SEC Issues Final Rules on Audit Committee Financial Experts and Code of Ethics

Audit Committee Financial Experts

A company, other than a small business issuer, in its annual report for fiscal years ending on or after July 15, 2003, must disclose whether it has a financial expert serving on its audit committee. A small business issuer must comply with the audit committee financial expert disclosure requirements in its annual report for fiscal years ending on or after December 15, 2003. Alternatively, a company may include this information in its proxy statement and incorporate the disclosure by reference into its annual report.

The disclosure must include whether the board of directors has determined that the company has at least one audit committee financial expert serving on its audit committee and, if so, disclose the expert’s name. In addition, a company must disclose whether the person identified as the audit committee financial expert is independent of management. If a company does not have an audit committee financial expert, it must disclose and explain why not. A company cannot satisfy the disclosure requirements by stating that it decided not to make the determination or by only disclosing the qualifications of the audit committee members.

An audit committee financial expert is defined as an individual who has the following attributes:

• an understanding of generally accepted accounting principles and financial statements;

• the ability to assess the general application of such principles in connection with the accounting for estimates, accruals and reserves;

• experience preparing, auditing, analyzing or evaluating financial statements that present a level of complexity of accounting issues that are comparable to the complexity of issues that can reasonably be expected to be raised by the company’s financial statements;

• an understanding of internal controls and procedures for financial reporting; and

• an understanding of audit committee functions.

An individual may have acquired such attributes through education and experience as a principal financial officer, principal accounting officer, controller, public accountant or auditor or by actively supervising individuals performing these same functions.

The SEC made clear that it does not believe that an audit committee financial expert is subject to an increased duty that could expose that individual to additional liability. The SEC included a safe harbor provision under the rule which provides that an individual designated as an audit committee financial expert would not be deemed an expert for any other purpose (including Section 11 of the Securities Act) and would not have any duties or liabilities greater than those imposed on members of an audit committee generally.

Code of Ethics

A company must disclose in its annual report or its proxy statement for the fiscal year ended after July 15, 2003 whether it has adopted a code of ethics that applies to the company’s principal executive officer, principal financial officer and principal accounting officer or controller. If a company has not adopted a code of ethics, it must disclose and explain why it has not done so. The code of ethics must include written standards that are designed to promote:

• honest and ethical conduct, including conflicts of interest;

• full, accurate and timely disclosure in public reports and documents;

• compliance with applicable governmental laws and rules;

• prompt internal reporting to an appropriate person identified in the code of violations of the code; and

• accountability for adherence to the code.

A company must make its code of ethics available to the public by filing it as an exhibit to its annual report, posting the text of the code of ethics on its website, or including an undertaking in its annual report to provide a copy of its code of ethics to any person without charge upon request. A company must make immediate disclosure on Form 8-K or its web site any change to, or waiver from, the company’s code of ethics.

For more information regarding the determination of whether a company has met the requirements of an audit committee financial expert or for assistance in drafting a code of ethics, please contact one of our securities attorneys.