirements do not applyto reports on Forms�8-K or 6-K. Certification requirements with respect to investment companiesare treated separately under the new rules. �The form of certification is contained in amended forms of the periodicreports that are part of the new rules, and no wording changes to the form ofcertification are permitted. Officersproviding a false certification potentially could be subject to SEC enforcementaction for violating Section�13(a) or 15(d) of the Exchange Act, and toboth SEC and private actions for violating Section�10(b) and Rule�10b-5. SeparateCertification Requirements in Effect for Periodic Reports.�The Section�302 certification is inaddition to, and does not supersede, the certification required underSection�906 of the Sarbanes-Oxley Act. The SEC’s statement in the adopting release with respect toSection�302 certifications that reports on Forms 6-K and 8-Kare “current reports … rather than periodic (quarterlyand annual) reports” provides useful guidance that Section�906certifications for “each periodic report containing financial statements” donot apply to reports on Forms�8-K or 6-K. CEO Certificationfor NYSE.The NYSE requires thateach listed company CEO certify to the NYSE each year that he or she is notaware of any violation by the company of NYSE corporate governance listingstandards. Every listed company mustcomply with this requirement within six months of SEC approval of the rule. Due Diligence.� The effect of the CEO and CFO certificationsunder the Sarbanes-Oxley Act and the NYSE rules is that the due diligenceburden will be shared by key executives who report to the certifying officersand, in larger companies, to even lower levels of executives.� The CEO and CFO will require that theircertifications be supported by sub-certifications. Companies will develop checklists and review procedures to assistin performing the due diligence and to create a record of what was done.� This should increase both the effectivenessof internal controls and the quality of corporate responsibility at everylevel. OtherRequirements Applicable to Officers and Directors Forfeiture of CEOand CFO Bonuses.The Sarbanes-Oxley Act provides that if the company isrequired to restate its financial statements due to material noncompliance withthe financial reporting requirements of the securities lawsas a result of misconduct, the CEO and CFO must reimburse the company for anybonus or incentive- or equity-based compensation received during the yearfollowing the filing of the flawed report, as well as any profits on sales ofcompany securities during that period. �There is no requirement that the misconduct in question be that of the CEO or CFO. Officer andDirector Bar.The Sarbanes-OxleyAct lowers the standard for a court to bar a person from being a director orofficer of a company for securities law violations from “substantial unfitness”to “unfitness.” In addition, the SECmay seek a bar in an administrative proceeding. Bar on PersonalLoans.Effective July 30, 2002, theSarbanes-Oxley Act prohibits companies from making personal loans to directorsand executive officers; this requirement will essentially eliminate allpersonal loans to directors and executive officers, and, unless clarified,cashless exercise of stock options, split-dollar life insurance plans andnumerous other extensions of credit. �Existing loans may stay in place, but they may not be modified orrenewed. Certain limited classes ofloans are excepted if they are made in the ordinary course of a company’sconsumer credit business and made on the same terms as generally made to thepublic. Freeze onPayments.The Sarbanes-Oxley Act gives the SEC the authority to seek atemporary court order to freeze “extraordinary payments (whether compensationor otherwise)” to directors, officers, employees or agents of a company ifthere is an ongoing securities investigation of the company or thosepersons. The freeze will be effectivefor 45 days unless set aside by a court, and may be extended upon good causefor an additional 45 days or, if the individual is charged with any securitieslaw violation during such period, until the conclusion of any related legalproceeding. INSIDERTRADING AND FINANCIAL DISCLOSURE REQUIREMENTS InsiderTrades AcceleratedDisclosure of Insider Trades.TheSarbanes-Oxley Act amended Section�16(a) of the Securities Exchange Act of1934 to require earlier filing by corporate insiders of changes in beneficialownership on Form�4. Under theact, reports that previously were due on the tenth day of the month followingthe month in which the transaction occurred will now be due on the secondbusiness day following the transaction. �Aside from the accelerated deadline for Form�4 filings, theprincipal amendment was the expansion of the class of transactions reportableon Form�4 to include the grants, cancellations and re-pricings ofstock options and the other transactions that are exempted fromSection�16(b) “short swing profit” recovery by Rule�16b-3.� Such transactions were previously requiredto be reported only annually on Form�5. �Transactions previously reportable on Form�5, other than thosereferred to above, can still be reported on Form�5 annually.� Transactions previously exempt fromSection�16(a) reporting remain exempt under the new rules.� The new two-business-day period beginsrunning on the execution date of the transaction (generally, the trade date). SecuritiesTrading Bar.The Sarbanes-Oxley Actprecludes directors and executive officers from trading in company securitiesacquired as compensation during any employee plan blackout period; the remedy is disgorgement ofprofits. This requirement will beeffective Jan. 26, 2003. SecuritiesAnalysts Conflict ofInterest.Conflict of interestrules in the Sarbanes-Oxley Act will restrict investment bankers’ involvementwith analysts; prohibit retaliation for adverse research reports; and defineresearch blackout periods following offerings in which the firm hasparticipated as underwriter or dealer. �These rules will be implemented by SEC or stock exchange rules no laterthan July 30, 2003. ConflictDisclosure.Conflict disclosurerules in the Sarbanes-Oxley Act will require disclosure of an analyst’sholdings of company securities and any compensation or client relationshipbetween an analyst and a company (including any compensation paid to an analystbased on investment banking fees). Theserules will be implemented by SEC or stock exchange rules no later than July 30,2003. FinancialDisclosure FinancialReports.Effective July 30, 2002,the Sarbanes-Oxley Act requires that financial reports reflect “all materialcorrecting adjustments” identified by outside auditors.� The act also requires the SEC to reviewcompanies’ filings at least every three years. Off-Balance SheetTransactions.The Sarbanes-OxleyAct requires the SEC to adopt rules by Jan. 26, 2003 that companies discloseall material off-balance sheet transactions, arrangements, obligations,contingencies and other relationships of the company with unconsolidatedentities or other persons that may have a material current or future effect onoverall financials or on “significant components” of revenue or expenses.� Pro FormaInformation.The Sarbanes-Oxley Actrequires the SEC to adopt rules by Jan. 26, 2003 that pro forma financialinformation included in SEC reports or press releases be presented so as to notbe misleading. In addition, pro formainformation must be reconciled with the financial condition and results ofoperations of the company under GAAP. ��� CurrentReporting.The Sarbanes-Oxley Actrequires companies to disclose “on a rapid and current basis” such additionalinformation in plain English concerning material changes in their financialcondition or operations, which may include trend and qualitative information,as the SEC determines by rule is necessary or useful. No deadline is specified for SEC rulemaking.� This requirement has major implications andmay, depending on the SEC’s rules implementing the new laws, push the U.S.system of disclosure toward the English disclosure model.� Principles-BasedAccounting.Under theSarbanes-Oxley Act, the SEC is required to conduct a study by July 30, 2003 onthe adoption by the U.S. financial reporting system of a principles-basedaccounting system. The study willexamine the extent to which principles-based accounting and financial reportingexists in the United States, the length of time required and the methods thatwould be used to change from a rules-based to a principles-based system.� The study will also undertake a thorougheconomic analysis of the implementation of a principles-based system. Proposed Form 8-KDisclosure Rules.Prior to theadoption of the Sarbanes-Oxley Act, the SEC proposed rules designed to enhanceinvestor confidence by requiring companies to provide more current disclosureabout specified significant corporate events. �The proposed rules would add many new items to the list of events thatrequire a company to file a current report on Form 8-K: � Execution, amendment or termination of a materialagreement not made in the ordinary course of the company’s business; � Termination or reduction of a business relationshipwith a customer that would result in a loss of 10 percent or more of the company’srevenues; � Entry by the company or a third party into atransaction or agreement, or the occurrence of an event (including default oracceleration events), that would create or trigger a direct or contingentfinancial obligation that is material to the company; � Definitive commitment to take actions, including plansto exit an activity, under which material write-offs or restructuring chargeswill be incurred under GAAP; � Determination by the board (or officers where boardapproval is not required) that the company is required to record a materialimpairment charge under GAAP; � A change in the company’s credit rating or outlook, therefusal to assign a credit rating after being requested by the company, or theissuance of a credit watch on the company by a rating agency to whom thecompany provides information; � Notice from a national securities exchange orassociation that the company or its securities do not satisfy its listingstandards or have been delisted; � Notice from the company’s current or previousindependent accountants that the company should not rely on a previously issuedaudit report, or a board or audit committee conclusion that any previously issuedaudited financial statements should no longer be relied upon; � Any event (such as a lock-out period) that materiallylimits, restricts or prohibits participants in the company’s broad-basedemployee benefit, retirement or stock ownership plans from acquiring ordisposing of their plan assets, other than restrictions based on access tomaterial non-public information; � Unregistered sales of equity securities and materialmodifications to rights of securityholders (these items were formerly includedin other Exchange Act reports); � Departure of a director for any reason, or the electionof a new director other than at an annual meeting; � Departure or appointment of a company’s CEO, president,COO, CFO or chief accounting officer; and � Amendment to a company’s certificate of incorporationor bylaws not disclosed in a proxy or information statement. Disclosure ofNon-Binding Agreements.Whileagreements still under negotiation would not require Form 8-K disclosure, theproposed disclosure of the execution or amendment of material agreements wouldcover both definitive agreements, such as merger and other business combinationagreements, as well as letters of intent and other non-binding agreements.� Companies would be required to file a copyof the agreement or letter as an exhibit, together with a description of thematerial terms and any other material relationships between the parties.� More Rapid,Fuller Disclosure.The proposedrules would create a uniform filing period of two business days for all mandatedForm 8-K disclosure items, compared to the current range of five to fifteendays. Many of the proposed Form 8-Kitems would require companies to provide explanations, including management’sanalysis of the expected effect of the event on the company.� The SEC expects such explanations to be asspecific and quantitative as possible. FOREIGNPRIVATE ISSUERS TheSarbanes-Oxley Act The Sarbanes-Oxley Act does not contain anyexemption for foreign private issuers. �In particular, the following two items may require foreign companies tomake changes in their corporate governance structures. CEO/CFOCertification.The act requiresthat each annual report on Form 20-F or Form 40-F that is filed with the SECinclude a written certification by the CEO and CFO. This requirement will necessitate the creation and maintenance ofadequate internal controls to enable the officers to provide theircertifications. Independent AuditCommittees.The act requires thatevery public company create and maintain an audit committee that meetsindependence standards. TheNYSE Rules The proposed NYSE rules generally do not applyto foreign private issuers, with the following exception: Disclosure ofDifferences.The NYSE rule requiresthat a foreign private issuer disclose, in English, in its annual report or onits website, any significant ways in which its corporate governance practicesdiffer from those followed by domestic companies under NYSE listingstandards. This may be a brief, generaldisclosure rather than a detailed analysis. �Every foreign private issuer must comply with this requirement withinsix months of SEC approval of the rule. THEINTEGRITY OF THE SECURITIES MARKET In addition to the studies mentioned above, theSarbanes-Oxley Act calls for various additional studies to be undertaken, withreports to be produced within six months to one year of the act’s enactment. The studies described below are intended to examine, fromdifferent angles, the integrity of the securities market, the role of various actorsin the recent crisis and solutions to rebuild investor confidence and ensurethe quality of the market. They havethe potential of resulting in further major changes. GAO StudyRegarding Consolidation of Public Accounting Firms.� The Comptroller General of the United Statesis required to conduct a study identifying the factors that have led to theconsolidation of public accounting firms since 1989, and the present and futureimpact of that consolidation on capital formation and securities markets, bothdomestic and international. The studywill focus on possible solutions to any negative effects on capital andmarkets, including ways to increase competition and the number of availablepublic auditors. The study will alsoattempt to identify the problems faced by business organizations that haveresulted from limited competition among public auditors, including highercosts, lower quality of services, impairment of auditor independence and lackof choice. The study will considerwhether and to what extent federal or state regulations impede competitionamong accounting firms. Commission Studyof Credit Rating Agencies.The SECis required to conduct a study of the role and function of credit ratingagencies in the operation of the securities market. The study will examine the role of rating agencies in theevaluation of issuers, the importance of that role to investors and thefunctioning of the securities markets, any impediments to the accurateappraisal by rating agencies of the financial resources and risks of issuers,any barriers to entry into the business of acting as a rating agency and anymeasures needed to remove such barriers, any measures that might improve thedissemination of information concerning resources and risks of issuers whenrating agencies announce ratings, and any conflicts of interest in theoperation of rating agencies and any measures that should be taken to preventor ameliorate the effects of such conflicts. SEC Study ofSecurities Law Violators and Violations.�The SEC is required to conduct a study, based on the four-year periodfrom Jan. 1, 1998 to Dec. 31, 2001, to determine the number ofsecurities professionals (including accountants, accounting firms, investmentbankers and investment advisors, brokers, dealers and attorneys) who have beenfound to have aided and abetted a violation of the federal securities lawswithout being sanctioned or penalized in any way, and the number of securitiesprofessionals who have been primary violators of the federal securitieslaws. In addition, the study will yielda description of the violations committed by these professionals, including thespecific violations, the sanctions and penalties imposed upon them (if any),the occurrence of multiple violations by the same persons, and the amount ofdisgorgement, restitution or fines that the SEC has assessed and collected fromthe violators. SEC Study ofEnforcement Actions.The SEC isrequired to study all enforcement actions over a five-year period involvingsecurities reporting violations and financial restatements to identify areasthat are most susceptible to fraud, manipulation or inappropriate earningsmanagement. GAO Study ofInvestment Banks.The ComptrollerGeneral of the United States is required to conduct a study of whetherinvestment banks and financial advisers assisted public companies inmanipulating their earnings and obfuscating their true financialcondition. The study will address therole of investment banks and financial advisers in the collapse of Enron, inthe failure of Global Crossing, and generally in creating and marketingtransactions that may have been designed solely to enable companies tomanipulate revenue streams, obtain loans or move liabilities off balance sheetswithout altering the economic or business risks faced by the companies. Martin Lipton is a partner and Laura A. McIntosh is an associate in the New York office of Wachtell, Lipton, Rosen & Katz ( ::::FOOTNOTE:::: FN *The NYSE proposed rules remain subject to SECreview.

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