04 19 2006 newsome-wilson

7/29/2019 04 19 2006 Newsome-Wilson

1/61

12006 Haynes and Boone, LLP

Sarbanes-Oxley Act of 2002

(SOX): An OverviewBy:

W. Bruce Newsome

Robert W. Wilson

Haynes and Boone, LLP

901 Main Street, Suite 3100

Dallas, TX 75202

April 19, 2006

7/29/2019 04 19 2006 Newsome-Wilson

2/61

2


SOX

SOX was signed into law July 30, 2002 to protect investorsby improving the reliability and accuracy of disclosures

made pursuant to the securities laws.

SOX provisions include, but are not limited to, the

following issues: Public Company Accounting Oversight Board

Auditor Independence

Corporate Responsibility/Governance

Enhanced Financial Disclosures Enhanced Penalty Provisions

7/29/2019 04 19 2006 Newsome-Wilson

3/61

3


To Whom Does SOX Apply?

SOX is generally applicable to all companies, regardless of

size, who are required to file reports with the SEC under

the 1934 Act or that have a registration statement on file

under the 1933 Act. Certain SOX provisions apply only to companies listed on

a national securities exchange.

Small business issuers that file reports on Form 10-QSB

and Form 10-KSB are generally subject to SOX in thesame way as larger companies.

7/29/2019 04 19 2006 Newsome-Wilson

4/61

4


Public Company AccountingOversight Board (PCAOB)

SOX established the creation of the PCAOB to oversee theaudit of public companies that are subject to the securitieslaws.

PCAOB is charged with several duties including:

Registering public accounting firms that prepare auditreports;

Establishing auditing, quality control, ethics,independence, and other standards relating to the

preparation of audit reports; and

Conducting inspections of registered public accountingfirms and conducting investigations and disciplinary

proceedings, where justified, concerning registeredpublic accounting firms.

7/29/2019 04 19 2006 Newsome-Wilson

5/61

5



Pursuant to SOX, the SEC has auditor independencerequirements that are applicable to all public companies,

regardless of size, and include the following:

Prohibition of certain non-audit services;

Requirement of audit committee pre-approval of allaudit and non-audit services;

Audit partner rotation;

Auditor reports to the audit committee;

Certain prohibited employment relationships; and

Prohibited compensation.

7/29/2019 04 19 2006 Newsome-Wilson

6/61

6



Prohibition of certain non-audit services: SOX Section 201 prohibits a registered accounting firm

from providing the following non-audit servicescontemporaneously with an audit:

Bookkeeping or other services related to the

accounting records or financial statements of the auditclient;

Financial information systems design andimplementation;

Appraisal or valuation services, fairness opinions, orcontribution-in-kind reports;

Actuarial services;

7/29/2019 04 19 2006 Newsome-Wilson

7/61



Prohibition of certain non-audit services (cont.): Internal audit outsourcing services;

Management functions or human resources;

Broker or dealer, investment advisor, or investmentbanking services; and

Legal services and expert services unrelated to the

audit.

Registered public accounting firms are not prohibited from

providing tax compliance, tax planning, or tax advice to

audit clients, subject to the normal audit committee pre-

approval requirements.

7/29/2019 04 19 2006 Newsome-Wilson

8/61



Pre-approval requirements and audit partner rotation: SOX requires that all audit and non-audit services be pre-

approved by the audit committee of the issuer. A de

minimus exception does apply to this requirement under

certain circumstances. SOX makes it unlawful to provide audit services to an

issuer if the lead (or coordinating) audit partner (having

primary responsibility for the audit), or the audit partner

responsible for reviewing the audit, has performed audit

services for that issuer in each of the 5 previous fiscal

years of that issuer.

7/29/2019 04 19 2006 Newsome-Wilson

9/61



Audit reports, prohibited relationships and compensation:

SOX requires all registered public accounting firms to

timely report to the respective audit committee:

All applicable critical accounting policies and practices; All alternative treatments of financial information

within generally accepted accounting principles that

were discussed with management; and

Other material written communications between theaccounting firm and management.

7/29/2019 04 19 2006 Newsome-Wilson

10/61


Auditor IndependenceAudit reports, prohibited relationships and compensation

(cont.):

SOX makes it unlawful for a registered public accountingfirm to perform any audit service for an issuer if the chiefexecutive officer, controller, chief financial officer, chiefaccounting officer, or any person serving in an equivalent

position for the issuer, was employed by that accounting firmand participated in any capacity in the audit of that issuerduring the one year period preceding the date of the initiationof the audit.

SOX provides that an accountant is not independent of an

audit client if, at any time during the engagement, any auditpartner earns or receives compensation based on the auditpartner procuring engagements with that client, other thanaudit or attest services.

7/29/2019 04 19 2006 Newsome-Wilson

11/61


Corporate Responsibility/Governance NASDAQ Stock Market, Inc. (NASDAQ), The American Stock

Exchange (AMEX) and SOX require issuers to have in place several

corporate governance measures, including:

Certain board composition measures;

Independence requirements;

Audit Committee requirements; CEO/CFO certifications;

Improper auditor influence prohibitions;

Reimbursement requirements;

Director & officer bars;

Certain insider trading requirements; and

Enhanced attorney responsibilities.

7/29/2019 04 19 2006 Newsome-Wilson

12/61



Board Composition and Independence: NASDAQ and AMEX each require listed companies to

have a majority of independent directors except for (i)

controlled companies, (ii) foreign companies, and (iii)

small business issuers. The board of directors must

affirmatively determine that each director does not have a

material relationship with the listed company, which would

interfere with the exercise of independent judgment.

Independent director means a person other than an

officer or employee of the company or any parent orsubsidiary and also excludes the following:

7/29/2019 04 19 2006 Newsome-Wilson

13/61



Board Composition and Independence (cont.)

A director who is, or during the past three years was,

employed by the company or by any parent or subsidiaryof the company, other than prior employment as an

interim Chairman or CEO;

7/29/2019 04 19 2006 Newsome-Wilson

14/61




A director who accepts or has an immediate familymember who accepts any payments from the company orany parent or subsidiary of the company in excess of$60,000 during the current or any of the past three fiscal

years (does not include compensation for board service,payments from investments, payments to a familymember who is a non-executive employee, compensationreceived for former service as interim Chairman or CEO,

benefits under a tax-qualified retirement plan, non-

discretionary compensation, certain permitted loans, andpayments from a financial institution in connection withthe deposit of funds);

7/29/2019 04 19 2006 Newsome-Wilson

15/61




A director who is an immediate family member of an

individual who is, or has been in any of the past three

years, employed by the company or any parent or

subsidiary of the company as an executive officer;

7/29/2019 04 19 2006 Newsome-Wilson

16/61




A director who is, or has an immediate family member

who is, a partner in, or a controlling shareholder or an

executive officer of, any organization to which the

company made, or from which the company received,

payments (other than those arising solely from investments

in the company's securities or payments under non-

discretionary charitable contribution matching programs)

that exceed 5% of the organization's consolidated grossrevenues for that year, or $200,000, whichever is more, in

any of the most recent three fiscal years;

7/29/2019 04 19 2006 Newsome-Wilson

17/61




A director of the listed company who is, or has an

immediate family member who is, employed as an

executive officer of another entity where at any time

during the most recent three fiscal years any of the

listed company's executive officers serve on that

entity's compensation committee; and

A director who is, or has an immediate family member

who is, a current partner of the company's outside

auditor, or was a partner or employee of the company's

outside auditor who worked on the company's audit at

any time during any of the past three years.

7/29/2019 04 19 2006 Newsome-Wilson

18/61



Audit Committee Requirements:

NASDAQ and AMEX require each issuer to have an Audit

Committee of at least three members, each of whom:

Satisfies the independence requirements of boardmembers generally, and satisfies Rule 10A-3 under the

Securities Act of 1934;

Is able to read and understand fundamental financial

statements, including a company's balance sheet,

income statement, and cash flow statement; and

7/29/2019 04 19 2006 Newsome-Wilson

19/61



Audit Committee Requirements (cont.):Additionally, each issuer must have at least one

member of the audit committee who is financially

sophisticated, in that he or she has past employment

experience in finance or accounting, requisite

professional certification in accounting, or any other

comparable experience or background which results in

the individual's financial sophistication, including, but

not limited, to being or having been a chief executive

officer, chief financial officer, or other senior officerwith financial oversight responsibilities.

7/29/2019 04 19 2006 Newsome-Wilson

20/61


Audit Committee Requirements (cont.): SOX requires all members of the Audit Committee to be

independent.

Independent means audit committee members may not,

directly or indirectly, accept any consulting, advisory orother compensatory fee from the issuer or a subsidiary

of the issuer, other than in the members capacity as a

director or as a member of any board committee.

Independent also means that a member of the audit

committee may not be an affiliated person of the

issuer or any subsidiary of the issuer.


7/29/2019 04 19 2006 Newsome-Wilson

21/61


Audit Committee Requirements (cont.):

SOX creates a safe harbor for determining affiliate status.

A person who is not an executive officer, director, or 10%

shareholder of the issuer would be deemed not to controlthe issuer and therefore would fall within the safe harbor.

A person who does not fall within the safe harbor, but

believes they do not control the issuer, can rely on a facts

and circumstances analysis.


7/29/2019 04 19 2006 Newsome-Wilson

22/61



The audit committee has responsibility for the oversight ofthe audit function.

The committee is responsible for the appointment,compensation, retention, and oversight of the work of the

independent auditor. The committee has the responsibility to resolve any

disagreements between management and the auditorregarding financial reporting.

The oversight responsibilities also include hiring and

firing the independent auditor, approving all auditengagement fees and terms, and all significant non-auditengagements of the independent auditor.


7/29/2019 04 19 2006 Newsome-Wilson

23/61



The committee must be given appropriate funding to engage

the independent auditor and outside advisors.

The committee must establish procedures for the receipt,retention, and treatment of complaints received by the listed

issuer regarding accounting, internal accounting controls, or

auditing matters, and the confidential, anonymous submission

by employees of the listed issuer of concerns regarding

questionable accounting or auditing matters.


7/29/2019 04 19 2006 Newsome-Wilson

24/61




Issuers must disclose whether a financial expert is amember of the audit committee, and if not, why not.

A financial expert must possess the following attributes:

An understanding of GAAP and financial statements;

The ability to apply GAAP in connection with the

accounting estimates, accruals and reserves; Experience preparing, auditing, analyzing or evaluating

financial statements of a complexity comparable to thatof the companys financial statements, or experience

actively supervising persons engaged in such activities; An understanding of internal controls and proceduresfor financial reporting; and

An understanding of audit committee function.

7/29/2019 04 19 2006 Newsome-Wilson

25/61




A person may qualify as an audit committee financialexpert based upon relevant experience including:

Education and experience as a principal financial oraccounting officer, controller, public accountant or

auditor or experience in one or more positions thatinvolve the performance of similar functions;

Experience actively supervising a person engaged inone of the described activities; or

Experience overseeing or assessing the performance ofcompanies or public accountants with respect to the

preparation, auditing or evaluation of financialstatements.

7/29/2019 04 19 2006 Newsome-Wilson

26/61


Corporate Responsibility/GovernanceAudit Committee Requirements (cont.):

Identification of the Audit Committee in Annual Reports Anissuer subject to the SEC proxy rules is required to disclose inits proxy statement or information statement, if action is to betaken with respect to the election of directors, whether theissuer has a standing audit committee, the names of each audit

committee member, the number of meetings held by the auditcommittee during the last fiscal year, and the functionsperformed by the committee. The members of the auditcommittee must be included, or incorporated by reference intothe annual statement.

A listed issuer is also required to disclose whether themembers of its audit committee are independent using thedefinition of independence for audit committee membersincluded in the applicable listing standards.

7/29/2019 04 19 2006 Newsome-Wilson

27/61



CEO/CFO Certifications: As part of the various corporate governance measures

required of issuers, SOX Sections 906 and 302 require

certifications to be made by the chief executive officer and

the chief financial officer of the company. SOX requires the CEO and CFO to furnish a written

certification with each SEC periodic report filed containing

financial statements certifying that the financial statements

and the disclosures therein fairly present, in all materialrespects, the operations and financial condition of the

issuer.

7/29/2019 04 19 2006 Newsome-Wilson

28/61



CEO/CFO Certifications (cont.): The criminal penalty for a false 906 certification are up

to (1) 20 years in prison for a willful violation; and (2)

ten years for a reckless and knowing violation.

SOX requires the CEO and CFO of each public companyfiling a form 10-K/10-KSB or 10-Q/10-QSB to certify (i)

that the financial statements filed with the SEC fairly

present, in all material respects, the operations and

financial condition of the issuer, (ii) as to the adequacy ofthe issuers disclosure controls and procedures and

internal controls, and (iii) as to certain other matters.

7/29/2019 04 19 2006 Newsome-Wilson

29/61



Improper Auditor Influence Prohibitions:

SOX makes it unlawful for any officer or director of anissuer, or any other person acting under the direction thereof,to take any action to fraudulently influence, coerce,manipulate, or mislead any independent or certified

accountant engaged in the performance of an audit of thefinancial statements of the issuer for the purpose of renderingsuch statements materially misleading.

The types of conduct that could be considered improperinclude, but are not limited to:

Offering or paying bribes or other financial incentives,including offering future employment or contracts fornon-audit services;

7/29/2019 04 19 2006 Newsome-Wilson

30/61



Improper Auditor Influence Prohibitions (cont.):

Providing an auditor with inaccurate or misleading

legal analysis;

Blackmailing; Making physical threats; and

Attempting to have a partner removed from the audit

engagement or threatening to cancel existing or future

engagements because the partner objects to the issuersaccounting.

7/29/2019 04 19 2006 Newsome-Wilson

31/61



Reimbursement Requirements and D&O Bars: SOX provides that if an issuer is required to restate its

financial statements because of noncompliance with

securities laws, the CEO and CFO must reimburse the

issuer for (1) any bonus or incentive or equity basedcompensation received in the 12 months prior to the

restatement and (2) any profits realized from the sale of

issuer securities within the preceding 12 months.

SOX authorizes a court to prohibit a violator of certain

SEC rules from serving as an officer or director of an

issuer if the persons conduct demonstrates unfitness to

serve.

7/29/2019 04 19 2006 Newsome-Wilson

32/61


Corporate Responsibility/GovernanceInsider Trading Requirements:

In response to certain insider trading transactions that tookplace during the Enron scandal, Congress included aprovision in SOX prohibiting certain insider transactionsduring plan blackout periods.

SOX prohibits any director or executive officer of an

issuer of any equity security from, directly or indirectly,purchasing, selling or otherwise acquiring or transferringany equity security of the issuer during a pension plan

blackout period that temporarily prevents plan participantsor beneficiaries from engaging in equity securities

transactions through their plan accounts, if the director orexecutive officer acquired the security in connection withhis or her service or employment as a director or executiveofficer.

7/29/2019 04 19 2006 Newsome-Wilson

33/61



Insider Trading Requirements (cont.):

In 2003, the SEC adopted Regulation Blackout Trading

Restriction (BTR). Under BTR, a transfer of an equity

security of an issuer during a blackout period will be

deemed to be a transfer involving an equity securityacquired in connection with service or employment as a

director or executive officer unless the director or officer

can establish by specific identification of securities that the

transfer did not involve equity securities acquired in

connection with service or employment

7/29/2019 04 19 2006 Newsome-Wilson

34/61




Blackout period generally means any period of more thanthree consecutive business days during which the ability totransfer an interest in any equity security of an issuer held inan individual account plan is temporarily suspended by such

issuer or by a fiduciary of the plan with respect to at least50% of plan participants or beneficiaries under all of theissuers individual account plans that permit participants or

beneficiaries to acquire or hold equity securities of theissuer.

Certain transactions are exempt from the trading restrictions: Acquisitions of equity securities under dividend or

interest reinvestment plans;

7/29/2019 04 19 2006 Newsome-Wilson

35/61




Purchases or sales of equity securities pursuant tocertain tax-conditioned plans, other than discretionary

transactions;

Purchases or sales of equity securities pursuant to a

contract, instruction or written plan that satisfies theaffirmative defense conditions of Rule 10b5-1(c),

unless the plan was entered into or modified during the

blackout period or at a time when the director or

executive officer was aware of the actual orapproximate beginning and ending dates of the blackout

period;

7/29/2019 04 19 2006 Newsome-Wilson

36/61




Increases or decreases in the number of equity

securities held as a result of a stock split or stock

dividend applying equally to all equity securities of that

class, including a stock dividend in which equity

securities of a different issuer are distributed, and

acquisitions of rights, such as shareholder or pre-

emptive rights, pursuant to a pro rata grant to all

holders of the same class of equity securities;

7/29/2019 04 19 2006 Newsome-Wilson

37/61




Compensatory grants and awards of equity securities

pursuant to a plan that, by its terms, permits directors or

executive officers to receive grants or awards, provides

for grants or awards to occur automatically, and specifies

the terms and conditions of the grants or awards; Exercises, conversions, or terminations of derivative

securities that were not written or acquired during the

blackout period and that meet certain other requirements;

Acquisitions or dispositions of equity securities involvinga bona fide gift or a transfer by will or the laws of descent

and distributions;

7/29/2019 04 19 2006 Newsome-Wilson

38/61




Acquisitions or dispositions of equity securities

compelled by the laws or other requirements of an

applicable jurisdiction; and

Acquisitions or dispositions of equity securities in

connection with a merger, acquisition, divestiture, or

similar transaction occurring by operation of law.

7/29/2019 04 19 2006 Newsome-Wilson

39/61




SOX provides for two remedies if the provision is violated:

Under Section 306(a)(1), a violation is treated as a

violation of the 1934 Act and subject to sanctions andSEC enforcement action.

Under Section 306(a)(2), where a director or executive

officer realizes a profit from a prohibited transaction

during a blackout period, the issuer, or a security holder

of the issuer on its behalf, may bring an action to

recover the profit.

7/29/2019 04 19 2006 Newsome-Wilson

40/61



Enhanced Attorney Responsibilities:

SOX requires an attorney to report evidence of a material

violation of securities law or breach of fiduciary duty or

similar violation by the company or any agent thereof, tothe chief legal counsel or the chief executive officer of the

company; and

7/29/2019 04 19 2006 Newsome-Wilson

41/61



Enhanced Attorney Responsibilities (cont.):

If the counsel or officer does not appropriately respond to

the evidence (adopting, as necessary, appropriate remedial

measures or sanctions with respect to the violation),

requiring the attorney to report the evidence to the audit

committee of the board of directors of the issuer or to

another committee of the board of directors comprised

solely of directors not employed directly or indirectly by

the issuer, or to the board of directors.

Section 307 applies to all attorneys, both in-house andoutside counsel appearing and practicing before the

SEC.

7/29/2019 04 19 2006 Newsome-Wilson

42/61


Corporate Responsibility/GovernanceEnhanced Attorney Responsibilities (cont.):

Appearing and practicing before the SEC includes: Transacting any business with the SEC, includingcommunication in any form;

Representing an issuer in an SEC administrativeproceeding or investigation;

Providing advice on any document that the attorney hasnotice will be filed with the SEC or incorporated into adocument that will be filed; and

Advising an issuer as to whether information or a

statement, opinion, or other writing is required underthe securities laws to be filed with or submitted to, orincorporated into any document that will be filed withthe SEC.

7/29/2019 04 19 2006 Newsome-Wilson

43/61


Corporate Responsibility/GovernanceEnhanced Attorney Responsibilities (cont.):

Section 307 makes it clear that the attorney represents theissuer and not the officers or directors or other individualsthat the attorney regularly communicates with.

The attorney owes his professional and ethical obligationsto the issuer as the organization.

Section 307 is triggered when the attorney becomes awareof evidence of a material violation, which meanscredible evidence, based upon which it would beunreasonable, under the circumstances, for a prudent and

competent attorney not to conclude that it is reasonablylikely that a material violation has occurred, is ongoing, oris about to occur.

7/29/2019 04 19 2006 Newsome-Wilson

44/61

44


Enhanced Financial Disclosures

SOX established enhanced financial disclosure obligationsupon issuers, including:

Certain disclosures in periodic reports;

Enhanced conflict of interest provisions;

Disclosures of transactions involving management andprincipal stockholders;

Managements assessment of internal controls;

Code of ethics;

Enhanced review of periodic disclosures; and

Real time issuer disclosures.

E h d Fi i l Di l

7/29/2019 04 19 2006 Newsome-Wilson

45/61

45


Enhanced Financial DisclosuresDisclosures in periodic reports:

SOX requires each financial report that contains financial

statements and is required to be prepared in accordance withgenerally accepted accounting principles, to reflect allmaterial correcting adjustments that have been identified by aregistered public accounting firm.

SOX also requires that each annual and quarterly financialreport required to be filed with the SEC disclose all materialoff-balance sheet transactions, arrangements, obligations(including contingent obligations), and other relationships ofthe issuer with unconsolidated entities or other persons, that

may have a material current or future effect on financialcondition, changes in financial condition, results ofoperations, liquidity, capital expenditures, capital resources,or significant components of revenues or expenses.

7/29/2019 04 19 2006 Newsome-Wilson

46/61

46


Enhanced Financial DisclosuresDisclosures in periodic reports (cont.):

The SEC rules, in part, require disclosure of the followinginformation:

The nature and business purpose of the off-balance sheetarrangements;

The importance of the off-balance sheet arrangements tothe issuer for liquidity, capital resources, market risk orcredit risk support, or other benefits;

The overall magnitude of a registrants off-balance sheetactivities, the specific material impact of the arrangements

on a registrant and the circumstances that could causematerial contingent obligations or liabilities to come tofruition; and

E h d Fi i l Di l

7/29/2019 04 19 2006 Newsome-Wilson

47/61

47


Enhanced Financial Disclosures Any known event, demand, commitment, trend or

uncertainty that will, or is reasonably likely to, result inthe termination, or material reduction in availability to theregistrant, of its off-balance sheet arrangements that

provide the registrant with material benefits.

Enhanced conflict of interest provisions:

SOX prohibits an issuer, including any subsidiary, fromdirectly or indirectly extending or maintaining credit, or toarrange for the extension of credit, or to renew an extensionof credit, in the form of a personal loan to any director orexecutive officer.

A preexisting extension of credit on the date of enactment ofthis section is excluded, provided there is not a subsequentmaterial modification to the extension of credit.

7/29/2019 04 19 2006 Newsome-Wilson

48/61

48



Disclosures involving management and principalstockholders:

Every person who is directly or indirectly the beneficial

owner of more than 10 percent of any class of equity

security (other than an exempted security) which isregistered pursuant to Section 12, or who is a director or an

officer of the issuer of such security, is required to file

statements of such ownership with the SEC.

7/29/2019 04 19 2006 Newsome-Wilson

49/61

49



Disclosures involving management and principal

stockholders (cont.):

The statements must be filed:

At the time of the registration of such security or the

effectiveness of the registration statement;

Within 10 days after such person becomes the

beneficial owner, director, or officer; and

If there has been a change in beneficial ownership

involving such security, by the end of the second

business day following the day on which the subjecttransaction was executed.

7/29/2019 04 19 2006 Newsome-Wilson

50/61

50



Management assessment of internal controls:

SOX requires management to make an assessment of the

issuers internal controls. The SEC requires each issuer to

include in its internal control report in the annual 10-K:

A statement of managements responsibilities forestablishing and maintaining adequate internal control

over financial reporting of the issuer;

A statement identifying the framework used by

management to conduct the required evaluation of the

effectiveness of the issuers internal control over

financial reporting;

7/29/2019 04 19 2006 Newsome-Wilson

51/61

51



Management assessment of internal controls (cont.):

Managements assessment of the effectiveness of the internal

control over financial reporting as of the end of the issuers

most recent fiscal year, including a statement as to whether

the issuers internal control over financial reporting iseffective; and

A statement that the registered public accounting firm that

audited the financial statements included in the annual report

has issued an attestation report on managements assessmentof the issuers internal control over financial reporting.

7/29/2019 04 19 2006 Newsome-Wilson

52/61

52



Management assessment of internal controls (cont.): SOX also requires reporting companies to perform

quarterly evaluations of changes that have materially

affected, or are reasonably likely to materially affect, the

companys internal control over financial reporting.

The requirement for implementing managements

assessment of internal controls is not effective until the

first fiscal year ending on or after July 15, 2007 for issuers

that are not accelerated filers.

7/29/2019 04 19 2006 Newsome-Wilson

53/61

53



Management assessment of internal controls (cont.): An accelerated filer means an issuer that first meets the

following conditions as of the end of its fiscal year:

The aggregate market value of the voting and non-

voting common equity held by non-affiliates of theissuer is $75 million or more, computed by use of the

price at which the common equity was last sold, or the

average of the bid and asked prices of such common

equity, as of the last business day of the issuers most

recently completed second fiscal quarter;

7/29/2019 04 19 2006 Newsome-Wilson

54/61

54


Enhanced Financial Disclosures The issuer has been subject to the requirements of

Section 13(a) or 15(d) of the Securities Exchange Actof 1934 for a period of at least twelve calendar months;

The issuer has filed at least one annual report; and

The issuer is not eligible to use Forms 10-KSB and 10-QSB for its annual and quarterly reports.

Code of ethics:

SOX requires issuers on their annual reports to disclosewhether or not they have adopted a code of ethics thatapplies to the principal executive officer, principal

financial officer, principal accounting officer or controller,and if the issuer has not adopted a code of ethics, why ithas not.

E h d Fi i l Di l

7/29/2019 04 19 2006 Newsome-Wilson

55/61

55


Enhanced Financial DisclosuresCode of Ethics (cont.):

SOX also requires issuers to report on Form 8-K of anychanges to its code of ethics within four days of such change.

The new Form 8-K item specifically requires disclosure of:

The nature of any amendment to the companys code ofethics that applies to its principal executive officer,

principal financial officer, principal accounting officer orcontroller, or other similar persons; and

The nature of any waiver, including any implicit waiver,from a provision of the code of ethics granted by the

company to one of these specified officers, the name of theperson to whom the company granted the waiver and thedate of the waiver.

E h d Fi i l Di l

7/29/2019 04 19 2006 Newsome-Wilson

56/61

56


Enhanced Financial DisclosuresEnhanced review of periodic disclosures and real time disclosures:

SOX requires the SEC to review disclosures on a regular andsystematic basis, and requires the SEC to review at least once

every three years, a public companys disclosures.

The SEC in its reviews will focus on:

Issuers that have made material restatements;Issuers with significant volatility in their stock price; and

Issuers with the largest market capitalization.

SOX requires issuers to disclose on a rapid and current basis

such additional information concerning material changes in thefinancial condition or operations of the issuer, in plain English.

7/29/2019 04 19 2006 Newsome-Wilson

57/61

57


Enhanced Penalty Provisions

SOX provides for several corporate accountability and

enhanced penalty provisions, including in part:

Criminal penalties for altering documents;

Changes in the statute of limitations;

Protection for whistleblowers;

Criminal penalties for defrauding shareholders; and

Penalties for false certification.

7/29/2019 04 19 2006 Newsome-Wilson

58/61

58


Enhanced Penalty ProvisionsCriminal penalties for altering documents:

SOX provides that whoever knowingly alters, destroys,mutilates, conceals, covers up, falsifies, or makes a falseentry in any record, document, or tangible object with theintent to impede, obstruct, or influence the investigation or

proper administration of any matter within the jurisdiction

of any department or agency of the United States or anycase filed under title 11, or in relation to or contemplationof any such matter or case, shall be fined under this title,imprisoned not more than 20 years, or both.

SOX also requires auditors to retain all audit and review

work papers for at least five years. Failure to comply canresult in both a fine and possible imprisonment of up to 10years.


7/29/2019 04 19 2006 Newsome-Wilson

59/61

59


Enhanced Penalty ProvisionsStatute of limitations and whistleblower protections:

SOX provides that a private right of action that involves a claim

of fraud, deceit, manipulation, or contrivance in contraventionof a regulatory requirement concerning the securities laws, may

be brought not later than the earlier of (i) 2 years after discoveryof the facts constituting the violation or (ii) 5 years after theviolation.

SOX provides protection for whistleblowers by providing thatno company may discharge, demote, suspend, threaten, harass,or in any other manner discriminate against an employee who

provides information or otherwise assists in any investigationregarding a violation of the securities laws, when the

investigation is conducted by a federal regulatory or lawenforcement agency, a member of Congress or anycongressional committee, or a person with supervisory authorityover the whistleblower.

7/29/2019 04 19 2006 Newsome-Wilson

60/61

60



Penalties for defrauding shareholders:

SOX provides that anyone who knowingly executes, or

attempts to execute a scheme or artifice to defraud any

person in connection with any security of an issuerregistered pursuant to Section 12 or to obtain, by means of

false or fraudulent pretenses, representations, or promises,

any money or property in connection with the purchase or

sale of any security of an issuer, will be subject to fine or

imprisonment of up to 25 years, or both.

7/29/2019 04 19 2006 Newsome-Wilson

61/61

Enhanced Penalty ProvisionsFalse certification:

SOX requires certification by the chief executive officer andthe chief financial officer. If the chief executive officer or

chief financial officer provide their certification knowing

that the periodic reports do not comply with the

requirements of section 13(a) or 15(d), they will be subject

to:

A fine of not more than $1,000,000 or imprisonment

of up to 10 years, or both; and

If the violation is willful, the fine increases up to a

maximum of $5,000,000 or imprisonment of up to 20

years, or both.

04 19 2006 newsome-wilson

Documents