[Federal Register Volume 68, Number 21 (Friday, January 31, 2003)]
[Rules and Regulations]
[Pages 5110-5132]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-2018]



[[Page 5109]]

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Part IV





Securities and Exchange Commission





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17 CFR Parts 228, 229, and 249



Disclosure Required by Sections 406 and 407 of the Sarbanes-Oxley Act 
of 2002; Final Rule

  Federal Register / Vol. 68, No. 21 / Friday, January 31, 2003 / Rules 
and Regulations  

[[Page 5110]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 228, 229 and 249

[Release Nos. 33-8177; 34-47235; File No. S7-40-02]
RIN 3235-AI66


Disclosure Required by Sections 406 and 407 of the Sarbanes-Oxley 
Act of 2002

AGENCY: Securities and Exchange Commission.

ACTION: Final rule; request for comment.

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SUMMARY: We are adopting rules and amendments requiring companies, 
other than registered investment companies, to include two new types of 
disclosures in their annual reports filed pursuant to the Securities 
Exchange Act of 1934. First, the rules require a company to disclose 
whether it has at least one ``audit committee financial expert'' 
serving on its audit committee, and if so, the name of the expert and 
whether the expert is independent of management. A company that does 
not have an audit committee financial expert must disclose this fact 
and explain why it has no such expert. Second, the rules require a 
company to disclose whether it has adopted a code of ethics that 
applies to the company's principal executive officer, principal 
financial officer, principal accounting officer or controller, or 
persons performing similar functions. A company disclosing that it has 
not adopted such a code must disclose this fact and explain why it has 
not done so. A company also will be required to promptly disclose 
amendments to, and waivers from, the code of ethics relating to any of 
those officers. These rules implement the requirements in Sections 406 
and 407 of the Sarbanes-Oxley Act of 2002. We also request additional 
comments regarding the appropriate treatment of foreign private issuers 
in light of our proposed rules implementing Section 301 of the Act.

DATES: Effective Date: March 3, 2003.
    Comment Date: Comments regarding treatment of certain foreign 
private issuers should be received on or before February 18, 2003.
    Compliance Dates: Companies must comply with the code of ethics 
disclosure requirements promulgated under Section 406 of the Sarbanes-
Oxley Act in their annual reports for fiscal years ending on or after 
July 15, 2003. They also must comply with the requirements regarding 
disclosure of amendments to, and waivers from, their ethics codes on or 
after the date on which they file their first annual report in which 
the code of ethics disclosure is required. Companies, other than small 
business issuers, similarly must comply with the audit committee 
financial expert disclosure requirements promulgated under Section 407 
of the Sarbanes-Oxley Act in their annual reports for fiscal years 
ending on or after July 15, 2003. Small business issuers must comply 
with the audit committee financial expert disclosure requirements in 
their annual reports for fiscal years ending on or after December 15, 
2003.

ADDRESSES: To help us process and review your comments more 
efficiently, comments should be sent by hard copy or e-mail, but not by 
both methods. Comments sent by hard copy should be submitted in 
triplicate to Jonathan G. Katz, Secretary, U.S. Securities and Exchange 
Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. Comments 
also may be submitted electronically at the following e-mail address: 
[email protected]. All comment letters should refer to File No. S7-
40-02; if e-mail is used, this file number should be included in the 
subject line. Comment letters will be available for inspection and 
copying in the Commission's Public Reference Room, 450 Fifth Street, 
NW., Washington, DC 20549-0102. Electronically submitted comment 
letters will be posted on the Commission's Internet Web site (http://www.sec.gov).\1\
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    \1\ We do not edit personal information, such as names or 
electronic mail addresses, from electronic submissions. You should 
submit only information that you wish to make available publicly.

FOR FURTHER INFORMATION CONTACT: Ray Be, Special Counsel, N. Sean 
Harrison, Special Counsel, or Kim McManus, Attorney-Advisor, Division 
of Corporation Finance, at (202) 942-2910, or with respect to 
accounting issues, Michael Thompson, Professional Accounting Fellow, 
Office of Chief Accountant, at (202) 942-4400, U.S. Securities and 
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Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549.

SUPPLEMENTARY INFORMATION: We are adopting amendments to Form 8-K,\2\ 
Form 10-K,\3\ Form 10-KSB,\4\ Form 20-F \5\ and Form 40-F \6\ under the 
Securities Exchange Act of 1934,\7\ Regulation S-B,\8\ and Regulation 
S-K.\9\
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    \2\ 17 CFR 249.308.
    \3\ 17 CFR 249.310.
    \4\ 17 CFR 249.310b.
    \5\ 17 CFR 249.220f.
    \6\ 17 CFR 249.240f.
    \7\ 15 U.S.C. 78a et seq.
    \8\ 17 CFR 228.10 et seq.
    \9\ 17 CFR 229.10 et seq.
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I. Background

    The strength of the U.S. financial markets depends on investor 
confidence. Recent events involving allegations of misdeeds by 
corporate executives, independent auditors and other market 
participants have undermined that confidence.\10\ In response to this 
threat to the U.S. financial markets, Congress passed, and the 
President signed into law, the Sarbanes-Oxley Act of 2002 (the 
``Sarbanes-Oxley Act''),\11\ which effects sweeping corporate 
disclosure and financial reporting reform.
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    \10\ See, for example, John Waggoner and Thomas A. Fogarty, 
``Scandals Shred Investors' Faith: Because of Enron, Andersen and 
Rising Gas Prices, the Public Is More Wary Than Ever of Corporate 
America,'' USA Today, May 5, 2002, and Louis Aguilar, ``Scandals 
Jolting Faith of Investors,'' Denver Post, June 27, 2002.
    \11\ Pub. L. 107-204, 116 Stat. 745 (2002).
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    This release is one of several that the Commission is required to 
issue to implement provisions of the Sarbanes-Oxley Act. In this 
release, we adopt rules to implement the following two provisions of 
the Sarbanes-Oxley Act:
    [sbull] Section 407, which directs us to adopt rules: (1) Requiring 
a company to disclose whether its audit committee includes at least one 
member who is a financial expert; and (2) defining the term ``financial 
expert''; and
    [sbull] Section 406, which directs us to adopt rules requiring a 
company to disclose whether it has adopted a code of ethics for its 
senior financial officers, and if not, the reasons therefor, as well as 
any changes to, or waiver of any provision of, that code of ethics.
    We received over 200 comment letters in response to our release 
proposing requirements to implement Sections 404, 406 and 407 of the 
Sarbanes-Oxley Act.\12\ These comment letters came from corporations, 
professional associations, accountants, law firms, analysts, 
consultants, academics, investors and others. In general, the 
commenters favored the objectives of the proposed new requirements. 
Investors generally supported the manner in which we proposed to 
achieve these objectives and, in some cases, urged us to require 
additional disclosure from companies. Many other commenters, however, 
thought that we were requiring more disclosure than necessary to 
fulfill the mandates of the Sarbanes-Oxley Act and suggested 
modifications to the proposals. We have reviewed and considered all of 
the comments on the proposals. The adopted rules reflect many of these 
comments--we discuss our conclusions with respect to each

[[Page 5111]]

topic and related comments in more detail throughout the release. We 
believe that the new rules and amendments are in the public interest 
and consistent with the protection of investors.
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    \12\ Release No. 33-8138 (October 22, 2002) [67 FR 66208] 
(``Proposing Release'').
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    The Proposing Release also included requirements to implement 
Section 404 of the Act, relating to internal control reports and 
auditor attestations of those reports. We will set forth the final 
rules to implement Section 404 in a separate adopting release to be 
issued at a later date. The Sarbanes-Oxley Act does not mandate that we 
issue final rules to implement Section 404 by a specific date. In 
addition, in the Proposing Release, we proposed to defer effectiveness 
of those rules so that they would apply only to companies whose fiscal 
years end on or after September 15, 2003 to allow the Public Company 
Accounting Oversight Board sufficient time to adopt standards for 
attestation engagements, and to allow companies and auditors sufficient 
time to prepare for imposition of the new requirements.
    We also will set forth the rules to implement the requirements of 
Sections 406 and 407 of the Sarbanes-Oxley Act with respect to 
registered investment companies in a subsequent release. We expect to 
consider implementing these requirements at the same time that we 
consider adopting proposed Form N-CSR \13\ to be used by registered 
management investment companies to file certified shareholder reports 
with the Commission under Section 302 of the Sarbanes-Oxley Act.
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    \13\ See Release No. IC-25723 (Aug. 30, 2002) [67 FR 57298].
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II. Discussion

A. Audit Committee Financial Experts

1. Title of the Expert
    In the Proposing Release, we solicited comment as to whether we 
should use the term ``financial expert'' in our rules consistent with 
its use in Section 407 of the Sarbanes-Oxley Act, or whether a 
different term such as ``audit committee financial expert'' would be 
more appropriate. A number of commenters expressed a concern that 
neither the term ``financial expert'' nor ``audit committee financial 
expert'' accurately reflects the required experience and expertise of 
the type of expert contemplated by Section 407 and our proposed rules. 
Some noted that many of the key characteristics included in our 
proposed definition of a financial expert relate to the expert's 
accounting knowledge and experience in an accounting or auditing 
position. One commenter therefore recommended that we use the term 
``audit committee accounting expert.'' Other suggested terms included 
``accounting expert,'' ``audit committee member financial lead'' and 
``financially proficient director.''
    We agree that the term ``financial'' may not completely capture the 
attributes referenced in Section 407, given the provision's focus on 
accounting and auditing expertise and the fact that traditional 
``financial'' matters extend to capital structure, valuation, cash 
flows, risk analysis and capital-raising techniques. Furthermore, 
several recent articles on the proposals have noted that many 
experienced investors and business leaders with considerable financial 
expertise would not necessarily qualify as financial experts under the 
proposed definition.\14\ We have decided to use the term ``audit 
committee financial expert'' in our rules implementing Section 407 
instead of the term ``financial expert.'' \15\ This term suggests more 
pointedly that the designated person has characteristics that are 
particularly relevant to the functions of the audit committee, such as: 
a thorough understanding of the audit committee's oversight role, 
expertise in accounting matters as well as understanding of financial 
statements, and the ability to ask the right questions to determine 
whether the company's financial statements are complete and accurate. 
The new rules include a definition of the term ``audit committee 
financial expert.'' \16\
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    \14\ See Andrew R. Sorkin, ``Back to School, but This One Is for 
Top Corporate Officials,'' NY Times, Sept. 3, 2002, Cassell Bryan-
Low, ``Defining Moment for SEC: Who is a financial expert,'' Wall 
Street Journal, Dec. 9, 2002, and Geoffrey Colvin, ``Sarbanes & Co. 
Can't Want This: Under Reform Law, Alan Greenspan Would Not Qualify 
as a Board's Financial Expert,'' Fortune, Dec. 30, 2002.
    \15\ Throughout this release, we will refer to both ``audit 
committee financial experts'' and ``financial experts'' as 
appropriate in a particular context. For example, when discussing 
statutory provisions, we will continue to refer to financial 
experts. For purposes of the discussions in this release, the 
meanings of these terms are identical.
    \16\ See new Item 401(h)(2) of Regulation S-K, Item 401(e)(2) of 
Regulation S-B, Item 16A(b) of Form 20-F, and paragraph (8)(b) of 
General Instruction B to Form 40-F.
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2. Disclosure of the Number and Names of Audit Committee Financial 
Experts
    A substantial number of commenters opposed our proposal to require 
a company to disclose the number and names of the persons that the 
company's board determined to be audit committee financial experts. 
Some were opposed on the ground that our proposed rules exceeded the 
mandates of the Sarbanes-Oxley Act.\17\ Much of the opposition stemmed 
from a fear that the designation of an audit committee financial expert 
may inappropriately suggest that the expert bears greater 
responsibility, and therefore is subject to a higher degree of 
liability, for audit committee decisions than other audit committee 
members. Some commenters thought that identification of the audit 
committee financial expert in the company's annual report would 
exacerbate that problem and discourage qualified persons from serving 
as such experts.
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    \17\ The Sarbanes-Oxley Act required only that we adopt rules 
requiring disclosure of whether a company had at least one financial 
expert on its audit committee, and if not, the reasons why.
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    We have modified the proposals that would have required disclosure 
of the number and names of audit committee financial experts serving on 
a company's audit committee to more closely track the language used in 
Section 407 of the Sarbanes-Oxley Act. Under the rules that we are 
adopting, a company must disclose that its board of directors has 
determined that the company either:
    [sbull] Has at least one audit committee financial expert serving 
on its audit committee; or
    [sbull] Does not have an audit committee financial expert serving 
on its audit committee.
    A company disclosing that it does not have an audit committee 
financial expert must explain why it does not have such an expert. We 
continue to believe that disclosure of the name of the audit committee 
financial expert is necessary to benefit investors and to carry out the 
purpose of Section 407. Therefore, under the final rules, if a company 
discloses that it has an audit committee financial expert, it also must 
disclose the expert's name. We believe that, in general, omission of 
the expert's name ultimately would not result in the expert's identity 
remaining non-public. To the extent that there are liability concerns, 
we believe that they are best addressed by our inclusion of a safe 
harbor in our rules, as discussed below.
    The final rules permit, but do not require, a company to disclose 
that it has more than one audit committee financial expert on its audit 
committee. Therefore, once a company's board determines that a 
particular audit committee member qualifies as an audit committee 
financial expert, it may, but is not required to, determine whether 
additional audit committee members also qualify as experts. Every 
company subject to the audit committee disclosure requirements would, 
however, have to determine whether or not it has at least one audit 
committee financial expert; a company will not

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satisfy the new disclosure requirements by stating that it has decided 
not to make a determination or by simply disclosing the qualifications 
of all of its audit committee members. Furthermore, if the company's 
board determines that at least one of the audit committee members 
qualifies as an expert, the company must accurately disclose this fact. 
It will not be appropriate for a company to disclose that it does not 
have an audit committee financial expert if its board has determined 
that such an expert serves on the audit committee.
3. Disclosure of Independence of Audit Committee Financial Experts
    We proposed to require a company to disclose whether its audit 
committee financial expert is independent of management. A number of 
commenters opposed this disclosure requirement as unnecessary, noting 
that Section 301 of the Sarbanes-Oxley Act mandates the Commission to 
direct the self-regulatory organizations to prohibit the listing of any 
company that does not require all of its audit committee members to be 
independent. However, not all Exchange Act reporting companies are 
listed on a national securities exchange or association.\18\ We believe 
that investors in these companies would be interested in knowing 
whether the audit committee financial expert is independent of 
management. Therefore, the final rules require a company to disclose 
whether the person or persons identified as the audit committee 
financial expert is independent of management.
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    \18\ As we note in our recent release proposing rules to 
implement Section 301 of the Sarbanes-Oxley Act, there are only 
7,250 listed companies out of a total of approximately 17,000 
reporting companies. See Release No. 33-8173 (Jan. 8, 2003).
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    In the proposing release, we defined ``independent'' by reference 
to Section 10A(m)(3) of the Exchange Act.\19\ Several commenters noted 
that this reference may cause some confusion because the securities 
laws include different definitions of the term ``affiliated,'' which is 
part of the definition used in Section 10A(m)(3).\20\ Therefore, to 
provide clarity, the final rules refer to the definition of 
``independent'' used in Item 7(d)(3)(iv) of Schedule 14A.\21\ This 
revision ensures that the term ``independent'' is used consistently in 
our rules.\22\
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    \19\ 15 U.S.C. 78j-1(m)(3).
    \20\ For example, Section 2(a)(3) of the Investment Company Act 
of 1940 (15 U.S.C. 80a-2(a)(3)) defines an ``affiliated person'' as, 
among other things, any person owning with power to vote five 
percent of the outstanding voting securities of an entity. Rule 405 
(17 CFR 230.405) under the Securities Act defines an ``affiliate'' 
as a person that controls or is controlled by, or is under common 
control with a specified person.
    \21\ 17 CFR 240.101. That item currently relies on the 
definitions of ``independent'' in the listing standards of the New 
York Stock Exchange, the American Stock Exchange and the NASD. Under 
Section 10A(m) of the Exchange Act (as amended by Section 301 of the 
Sarbanes-Oxley Act), we recently proposed rules directing the 
national securities exchanges and national securities associations 
to prohibit the listing of any security of an issuer that, among 
other things, does not have an independent audit committee as that 
term is used in Section 10A(m)(3). See Release No. 33-8173 (Jan. 8, 
2003). As a result of those proposals, the current references in 
Item 7(d)(3)(iv) of Schedule 14A may be amended. See id.
    \22\ For domestic issuers, the audit committee independence 
standard is found in new Regulation S-K Item 401(h)(1)(ii) (17 CFR 
229.401(h)(1)(ii)) and Regulation S-B Item 401(e)(1)(ii) (17 CFR 
228.401(e)(1)(ii)). See Part II.C, below for further discussion of 
the audit committee financial expert disclosure requirements for 
foreign issuers.
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4. Definition of ``Audit Committee Financial Expert''
    a. Proposed definition of the term ``financial expert''. We 
proposed to define the term ``financial expert'' to mean a person who 
has, through education and experience as a public accountant, auditor, 
principal financial officer, controller or principal accounting 
officer, of a company that, at the time the person held such position, 
was required to file reports pursuant to Section 13(a) or 15(d) of the 
Exchange Act, or experience in one or more positions that involve the 
performance of similar functions (or that results, in the judgment of 
the company's board of directors, in the person's having similar 
expertise and experience),\23\ the following attributes:
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    \23\ The proposed definition would have broadened the types of 
persons listed in Section 407 of the Sarbanes-Oxley Act as qualified 
to serve as experts by enabling the board of directors to conclude 
that a person is a financial expert if, in lieu of having experience 
as a public accountant, auditor, principal financial officer, 
principal accounting officer, or controller, or experience in a 
position involving the performance of similar functions, the person 
has experience in a position that results, in the judgment of the 
board of directors, in the person having similar expertise and 
experience. Under the proposals, if the board made such a 
determination, the company would have been required to disclose the 
basis for that determination.
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    (1) An understanding of generally accepted accounting principles 
and financial statements;
    (2) Experience applying such generally accepted accounting 
principles in connection with the accounting for estimates, accruals, 
and reserves that are generally comparable to the estimates, accruals 
and reserves, if any, used in the registrant's financial statements;
    (3) Experience preparing or auditing financial statements that 
present accounting issues that are generally comparable to those raised 
by the registrant's financial statements;
    (4) Experience with internal controls and procedures for financial 
reporting; and
    (5) An understanding of audit committee functions.
    In addition, the proposed rule would have provided guidance to 
companies by providing a list of factors to be considered in making 
that evaluation, including:
    [sbull] The level of the person's accounting or financial 
education, including whether the person has earned an advanced degree 
in finance or accounting;
    [sbull] Whether the person is a certified public accountant, or the 
equivalent, in good standing, and the length of time that the person 
actively has practiced as a certified public accountant, or the 
equivalent;
    [sbull] Whether the person is certified or otherwise identified as 
having accounting or financial experience by a recognized private body 
that establishes and administers standards in respect of such 
expertise, whether that person is in good standing with the recognized 
private body, and the length of time that the person has been actively 
certified or identified as having this expertise;
    [sbull] Whether the person has served as a principal financial 
officer, controller or principal accounting officer of a company that, 
at the time the person held such position, was required to file reports 
pursuant to Section 13(a) or 15(d) of the Exchange Act, and if so, for 
how long;
    [sbull] The person's specific duties while serving as a public 
accountant, auditor, principal financial officer, controller, principal 
accounting officer or position involving the performance of similar 
functions;
    [sbull] The person's level of familiarity and experience with all 
applicable laws and regulations regarding the preparation of financial 
statements that must be included in reports filed under Section 13(a) 
or 15(d) of the Exchange Act;
    [sbull] The level and amount of the person's direct experience 
reviewing, preparing, auditing or analyzing financial statements that 
must be included in reports filed under Section 13(a) or 15(d) of the 
Exchange Act;
    [sbull] The person's past or current membership on one or more 
audit committees of companies that, at the time the person held such 
membership, were required to file reports pursuant to Section 13(a) or 
15(d) of the Exchange Act;
    [sbull] The person's level of familiarity and experience with the 
use and analysis of

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financial statements of public companies; and
    [sbull] Whether the person has any other relevant qualifications or 
experience that would assist him or her in understanding and evaluating 
the registrant's financial statements and other financial information 
and to make knowledgeable and thorough inquiries whether:
    [sbull] The financial statements fairly present the financial 
condition, results of operations and cash flows of the company in 
accordance with generally accepted accounting principles; and
    [sbull] The financial statements and other financial information, 
taken together, fairly present the financial condition, results of 
operations and cash flows of the company.
    b. Comments on Proposed Definition. The proposed definition of the 
term ``financial expert'' proved to be the most controversial aspect of 
the proposals--more commenters remarked on it than on any other topic 
addressed by the proposed rules. Most of the commenters thought that 
the proposed definition was too restrictive. Several expressed concern 
that many companies, especially small ones, would have a difficult time 
attracting an audit committee member who would qualify as an expert 
under the proposed definition. Some of the corporate commenters were of 
the view that they already have exemplary audit committees, despite the 
fact that none of their current members would meet our proposed 
definition of an expert. A few complained that companies may have to 
sacrifice the diversity of their boards and nominate directors who 
satisfy the audit committee financial expert definition even if the 
company does not believe that these directors are best-suited for the 
position.
    Furthermore, several commenters debated the merits of defining an 
audit committee financial expert as a person with strong accounting 
credentials, given that an audit committee member's role is one of 
oversight, rather than direct involvement in the company's accounting 
functions, and suggested that the emphasis on technical accounting 
expertise in the definition was misplaced. A few commenters further 
argued that it is unnecessary to have a financial expert serving on the 
audit committee because audit committee members should have the 
discretion to retain experts with specific financial expertise as they 
deem necessary or appropriate.
    Other commenters asserted that the proposed definition was more 
restrictive than necessary to satisfy Congressional intent--they noted 
that Section 407 of the Sarbanes-Oxley Act requires us, in defining the 
term ``financial expert,'' only to ``consider'' whether a person has, 
through education and experience as a public accountant, auditor, 
principal financial officer, comptroller, principal accounting officer, 
or similar position, the four attributes specified in the Act.\24\ 
These commenters argued that in light of the Congressional directive 
only to consider the four attributes, our proposed definition did not 
need to incorporate all of them, or even any of them. Some commenters 
believed that a single member of the audit committee should not have to 
possess all of the required financial expert attributes so long as the 
members of the audit committee collectively possess these attributes. 
Others suggested various permutations such as requiring the financial 
expert to have the first and fifth attributes in our proposed 
definition, but only two of the other three attributes.
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    \24\ The attributes listed in Section 407 of the Sarbanes-Oxley 
Act include:
    (1) An understanding of generally accepted accounting principles 
and financial statements;
    (2) Experience in: (a) The preparation or auditing of financial 
statements of generally comparable issuers; and (b) the application 
of such principles in connection with the accounting for estimates, 
accruals, and reserves;
    (3) Experience with internal accounting controls; and
    (4) An understanding of audit committee functions.
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    Many commenters criticized specific provisions of the proposed 
financial expert definition as being too narrow. In particular, many 
commenters asserted that our proposed requirement that an expert have 
direct experience preparing or auditing financial statements was 
greatly, and needlessly, restrictive. Other commenters were concerned 
that the requirement that a person have had experience with financial 
statements presenting issues generally comparable to those raised by 
the company's financial statements might have anti-competitive effects 
if we interpreted this requirement to mean that a financial expert 
would need previous experience with financial statements of other 
companies in the same industry.
    Several commenters sought clarification regarding the relevant body 
of generally accepted accounting principles, in particular for 
financial experts of foreign private issuers. Other commenters 
expressed concern over the possible lack of potential financial experts 
that would be knowledgeable about accounting for estimates and reserves 
in specific industries, such as the insurance and oil industries.
    Numerous additional commenters were concerned that the proposed 
definition was too restrictive regarding the means by which a person 
could acquire the required expertise to qualify as a financial expert. 
They suggested that a requirement that an expert have experience as a 
public accountant, auditor, principal financial officer, controller, 
principal accounting officer or in a similar position, would severely 
limit the number of persons qualified to be financial experts. Some 
believed that there are a substantial number of highly qualified 
persons who have sufficient knowledge and experience to effectively and 
competently perform the activities required of a financial expert, but 
do not have experience in one of the listed positions. They questioned 
the relevance of the means by which a person acquires the necessary 
expertise, so long as the person in fact has such expertise.
    c. Final Definition of ``Audit Committee Financial Expert''. The 
final rules define an audit committee financial expert as a person who 
has the following attributes:
    [sbull] An understanding of generally accepted accounting 
principles and financial statements;
    [sbull] The ability to assess the general application of such 
principles in connection with the accounting for estimates, accruals 
and reserves;
    [sbull] Experience preparing, auditing, analyzing or evaluating 
financial statements that present a breadth and level of complexity of 
accounting issues that are generally comparable to the breadth and 
complexity of issues that can reasonably be expected to be raised by 
the registrant's financial statements, or experience actively 
supervising one or more persons engaged in such activities;
    [sbull] An understanding of internal controls and procedures for 
financial reporting; and
    [sbull] An understanding of audit committee functions.\25\
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    \25\ See new Item 401(h)(2) of Regulation S-K, Item 401(e)(2) of 
Regulation S-B, Item 16A(b) of Form 20-F and paragraph (8)(b) of 
General Instruction B to Form 40-F.
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    Under the final rules, a person must have acquired such attributes 
through any one or more of the following:
    (1) Education and experience as a principal financial officer, 
principal accounting officer, controller, public accountant or auditor 
or experience in one or more positions that involve the performance of 
similar functions;
    (2) Experience actively supervising a principal financial officer, 
principal accounting officer, controller, public accountant, auditor or 
person performing similar functions;

[[Page 5114]]

    (3) Experience overseeing or assessing the performance of companies 
or public accountants with respect to the preparation, auditing or 
evaluation of financial statements; or
    (4) Other relevant experience.\26\
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    \26\ See new Item 401(h)(3) of Regulation S-K, Item 401(e)(3) of 
Regulation S-B, Item 16A(c) of Form 20-F and paragraph (8)(c) of 
General Instruction B to Form 40-F.
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    d. Discussion of Significant Modifications to the Proposed 
Definition of ``Financial Expert''. We have made several changes to our 
proposed definition of a financial expert. As already discussed, we 
have decided to use the term audit committee financial expert rather 
than financial expert in the final rules. We also have reorganized the 
components of the definition to make it easier to read and to 
emphasize, by including them in the first part of the definition, the 
attributes that an audit committee financial expert must possess. The 
second part of the definition discusses the means by which a person 
must acquire the necessary attributes. We also have eliminated the 
proposed instruction listing several factors that a company's board of 
directors should consider in evaluating the education and experience of 
an audit committee financial expert candidate.
    Proposed attributes of a financial expert. i. The financial expert 
must have an understanding of generally accepted accounting principles 
and financial statements. We are adopting this attribute substantially 
as proposed. However, in response to comments, we have added an 
instruction to clarify that, with respect to foreign private issuers, 
the audit committee financial expert's understanding must be of the 
generally accepted accounting principles used by the foreign private 
issuer in preparing its primary financial statements filed with the 
Commission.\27\ Our rules require foreign private issuers that do not 
prepare their primary financial statements in accordance with U.S. 
generally accepted accounting principles to include a reconciliation to 
those principles in the financial statements that they file with the 
Commission. Although an understanding of reconciliation to U.S. 
generally accepted accounting principles would be helpful, we believe 
that the proper focus of audit committee financial expertise is on the 
principles used to prepare the primary financial statement. We also are 
sensitive to the fact that requiring an audit committee financial 
expert to possess expertise relating to U.S. generally accepted 
accounting principles could burden foreign private issuers who use home 
country accounting principles or international accounting standards to 
prepare their primary financial statements.
---------------------------------------------------------------------------

    \27\ See new Instruction 3 to Item 401(h) of Regulation S-K, 
Item 401(e) of Regulation S-B, Instruction 3 to Item 16A of Form 20-
F, and Note 3 to paragraph (8) of General Instruction B to Form 40-
F.
---------------------------------------------------------------------------

    ii. The financial expert must have experience applying such 
generally accepted accounting principles in connection with the 
accounting for estimates, accruals and reserves that are generally 
comparable to the estimates, accruals and reserves, if any, used in the 
registrant's financial statements. Several commenters were concerned 
that potential audit committee financial experts would not have 
experience with the unique and complex accounting for estimates, 
accruals and reserves in certain industries, such as the insurance 
industry, unless they have had direct previous experience in these 
industries. The commenters further noted that there could be a very 
limited pool of audit committee financial expert candidates available 
with such experience that would not have ties to a competitor within 
the same industry. In light of these comments, we have revised this 
attribute by eliminating the clause ``that are generally comparable to 
the estimates, accruals and reserves, if any, used in the registrant's 
financial statements.'' We also have revised this attribute to state 
that the audit committee financial expert must have the ability to 
assess the general application of generally accepted accounting 
principles in connection with the accounting for estimates, accruals 
and reserves, rather than stating that the expert must have experience 
applying these principles.\28\ We believe that this description of the 
attribute better satisfies the intent of the statute and better 
reflects the role to be played by audit committees. We recognize that 
the pool of persons possessing the highly specialized technical 
knowledge that some thought the proposals necessitated may be so small 
that a substantial percentage of companies in certain industries would 
be compelled to disclose that they could not retain an expert without 
recruiting a person associated with a competitor. We do not intend for 
the new requirements to lead to such a result. An audit committee 
financial expert must be able to assess the general application of 
generally accepted accounting principles in connection with accounting 
for estimates, accruals and reserves. This general attribute provides 
the necessary background for an audit committee when addressing more 
detailed industry-specific standards or other particular topics. 
Experience with such detailed standards or topics is not a necessary 
attribute of audit committee financial expertise.
---------------------------------------------------------------------------

    \28\ See new Item 401(h)(2)(ii) of Regulation S-K, Item 
401(e)(2)(ii) of Regulation S-B, Item 16A(b)(2) of Form 20-F and 
paragraph (8)(b)(2) of General Instruction B to Form 40-F.
---------------------------------------------------------------------------

    iii. The financial expert must have experience preparing or 
auditing financial statements that present accounting issues that are 
generally comparable to those raised by the registrant's financial 
statements. The majority of commenters who thought that the proposed 
definition of ``financial expert'' was too restrictive focused on this 
attribute. We are convinced by the weight of the comments that the 
proposed requirement that an expert have direct experience preparing or 
auditing financial statements could impose an undue burden on some 
companies, especially small companies, that desire to have an audit 
committee financial expert. We also are persuaded by commenters' 
arguments that persons who have experience performing in-depth analysis 
and evaluation of financial statements should not be precluded from 
being able to qualify as audit committee financial experts if they 
possess the other four necessary attributes of an expert. We therefore 
have broadened this attribute by requiring an audit committee financial 
expert to have experience ``preparing, auditing, analyzing or 
evaluating'' financial statements.\29\
---------------------------------------------------------------------------

    \29\ See new Item 401(h)(2)(iii) of Regulation S-K, Item 
401(e)(2)(iii) on Regulation S-B, Item 16A(b)(3) of Form 20-F and 
paragraph (8)(b)(3) of General Instruction B to Form 40-F.
---------------------------------------------------------------------------

    We believe that our revisions properly capture the clear intent of 
the statute that an audit committee financial expert must have 
experience actually working directly and closely with financial 
statements in a way that provides familiarity with the contents of 
financial statements and the processes behind them. We also believe 
that our revisions appropriately broaden the group of persons who are 
eligible to be audit committee financial experts. We recognize that 
many people actively engaged in industries such as investment banking 
and venture capital investment have had significant direct and close 
exposure to, and experience with, financial statements and related 
processes. Similarly, professional financial analysts closely 
scrutinize financial statements on a regular basis. Indeed, all of 
these types of individuals

[[Page 5115]]

often hold positions that require them to inspect financial statements 
with a healthy dose of skepticism. They therefore would be well 
prepared to diligently and zealously question management and the 
company's auditor about the company's financial statements. Effective 
audit committee members must have both the ability and the 
determination to ask the right questions. Therefore, we have broadened 
this attribute to include persons with experience performing extensive 
financial statement analysis or evaluation.
    We also are convinced by commenters that a potential audit 
committee financial expert should be considered to possess this 
attribute by virtue of his or her experience actively supervising a 
person who prepares, audits, analyzes or evaluates financial 
statements. The term ``active supervision'' means more than the mere 
existence of a traditional hierarchical reporting relationship between 
supervisor and those being supervised. Rather, we mean that a person 
engaged in active supervision participates in, and contributes to, the 
process of addressing, albeit at a supervisory level, the same general 
types of issues regarding preparation, auditing, analysis or evaluation 
of financial statements as those addressed by the person or persons 
being supervised. We also mean that the supervisor should have 
experience that has contributed to the general expertise necessary to 
prepare, audit, analyze or evaluate financial statements that is at 
least comparable to the general expertise of those being supervised. A 
principle executive officer should not be presumed to qualify. A 
principal executive officer with considerable operations involvement, 
but little financial or accounting involvement, likely would not be 
exercising the necessary active supervision. Active participation in, 
and contribution to, the process, albeit at a supervisory level, of 
addressing financial and accounting issues that demonstrates a general 
expertise in the area would be necessary.
    Finally, we are retaining, with clarification, the requirement that 
an audit committee financial expert have experience with financial 
statements that present accounting issues that are ``generally 
comparable'' to those raised by the registrant's financial statements. 
We do not intend for this phrase to imply that a person must have 
previous experience in the same industry as the company that is 
evaluating the person as a potential audit committee financial expert, 
or that the person's experience must have been with a company subject 
to the Exchange Act reporting requirements. We therefore have modified 
the requirement to focus on the breadth and level of complexity of the 
accounting issues with which the person has had experience. We think 
that a company's board of directors will make the necessary assessment 
based on particular facts and circumstances. In making its assessment, 
the board should focus on a variety of factors such as the size of the 
company with which the person has experience, the scope of that 
company's operations and the complexity of its financial statements and 
accounting. We do not believe that familiarity with particular 
financial reporting or accounting issues, or any other narrow area of 
experience should be dispositive.
    iv. A financial expert must have experience with internal controls 
and procedures for financial reporting. We are substituting the term 
``understanding'' for the term ``experience.'' \30\ In our view, it is 
necessary that the audit committee financial expert understand the 
purpose, and be able to evaluate the effectiveness, of a company's 
internal controls and procedures for financial reporting. It is 
important that the audit committee financial expert understand why the 
internal controls and procedures for financial reporting exist, how 
they were developed, and how they operate. Previous experience 
establishing or evaluating a company's internal controls and procedures 
for financial reporting can, of course, contribute to a person's 
understanding of these matters, but the attribute as rephrased properly 
focuses on the understanding rather than the experience.
---------------------------------------------------------------------------

    \30\ See new Item 401(h)(2)(iv) of Regulation S-K, Item 
401(e)(2)(iv) on Regulation S-B, Item 16A(b)(4) of Form 20-F and 
paragraph (8)(b)(4) of General Instruction B to Form 40-F.
---------------------------------------------------------------------------

    v. A financial expert must have an understanding of audit committee 
functions. We are adopting this attribute as proposed.\31\
---------------------------------------------------------------------------

    \31\ See new Item 401(h)(2)(v) of Regulation S-K, Item 
401(e)(2)(v) on Regulation S-B, Item 16A(b)(5) of Form 20-F and 
paragraph (8)(b)(5) of General Instruction B to Form 40-F.
---------------------------------------------------------------------------

    Means of obtaining expertise. We have revised the audit committee 
financial expert definition to state that a person must have acquired 
the five necessary attributes through any one or more of the following:
    (1) Education and experience as a principal financial officer, 
principal accounting officer, controller, public accountant or auditor 
or experience in one or more positions that involve the performance of 
similar functions;
    (2) Experience actively supervising a principal financial officer, 
principal accounting officer, controller, public accountant, auditor or 
person performing similar functions;
    (3) Experience overseeing or assessing the performance of companies 
or public accountants with respect to the preparation, auditing or 
evaluation of financial statements; or
    (4) Other relevant experience.\32\
---------------------------------------------------------------------------

    \32\ See new Item 401(h)(3) of Regulation S-K, Item 401(e)(3) on 
Regulation S-B, Item 16A(c) of Form 20-F and paragraph (8)(c) of 
General Instruction B to Form 40-F.
---------------------------------------------------------------------------

    In response to commenters' remarks, we have eliminated the proposed 
requirement that an audit committee financial expert must have gained 
the relevant experience with a company that, at the time the person 
held such position, was required to file reports pursuant to Section 
13(a) or 15(d) of the Exchange Act. Many private companies are 
contractually required to prepare audited financial statements that 
comply with generally accepted accounting principles. In addition, a 
potential expert may have gained relevant experience at a foreign 
company that is publicly traded in its home market but that is not 
registered under the Exchange Act.
    We have added a provision in response to comments that experience 
overseeing or assessing the performance of companies or public 
accountants with respect to the preparation, auditing or evaluation of 
financial statements can provide a person with in-depth knowledge and 
experience of accounting and financial issues. For example, certain 
individuals serving in governmental, self-regulatory and private-sector 
bodies overseeing the banking, insurance and securities industries work 
on issues related to financial statements on a regular basis. We 
believe that such experience can constitute a very useful background 
for an audit committee financial expert.
    In addition, we have revised the last provision of this part of the 
proposed definition. The original proposal stated that a person who had 
not served in one of the specified positions alternatively could have 
acquired the relevant attributes and experience in a position that 
results, in the judgment of the board of directors, in the person's 
having similar expertise and experience. The final rules state simply 
that a person may acquire the necessary attributes of an audit 
committee financial expert through other relevant experience, and no 
longer require the company to disclose the basis for the board's 
determination that a person has

[[Page 5116]]

``similar expertise and experience.'' We also have eliminated the 
reference to the judgment of the board with respect to this provision 
because, as explicitly stated in the audit committee financial expert 
disclosure requirement, the board must make all determinations as to 
whether a person qualifies as an expert. Therefore, this reference is 
redundant.
    This revision permitting a person to have ``other relevant 
experience'' recognizes that an audit committee financial expert can 
acquire the requisite attributes of an expert in many different ways. 
We do believe that this expertise should be the product of experience 
and not, for example, merely education. Under the final rules, if a 
person qualifies as an expert by virtue of possessing ``other relevant 
experience,'' the company's disclosure must briefly list that person's 
experience.\33\
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    \33\ See new Instruction 2 to Item 401(h) of Regulation S-K, 
Item 401(e) of Regulation S-B and Item 16A of Form 20-F and Note 2 
to paragraph (8) of General Instruction B to Form 40-F.
---------------------------------------------------------------------------

    Proposed factors to be considered in evaluating the education and 
experience of a financial expert. The proposed definition of 
``financial expert'' included a non-exclusive list of qualitative 
factors for a company's board to consider in assessing audit committee 
financial expert candidates. These factors focused on the breadth and 
level of a potential audit committee financial expert's experience, 
understanding and involvement in relevant activities, including the 
person's length of experience in relevant positions, and the types of 
duties held by such person in those positions. We believe that the 
board should consider all the available facts and circumstances, 
including but certainly not limited to, qualitative factors of the type 
that we had identified, in its determination. Some commenters were 
concerned that some boards would use the list as a mechanical checklist 
rather than as guidance to be used in considering a person's knowledge 
and experience as a whole. In light of these comments, the definition 
does not include this list.
    The fact that a person previously has served on an audit committee 
does not, by itself, justify the board of directors in 
``grandfathering'' that person as an audit committee financial expert 
under the definition. Similarly, the fact that a person has experience 
as a public accountant or auditor, or a principal financial officer, 
controller or principal accounting officer or experience in a similar 
position does not, by itself, justify the board of directors in deeming 
the person to be an audit committee financial expert. In addition to 
determining that a person possesses an appropriate degree of knowledge 
and experience, the board must ensure that it names an audit committee 
financial expert who embodies the highest standards of personal and 
professional integrity. In this regard, a board should consider any 
disciplinary actions to which a potential expert is, or has been, 
subject in determining whether that person would be a suitable audit 
committee financial expert.
    Requirement that an audit committee financial expert possess all 
five required attributes. We are not convinced by comments stating that 
an audit committee financial expert should not have to possess all of 
the attributes included in our definition. Although Congress did not 
explicitly require us to incorporate all of the attributes listed in 
Section 407 of the Sarbanes-Oxley Act, it also did not limit us to 
consideration of those attributes. Congress obviously considered each 
of the listed attributes to be important. A definition of ``audit 
committee financial expert'' that leaves the meaning of the term 
entirely to the judgment of the board of directors would be highly 
subjective and could constitute an abrogation of our responsibilities 
under Section 407.
    The Sarbanes-Oxley Act clearly was intended to enhance corporate 
responsibility by effecting significant change; its purpose was not to 
perpetuate the status quo. Therefore, while many companies likely will 
be able to determine that they already have an audit committee 
financial expert serving on their audit committees, we believe that the 
fact that some companies will not be able to draw this conclusion 
unless they are able to attract a new director with the requisite 
qualifications is consistent with the Act.
    Moreover, the Sarbanes-Oxley Act did not contemplate that a company 
could disclose that it has an audit committee financial expert by 
virtue of the fact that the audit committee members collectively 
possess all of the attributes of an expert; the statute directs us to 
issue rules to require a company to disclose whether or its audit 
committee is comprised of ``at least one member'' who is a financial 
expert. Due to the statute's use of this specific language, there is no 
doubt that Congress had in mind individual experts and did not 
contemplate a ``collective'' expert. We note, however, that it would be 
appropriate under the final rules for a company disclosing that it does 
not have an audit committee financial expert to explain the aspects of 
the definition that various members of the committee satisfy.
5. Safe Harbor From Liability for Audit Committee Financial Experts
    Several commenters urged us to clarify that the designation or 
identification of an audit committee financial expert will not increase 
or decrease his or her duties, obligations or potential liability as an 
audit committee member. A few recommended a formal safe harbor from 
liability for audit committee financial experts. Unlike the provisions 
of the Act that impose substantive requirements,\34\ the requirements 
contemplated by Section 407 are entirely disclosure-based. We find no 
support in the Sarbanes-Oxley Act or in related legislative history 
that Congress intended to change the duties, obligations or liability 
of any audit committee member, including the audit committee financial 
expert, through this provision.
---------------------------------------------------------------------------

    \34\ For example, the Sarbanes-Oxley Act requires the Commission 
to direct the self-regulatory organizations by rule to mandate the 
independence of all audit committee members of companies listed on 
national securities exchanges and associations. See Section 301 of 
the Sarbanes-Oxley Act. As another example, Section 402 of the 
Sarbanes-Oxley Act prohibits certain loans made by companies to 
their directors and executive officers.
---------------------------------------------------------------------------

    In the proposing release, we stated that we did not believe that 
the mere designation of the audit committee financial expert would 
impose a higher degree of individual responsibility or obligation on 
that person. Nor did we intend for the designation to decrease the 
duties and obligations of other audit committee members or the board of 
directors.
    We continue to believe that it would adversely affect the operation 
of the audit committee and its vital role in our financial reporting 
and public disclosure system, and systems of corporate governance more 
generally, if courts were to conclude that the designation and public 
identification of an audit committee financial expert affected such 
person's duties, obligations or liability as an audit committee member 
or board member. We find that it would be adverse to the interests of 
investors and to the operation of markets and therefore would not be in 
the public interest, if the designation and identification affected the 
duties, obligations or liabilities to which any member of the company's 
audit committee or board is subject. To codify this position, we are 
including a safe harbor in the new audit committee disclosure item to 
clarify that:
    [sbull] A person who is determined to be an audit committee 
financial expert will not be deemed an ``expert'' for any purpose, 
including without limitation

[[Page 5117]]

for purposes of Section 11 of the Securities Act,\35\ as a result of 
being designated or identified as an audit committee financial expert 
pursuant to the new disclosure item;
---------------------------------------------------------------------------

    \35\ 15 U.S.C. 77k.
---------------------------------------------------------------------------

    [sbull] The designation or identification of a person as an audit 
committee financial expert pursuant to the new disclosure item does not 
impose on such person any duties, obligations or liability that are 
greater than the duties, obligations and liability imposed on such 
person as a member of the audit committee and board of directors in the 
absence of such designation or identification; and
    [sbull] The designation or identification of a person as an audit 
committee financial expert pursuant to the new disclosure item does not 
affect the duties, obligations or liability of any other member of the 
audit committee or board of directors.\36\
---------------------------------------------------------------------------

    \36\ See new Item 401(h)(4) of Regulation S-K, Item 401(e)(4) of 
Regulation S-B, Item 16A(d) of Form 20-F and paragraph (8)(d) of 
General Instruction B to Form 40-F. Although other audit committee 
members may look to the audit committee financial expert as a 
resource on certain issues that arise, audit committee members 
should work together to perform the committee's responsibilities. 
The safe harbor provides that other audit committee members may not 
abdicate their responsibilities.
---------------------------------------------------------------------------

    This safe harbor clarifies that any information in a registration 
statement reviewed by the audit committee financial expert is not 
``expertised'' unless such person is acting in the capacity of some 
other type of traditionally recognized expert. Similarly, because the 
audit committee financial expert is not an expert for purposes of 
Section 11,\37\ he or she is not subject to a higher level of due 
diligence with respect to any portion of the registration statement as 
a result of his or her designation or identification as an audit 
committee financial expert.
---------------------------------------------------------------------------

    \37\ Section 11 of the Securities Act imposes liability for 
material misstatements and omissions in a registration statement, 
but provides a defense to liability for those who perform adequate 
due diligence. The level of due diligence required depends on the 
position held by a defendant and the type of information at issue. 
Escott v. BarChris Construction Corp., 283 F. Supp. 643 (S.D.N.Y. 
1968). The type of information can be categorized as either 
``expertised,'' which means information that is prepared or 
certified by an expert who is named in the registration statement, 
or ``non-expertised.'' Similarly, a defendant can be characterized 
either as an ``expert'' or a ``non-expert.''
---------------------------------------------------------------------------

    In adopting this safe harbor, we wish to emphasize that all 
directors bear significant responsibility. State law generally imposes 
a fiduciary duty upon directors to protect the interests of a company's 
shareholders. This duty requires a director to inform himself or 
herself of relevant facts and to use a ``critical eye'' in assessing 
information prior to acting on a matter.\38\ Our new rule provides that 
whether a person is, or is not, an audit committee financial expert 
does not alter his or her duties, obligations or liabilities. We 
believe this should be the case under federal and state law.
---------------------------------------------------------------------------

    \38\ See, for example, Smith v. Van Gorkom, 488 A.2d 858 (Del. 
1985).
---------------------------------------------------------------------------

6. Determination of a Person's Status as an Audit Committee Financial 
Expert
    The Sarbanes-Oxley Act does not explicitly state who at the company 
should determine whether a person qualifies as an audit committee 
financial expert. We believe that the board of directors in its 
entirety, as the most broad-based body within the company, is best-
equipped to make the determination. We think that it is appropriate 
that any such determination will be subject to relevant state law 
principles such as the business judgment rule.
7. Location of Audit Committee Financial Expert Disclosure
    The Sarbanes-Oxley Act expressly states that companies must include 
the financial expert disclosure in their periodic reports required 
pursuant to Section 13(a) or 15(d) of the Exchange Act. The final rules 
that we are adopting require companies to include the new disclosure in 
their annual reports on Forms 10-K, 10-KSB, 20-F or 40-F. The 
requirement to provide the new audit committee disclosure item is 
included in Part III of Forms 10-K and 10-KSB, enabling a domestic 
company that voluntarily chooses to include this disclosure in its 
proxy or information statement to incorporate this information by 
reference into its Form 10-K or 10-KSB if it files the proxy or 
information statement with the Commission no later than 120 days after 
the end of the fiscal year covered by the Form 10-K or 10-KSB.\39\
---------------------------------------------------------------------------

    \39\ See General Instruction E(3) to Form 10-KSB [17 CFR 
249.310b] and General Instruction G(3) to Form 10-K [17 CFR 
249.310].
---------------------------------------------------------------------------

    Although some commenters recommended that we require companies to 
include the audit committee financial expert disclosure in their proxy 
and information statements, registration statements and quarterly 
reports, as well as in their annual reports, we are not convinced that 
the benefits to investors would exceed the costs to companies of 
requiring this disclosure in additional documents or on a more frequent 
basis.
8. Change in Item Number
    We proposed to designate the audit committee financial expert 
disclosure requirement as new Item 309 of Regulations S-K and S-B.\40\ 
However, existing Item 401 seems to be a more logical location for this 
requirement. Item 401 currently requires, among other things, a brief 
description of the business experience of each director. Therefore, we 
are designating the new disclosure item as Item 401(h) of Regulation S-
K and Item 401(e) of Regulation S-B. The new item specifies that a 
company may choose to include the audit committee financial expert 
disclosure in its proxy or information statement if the company 
incorporates such information into its annual report as permitted by 
the instructions to Forms 10-K and 10-KSB.\41\
---------------------------------------------------------------------------

    \40\ We had proposed to add new items to Forms 20-F and 40-F as 
well. Those item numbers have not changed.
    \41\ See new Instruction 1 to Item 401(h) of Regulation S-K and 
Item 401(e) of Regulation S-B.
---------------------------------------------------------------------------

B. Code of Ethics

1. Code of Ethics Disclosure Requirements
    a. Proposed Disclosure Requirements. Section 406 of the Sarbanes-
Oxley Act directs us to issue rules requiring a company that is subject 
to the reporting requirements of Section 13(a) or 15(d) of the Exchange 
Act to disclose whether or not the company has adopted a code of ethics 
for its senior financial officers that applies to the company's 
principal financial officer and controller or principal accounting 
officer, or persons performing similar functions. The Act further 
directs us to require companies that have not adopted such a code of 
ethics to explain why they have not done so. In addition to requiring 
the disclosure mandated by Section 406, we proposed rules to require 
disclosure as to whether the company has a code of ethics that applies 
to its principal executive officer.
    b. Commenters' Remarks. Some of the commenters thought that the 
required disclosure should be limited to a statement indicating whether 
the company has a code of ethics that applies to its senior financial 
officers, and if not, why not. Others stated that it was appropriate to 
expand the requirements of the Sarbanes-Oxley Act to also require a 
company to disclose whether it has a code of ethics that applies to its 
principal executive officer. A few commenters thought that we should 
extend the requirement even further to require a company to state 
whether it has a code of ethics that applies to other individuals, such 
as directors, all executive officers, and the company's employees 
generally.

[[Page 5118]]

    After considering the comments, we continue to think that it is 
appropriate and consistent with the purposes of the Sarbanes-Oxley Act 
to extend the scope of our rules under Section 406 to include a 
company's principal executive officer, as proposed. It seems reasonable 
to expect that a company would hold its chief executive officer, an 
official superior to the company's senior financial officers, to at 
least the same standards of ethical conduct to which it holds its 
senior financial officers. Some commenters who are investors confirmed 
that they not only have an interest in knowing whether a company holds 
its senior financial officers to certain ethical standards, but whether 
the company holds its principal executive officer to ethical standards 
as well.
    c. Final Disclosure Requirements. The final rules require a company 
to disclose whether it has adopted a code of ethics that applies to the 
registrant's principal executive officer, principal financial officer, 
principal accounting officer or controller, or persons performing 
similar functions. If the company has not adopted such a code of 
ethics, it must explain why it has not done so.\42\
---------------------------------------------------------------------------

    \42\ See new Items 406(a) of Regulation S-K, and S-B, Item 
16B(a) of Form 20-F and paragraph (9)(a) of General Instruction B to 
Form 40-F.
---------------------------------------------------------------------------

2. Definition of the Term ``Code of Ethics''
    a. Proposed Definition. We proposed to define the term ``code of 
ethics'' to mean written standards that are reasonably designed to 
deter wrongdoing and to promote: \43\
---------------------------------------------------------------------------

    \43\ The Sarbanes-Oxley Act Section 406(c) definition of the 
term ``code of ethics'' does not include the phrase ``to deter 
wrongdoing'' that we have incorporated into proposed Item 406 of 
Regulations S-K and S-B, but we think that it is appropriate to 
expand the definition in this manner. Although codes of ethics 
typically are designed to promote high standards of ethical conduct, 
they also generally seek to instruct those to whom they apply as to 
improper or illegal conduct or activity and to prohibit such conduct 
or activity.
---------------------------------------------------------------------------

    (1) Honest and ethical conduct, including the ethical handling of 
actual or apparent conflicts of interest between personal and 
professional relationships;
    (2) Avoidance of conflicts of interest, including disclosure to an 
appropriate person or persons identified in the code of any material 
transaction or relationship that reasonably could be expected to give 
rise to such a conflict;
    (3) Full, fair, accurate, timely, and understandable disclosure in 
reports and documents that a company files with, or submits to, the 
Commission and in other public communications made by the company;
    (4) Compliance with applicable governmental laws, rules and 
regulations; \44\
---------------------------------------------------------------------------

    \44\ We proposed to add ``laws'' to this prong of the proposed 
definition. The Sarbanes-Oxley Act Sectin 406(c) definition refers 
only to compliance with applicable governmental rules and 
regulations.
---------------------------------------------------------------------------

    (5) The prompt internal reporting to an appropriate person or 
persons identified in the code of violations of the code; and
    (6) Accountability for adherence to the code.
    The second, fifth and sixth prongs of this proposed definition were 
broader than the requirements specified by Section 406 of the Sarbanes-
Oxley Act, but were intended to supplement the requirements contained 
in the Act.
    b. Commenters' Remarks. We received several comments on the 
proposed definition of a code of ethics. Some commenters recommended 
that we make the code of ethics cover more issues or general topics 
than proposed. Some of these recommendations identified very specific 
topics that the code of ethics should address. These topics included 
matters such as: personal participation in initial public offerings, 
the reporting of any items of value received as a result of the 
officer's position with the company, and change of control 
transactions.
    c. Final Definition of ``Code of Ethics''. The final rule defines 
the term ``code of ethics'' as written standards that are reasonably 
designed to deter wrongdoing and to promote:
    [sbull] Honest and ethical conduct, including the ethical handling 
of actual or apparent conflicts of interest between personal and 
professional relationships;
    [sbull] Full, fair, accurate, timely, and understandable disclosure 
in reports and documents that a registrant files with, or submits to, 
the Commission and in other public communications made by the 
registrant;
    [sbull] Compliance with applicable governmental laws, rules and 
regulations;
    [sbull] The prompt internal reporting to an appropriate person or 
persons identified in the code of violations of the code; \45\ and
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    \45\ Although the company retains discretion to determine the 
identity of the appropriate person or persons, such person should 
not be involved in the matter giving rise to the violation. 
Furthermore, we believe the person identified in the code should 
have sufficient status within the company to engender respect for 
the code and the authority to adequately deal with the persons 
subject to the code regardless of their stature in the company.
---------------------------------------------------------------------------

    [sbull] Accountability for adherence to the code.\46\
---------------------------------------------------------------------------

    \46\ See new Items 406(b) of Regulations S-K, and S-B, Item 
16B(b) of Form 20-F and paragraph (9)(b) of General Instruction B to 
Form 40-F.
---------------------------------------------------------------------------

    We eliminated the component of the definition requiring the code to 
promote the avoidance of conflicts of interest, including disclosure to 
an appropriate person or persons identified in the code of any material 
transaction or relationship that reasonably could be expected to give 
rise to such a conflict, because the conduct addressed by this 
component already is addressed by the first prong of the proposed 
definition, requiring honest and ethical conduct and the ethical 
handling of actual and apparent conflicts of interest.
    We are not adopting commenters' suggestions that we set forth 
additional ethical principles that the code of ethics should address. 
We continue to believe that ethics codes do, and should, vary from 
company to company and that decisions as to the specific provisions of 
the code, compliance procedures and disciplinary measures for ethical 
breaches are best left to the company. Such an approach is consistent 
with our disclosure-based regulatory scheme. Therefore, the rules do 
not specify every detail that the company must address in its code of 
ethics, or prescribe any specific language that the code of ethics must 
include. They further do not specify the procedures that the company 
should develop, or the types of sanctions that the company should 
impose, to ensure compliance with its code of ethics. We strongly 
encourage companies to adopt codes that are broader and more 
comprehensive than necessary to meet the new disclosure requirements.
    We have added an instruction to the code of ethics disclosure item 
indicating that a company may have separate codes of ethics for 
different types of officers. The instruction also clarifies that the 
provisions of the company's code of ethics that address the elements 
listed in the definition and apply to those officers may be part of a 
broader code that addresses additional issues and applies to additional 
persons, such as all executive officers and directors of the 
company.\47\
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    \47\ See Instruction 1 to Items 406 of Regulations S-K and S-B, 
Instruction 2 to Item 16B of Form 20-F and Note 2 to paragraph (9) 
of General Instruction B to Form 40-F.
---------------------------------------------------------------------------

3. Filing of Ethics Code as an Exhibit
    We proposed to require a company to file a copy of its ethics code 
as an exhibit to its annual report. We received several comment letters 
stating that the rules should not include this requirement. A common 
ground for objection was that some codes are extremely lengthy and 
therefore would be difficult to file electronically on our

[[Page 5119]]

EDGAR system. Some also asserted that ethics codes may contain a 
significant amount of detailed information that would not be of 
particular interest to investors.
    We are not entirely persuaded by the commenters that we should not 
require a company disclosing that it has a code of ethics that applies 
to its principal executive officer and senior financial officers to 
make those provisions of the code available. However, more flexibility 
seems appropriate in light of the fact that many companies already post 
their codes on their websites. We therefore are adopting rules that 
will allow companies to choose between three alternative methods of 
making their ethics codes publicly available. First, a company may file 
a copy of its code of ethics that applies to the registrant's principal 
executive officer, principal financial officer, principal accounting 
officer or controller, or persons performing similar functions and 
addresses the specified elements as an exhibit to its annual 
report.\48\ Alternatively, a company may post the text of its code of 
ethics, or relevant portion thereof, on its Internet website, provided 
however, that a company choosing this option also must disclose its 
Internet address and intention to provide disclosure in this manner in 
its annual report on Form 10-K, 10-KSB, 20-F or 40-F.\49\ As another 
alternative, a company may provide an undertaking in its annual report 
on one of these forms to provide a copy of its code of ethics to any 
person without charge upon request.\50\
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    \48\ See new Item 601(b)(14) of Regulations S-K and S-B. 
Although Section 406 of the Sarbanes-Oxley Act does not state that 
our rules must require a company to file a copy of the code of 
ethics as an exhibit to its annual report, some investors likely 
will be interested in examining the actual code itself, given that 
codes are likely to vary significantly from one company to another.
    \49\ See new Item 406(c)(2) of Regulations S-K and S-B, Item 
16B(c)(2) of Form 20-F and paragraph (9)(c)(2) of General 
Instruction B to Form 40-F. We note that the NYSE has filed with the 
Commission a proposed rule change under Section 19(b)(1) of the 
Exchange Act[15 U.S.C. 78s(b)(1)] that, if adopted, would require 
listed companies to adopt codes of ethics and post them on their 
internet websites. See SR-NYSE-2002-33 (pending before the 
Commission). Therefore, this alternative would be consistent with 
the proposals of the NYSE, minimizing unnecessary duplication.
    \50\ See new Item 406(c)(3) of the Regulations S-K and S-B, Item 
16B(c)(3) of Form 20-F and paragraph (9)(c)(3) of General 
Instruction B to Form 40-F.
---------------------------------------------------------------------------

    If a company is complying with this disclosure item in its annual 
report, inclusion of the company's website address in the annual report 
will not, by itself, include or incorporate by reference the 
information on the company's website into the annual report, unless the 
company otherwise acts to incorporate the information by reference.\51\ 
Also, we understand that a company may have multiple websites that it 
uses for various purposes, such as investor relations, product 
information and business-to-business activities. We intend the 
requirement to disclose the company's website address to mean the 
website the company normally uses for its investor relations functions.
---------------------------------------------------------------------------

    \51\ In Release No. 33-7856 (Apr. 28, 2000)[65 FR 25843], we 
provided interpretive guidance on the effect of including a Web site 
address in other situations. We are not changing that guidance for 
those other situations.
---------------------------------------------------------------------------

4. Location of the Code of Ethics Disclosure
    A company will have to include the new code of ethics disclosure in 
its annual report filed on Form 10-K, 10-KSB, 20-F or 40-F.
5. Form 8-K or Internet Disclosure Regarding Changes to, or Waivers 
From, the Code of Ethics
    Section 406(b) of the Sarbanes-Oxley Act directs us to require a 
company to make ``immediate disclosure'' on Form 8-K or via Internet 
dissemination of any change to, or waiver from, the company's code of 
ethics for its senior financial officers. Consistent with this mandate, 
and in keeping with our decision to also require a company to disclose 
whether its principal executive officer is subject to a code of ethics, 
we are adding an item to the list of Form 8-K triggering events to 
require disclosure of:
    [sbull] The nature of any amendment to the company's code of ethics 
that applies to its principal executive officer, principal financial 
officer, principal accounting officer or controller, or persons 
performing similar functions; \52\ and
    [sbull] The nature of any waiver, including an implicit waiver, 
from a provision of the code of ethics granted by the company to one of 
these specified officers, the name of the person to whom the company 
granted the waiver and the date of the waiver.\53\
---------------------------------------------------------------------------

    \52\ The new rule includes an instruction clarifying that a 
company need not disclose technical, administrative or other non-
substantive amendments to the code of ethics. See Instruction 1 to 
new Item 10 of Form 8-K, Instruction 6 to Item 16B of Form 20-F, and 
Note 6 to paragraph (9) of General Instruction B to Form 40-F.
    \53\ See new Form 8-K Item 10. In Release No. 33-8106 (June 17, 
2002)[67 FR 42914], we proposed to reorganize and renumber the Form 
8-K items as part of our Form 8-K proposals. In anticipation of such 
change, we had proposed to designate this item as Item 5.05. Because 
we are adopting it before we consider adoption of the reorganization 
of Form 8-K, we are designating this new item as Item 10 under the 
existing Form 8-K numbering system.
---------------------------------------------------------------------------

    Only amendments or waivers relating to the specified elements of 
the code of ethics and the specified officers must be disclosed. This 
clarification is intended to allow and encourage companies to retain 
broad-based business codes. For example, if a company has a code of 
ethics that applies to its directors, as well as its principal 
executive officer and senior financial officers, an amendment to a 
provision affecting only directors would not require Form 8-K or 
Internet disclosure.
    A company choosing to provide the required disclosure on Form 8-K 
must do so within five business days after it amends its ethics code or 
grants a waiver.\54\ As an alternative to reporting this information on 
Form 8-K, a company may use its Internet Web site as a method of 
disseminating this disclosure, but only if it previously has disclosed 
in its most recently filed annual report on Form 10-K or 10-KSB: \55\
---------------------------------------------------------------------------

    \54\ We initially proposed a two business day filing period to 
be consistent with the accelerated Form 8-K filing deadlines that we 
proposed in Release No. 33-8106. Because we have not yet adopted 
those proposals, the five business day period will serve as an 
interim deadline for an Item 10 Form 8-K. The five business day 
period is the shorter of the two existing Form 8-K deadlines. When 
we address the Form 8-K proposals, we will consider whether to 
shorten the Item 10 deadline to two business days.
    \55\ See new Item 406(b) of Regulations S-K and S-B. Because 
investors may not expect these disclosures to be made on the 
company's Web site in lieu of a Form 8-K filing, we are requiring a 
company to provide investors with advance notice that it may choose 
to use this option to avoid confusion.
---------------------------------------------------------------------------

    [sbull] Its intention to disclose these events on its Internet 
website, and
    [sbull] Its Internet website address.\56\
---------------------------------------------------------------------------

    \56\ If a company elects to disclose this information on its Web 
site, it must do so within the same five-business day period as 
required for a Form 8-K that includes this type of disclosure. In 
addition, a company electing to provide disclosure in this manner 
must make the disclosure available on its Web site for at least 12 
months after it initially posts the disclosure. Although a company 
may remove information from its Web site after the 12-month posting 
period, the company must retain this disclosure for a period of not 
less than five years and make it available to the Commission or its 
staff upon request. New Item 10(c) of Form 8-K.
---------------------------------------------------------------------------

    The commenters were mixed in their reaction to our proposal to 
permit Internet disclosure of changes and waivers of the code of ethics 
in lieu of a Form 8-K filing. Some commenters did not believe that 
Internet disclosure would provide sufficiently broad dissemination. 
Others believed that such disclosure would be sufficient. The final 
rules retain the Internet disclosure option because the language in 
Section 406(b) of the Sarbanes-Oxley Act clearly indicates that 
Congress intended companies to have this option.

[[Page 5120]]

    Several commenters remarked on the proposal to require a company to 
disclose ethics waivers. A number of these suggested that we provide 
guidance as to the meaning of the terms ``waiver'' and ``implicit 
waiver.'' In response, the final rules define the term ``waiver'' as 
the approval by the company of a material departure from a provision of 
the code of ethics.\57\ They define the term ``implicit waiver'' as the 
registrant's failure to take action within a reasonable period of time 
regarding a material departure from a provision of the code of ethics 
that has been made known to an executive officer, as defined in Rule 
3b-7,\58\ of the registrant.\59\
---------------------------------------------------------------------------

    \57\ See Instruction 3.a. to new Item 10 of Form 8-K.
    \58\ 17 CFR 240.3b-7.
    \59\ See Instruction 3.b. to new Item 10 of Form 8-K.
---------------------------------------------------------------------------

C. Foreign Private Issuers and Request for Comments

    We included foreign private issuers within the scope of the 
proposed rules implementing both Sections 406 and 407 of the Sarbanes-
Oxley Act. Some commenters requested that we exempt foreign private 
issuers from the application of these rules on the ground that the 
rules would overlap or conflict with the audit committee requirements 
and corporate governance code of ethics provisions in the issuers' home 
jurisdictions. Other commenters stated that, for the sake of 
simplicity, any rule requiring a company, whether foreign or domestic, 
to disclose whether its audit committee financial expert is independent 
should reflect the standard of independence set forth in the rules that 
we will adopt to implement Section 301 of the Sarbanes-Oxley Act.
    We have determined to include foreign private issuers within the 
scope of the final rules implementing Sections 406 and 407. Their 
inclusion comports both with the plain language of the above statutory 
sections, which applies broadly to issuers, as well as with the 
overarching purpose of the Sarbanes-Oxley Act, which is to restore 
investor confidence in U.S. financial markets, regardless of the origin 
of the market participants.
    Accordingly, like a domestic issuer, a foreign private issuer will 
have to disclose whether it has an audit committee financial expert in 
its Exchange Act annual report. Because foreign private issuers are not 
subject to Regulation S-K, however, we have amended Forms 20-F and 40-F 
to require the audit committee financial expert disclosure.\60\
---------------------------------------------------------------------------

    \60\ See new Item 16A of Form 20-F and new paragraph (8) to 
General Instruction B of Form 40-F.
---------------------------------------------------------------------------

    We agree with the commenters that urged us to adopt an independence 
standard for the required audit committee financial expert disclosure 
that will be the same as that embodied in the rules to be adopted under 
Section 301 of the Sarbanes-Oxley Act. Accordingly, we intend to revise 
the Section 407 rules to reflect the independence standard eventually 
adopted and set forth in the rules implementing Section 301.\61\
---------------------------------------------------------------------------

    \61\ See proposed Exchange Act Rule 10A-3 set forth in Release 
No. 33-8173 (Jan. 8, 2003).
---------------------------------------------------------------------------

    In the interim, we believe that it is not appropriate or necessary 
at this time to require foreign private issuers to disclose whether 
their audit committee financial experts are independent.\62\ Unlike 
domestic issuers, foreign private issuers currently are not required to 
disclose whether their audit committee members are independent.\63\ 
Imposing the independence disclosure requirement immediately may compel 
a foreign private issuer to disclose that its expert is not independent 
under our definition even though there has been no prior context in 
which that issuer has been required to consider our definition of the 
term. In addition, immediate imposition of our current definition of 
``independent'' would require foreign private issuers to familiarize 
themselves with rules which we expect to revise within one annual 
reporting period. Such imposition may be unfair to foreign private 
issuers. Therefore, the final rules do not require a foreign private 
issuer to disclose whether its audit committee financial expert is 
independent. However, we reiterate that in conjunction with the 
adoption of our rules under Section 301, which will apply to foreign 
private issuers, we intend to amend Forms 20-F and 40-F to require such 
disclosure.
---------------------------------------------------------------------------

    \62\ A domestic company must disclose whether its audit 
committee financial expert is independent under the existing 
dfinition of independence in Item 7 of Schedule 14A. Upon the 
expected revision of that item, a domestic company must disclose 
whether its audit committee financial expert is independent under 
the new definition of independence.
    \63\ Foreign private issuers generally are exempt from the 
requirements of Regulation 14A, including Item 7(d) of Schedule 14A 
which requires disclosure of whether audit committee members are 
independent. See 17 CFR 240.3a12-3(b).
---------------------------------------------------------------------------

    In the release implementing Section 301, we propose a special 
accommodation for certain audit committee requirements for foreign 
private issuers with a board of auditors or statutory auditors under 
home country legal or listing provisions, subject to certain 
conditions. Specifically, foreign private issuers with boards of 
auditors or similar bodies or statutory auditors meeting the 
requirements of our proposals would be exempt from the requirements 
regarding the independence of audit committee members. We request 
comment on whether the disclosure requirements related to audit 
committee financial experts should apply to such issuers. To the extent 
they should apply to such issuers, should the requirements apply to the 
board of auditors or similar body? Should we apply different standards 
or disclosure requirements for such issuers? For example, should audit 
committee financial experts of such issuers be subject to the same 
disclosure requirement regarding independence as other foreign private 
issuers? One of the proposed requirements for the listing exemption 
would be that home country legal or listing provisions set forth 
standards for the independence of such board or body. Should we permit 
these issuers to use those independence standards for their 
independence disclosure?
    Like a domestic issuer, under the adopted Section 406 rules, a 
foreign private issuer will have to provide the new code of ethics 
disclosure in its Exchange Act annual report. However, in contrast to a 
domestic issuer, a foreign private issuer will not have to provide in a 
current report ``immediate disclosure'' of any change to, or waiver 
from, the company's code of ethics for its senior financial officers 
and principal executive officer. Instead, we are adopting as proposed 
the requirement that a foreign private issuer disclose any such change 
or waiver that has occurred during the past fiscal year in its Exchange 
Act annual report.\64\ This differing treatment reflects the fact that, 
unlike domestic Exchange Act reporting companies, reporting foreign 
private issuers do not have any specific interim or current disclosure 
requirements mandated by the Commission.\65\
---------------------------------------------------------------------------

    \64\ See Release No. 33-8138, the text before and after n. 84.
    \65\ Instead, a foreign private issuer must file under cover of 
Form 6-K copies of all information that it: Makes or is required to 
make public under the laws of its jurisdiction of incorporation, 
domicile or organization; files or is required to file under the 
rules of any stock exchange; or distributes or is required to 
distribute to its security holders. See General Instruction B to 
Form 6-K.
---------------------------------------------------------------------------

    The adopted revisions to Forms 20-F and 40-F do state, however, 
that a foreign private issuer may disclose any change to or waiver from 
the code of ethics obligations of its senior officers

[[Page 5121]]

on a Form 6-K or its Internet Web site.\66\ We strongly encourage 
foreign private issuers to use these alternative means of disclosure in 
the interest of promptness.
---------------------------------------------------------------------------

    \66\ See new Item 16B to Form 20-F and new paragraph (9) to 
General Instruction B of Form 40-F.
---------------------------------------------------------------------------

D. Asset-Backed Issuers

    In several of our releases implementing provisions of the Sarbanes-
Oxley Act, including the Proposing Release, we have noted the special 
nature of asset-backed issuers.\67\ Because of the nature of these 
entities, such issuers are subject to substantially different reporting 
requirements. Most significantly, asset-backed issuers generally are 
not required to file the financial statements that other companies must 
file. Also, such entities typically are passive pools of assets, 
without an audit committee or board of directors or persons acting in a 
similar capacity. Accordingly, we are excluding asset-backed issuers 
from the new disclosure requirements.
---------------------------------------------------------------------------

    \67\ The term ``asset-backed issuer'' is defined in Exchange Act 
Rules 13a-14(g) and 15d-14(g) [17 CFR 240.13a-14(g) and 240.15d-
14(g)].
---------------------------------------------------------------------------

E. Transition Periods

    We received numerous comments urging us to adopt transition periods 
for compliance. Commenters noted that some companies desiring audit 
committee financial experts and codes of ethics that meet the 
definitions included in the new rules may need some time to adjust. 
Several commenters asserted that no special transition periods were 
necessary because the new rules only require disclosure. They noted 
that a company that has no audit committee financial expert or code of 
ethics would not be at risk of non-compliance with our rules as long as 
it makes appropriate disclosure. However, we recognize that a company 
that does not have an audit committee financial expert or a code of 
ethics that complies with these new definitions may be harmed by having 
to disclose these facts even if the company intends to obtain such 
expert or code. Therefore, we have decided to provide a limited 
transition period. Companies must comply with the code of ethics 
disclosure requirements promulgated under Section 406 of the Sarbanes-
Oxley Act in their annual reports for fiscal years ending on or after 
July 15, 2003. They also must comply with the requirements regarding 
disclosure of amendments to, and waivers from, their ethics codes on or 
after the date on which they file their first annual report in which 
disclosure of their code of ethics is required. Companies, other than 
small business issuers, similarly must comply with the audit committee 
financial expert disclosure requirements promulgated under Section 407 
of the Sarbanes-Oxley Act in their annual reports for fiscal years 
ending on or after July 15, 2003. Recognizing that smaller businesses 
may have the greatest difficulty attracting qualified audit committee 
financial experts, small business issuers must comply with the audit 
committee financial expert disclosure requirements in their annual 
reports for fiscal years ending on or after December 15, 2003.

III. Paperwork Reduction Act

    The amendments contain ``collection of information'' requirements 
within the meaning of the Paperwork Reduction Act of 1995 (``PRA''). We 
published a notice requesting comment on the collection of information 
requirements in the Proposing Release, and we submitted requests to the 
Office of Management and Budget (``OMB'') for approval in accordance 
with the PRA. These requests are pending before the OMB.
    The titles for the collection of information are ``Form 10-K,'' 
``Form 10-KSB,'' ``Form 20-F,'' ``Form 40-F'' and ``Form 8-K.'' An 
agency may not conduct or sponsor, and a person is not required to 
respond to, a collection of information unless it displays a currently 
valid OMB control number.
    Form 10-K (OMB Control No. 3235-0063) prescribes information that a 
registrant must disclose annually to the market about its business. 
Form 10-KSB (OMB Control No. 3235-0420) prescribes information that a 
``small business issuer'' as defined under our rules must disclose 
annually to the market about its business. Form 20-F (OMB Control No. 
3235-0288) prescribes information that a foreign private issuer must 
disclose annually to the market about its business. Form 40-F (OMB 
Control No. 3235-0381) prescribes information that certain Canadian 
issuers must disclose annually to the market about their businesses. 
Form 8-K (OMB Control No. 3235-0060) prescribes information about 
significant events that a registrant must disclose on a current basis. 
Form 8-K also may be used, at a registrant's option, to report any 
events that the registrant deems to be of importance to shareholders. 
Additionally, companies may use the form to disclose the nonpublic 
information required to be disclosed by Regulation FD.\68\
---------------------------------------------------------------------------

    \68\ 17 CFR 243.100-103.
---------------------------------------------------------------------------

A. Summary of Amendments

    The amendments require two new types of disclosure that must be 
included in Form 10-K, Form 10-KSB, Form 20-F and Form 40-F. A domestic 
company may, at its discretion, provide the new disclosures in its 
proxy or information statement on Schedule 14A or 14C and incorporate 
those disclosures by reference into its annual report. These new 
disclosure items require a company to disclose the following:
    [sbull] Whether it has at least one ``audit committee financial 
expert'' serving on its audit committee, and if so, the name of the 
expert and whether the expert is independent of management. A company 
that does not have an audit committee financial expert must disclose 
this fact and explain why it has no such expert.
    [sbull] Whether it has adopted a code of ethics that applies to the 
company's principal executive officer, principal financial officer, 
principal accounting officer, controller, or persons performing similar 
functions. A company disclosing that it has not adopted such a code 
must disclose this fact and explain why it has not done so. A company 
also will be required to promptly disclose amendments to, and waivers 
from, the code of ethics relating to any of those officers.
    None of these amendments requires a company to have an audit 
committee financial expert or a code of ethics.

B. Summary of Comment Letters and Revisions to Proposals

    We requested comment on the PRA analysis contained in the proposing 
release. Several commenters asserted that the benefits of a rule 
requiring a company to file its code of ethics do not justify the 
costs. In response to those comments, the final rules provide for two 
additional means by which a company may make copies of its code of 
ethics available to the public. Instead of filing the code, the rules 
permit a company to either post its code of ethics on the company's Web 
site if it discloses in its annual report that it intends to do so or 
to include a written undertaking in its annual report to provide any 
person with a copy of the code of ethics free of charge upon request. 
We include in this PRA analysis an adjustment to reflect the added 
disclosure required if a company intends to post its ethics code on its 
Web site and by the undertaking if a company elects to make copies 
available to the public without charge upon request. The purpose of 
these new disclosures is to provide flexibility for companies in making 
their

[[Page 5122]]

codes of ethics available to the public and to ensure that interested 
investors will be able to obtain a copy of the code of ethics if the 
company does not otherwise make the code publicly accessible. At the 
same time, we assume that companies will choose the least burdensome 
means of providing the information.
    Although we have made several other modifications to the proposals, 
they will not affect our estimates of the burden imposed on companies 
by the new disclosure requirements. These modifications clarify the 
definitions of certain terms, such as ``audit committee financial 
expert'' and ``code of ethics,'' used in the new disclosure items. 
Although the revision to the audit committee financial expert 
definition may increase the number of persons who would qualify as an 
audit committee financial expert, it will not affect the amount of 
disclosure necessary under the disclosure items. The change to the code 
of ethics definition similarly will not affect the amount of disclosure 
required under the new rules. Therefore, we do not believe that these 
changes affect our previous estimates of the burden on registrants 
associated with these new disclosure items.

C. Burden Estimates

    All Form 10-K, 10-KSB, 20-F and 40-F respondents will be subject to 
the new audit committee financial expert and code of ethics disclosure 
requirements. In the Proposing Release, we estimated that the total 
burden imposed by the new disclosure items that we are adopting would 
be one burden hour per year per registrant, of which 75%, or \3/4\ 
hour, would be borne by the company internally and 25%, or \1/4\ hour, 
would be borne externally by outside counsel retained by the company at 
a cost of $300 per hour.\69\ We also estimated in the Proposing Release 
that preparation of a Form 8-K to report changes to, or waivers from, 
provisions of the code of ethics would impose a burden of 5 hours per 
form. We estimated that a company will file such a report once every 
three years. This results in an estimate of 1\2/3\ hours per company 
per year, of which 75%, or 1\1/4\ hours would be borne by the company 
internally and 25%, or \5/12\ of an hour, would be reflected as an 
outside counsel cost of $300 per hour.
---------------------------------------------------------------------------

    \69\ Estimates regarding burden within the company, for third 
party services, and for professional costs were obtained by 
contacting a number of law firms and other persons regularly 
involved in completing the forms.
---------------------------------------------------------------------------

    The new disclosures required when a company elects to post its code 
of ethics on its Web site or to undertake to provide copies to persons 
upon request will result in an additional one or two sentences in the 
company's annual report. We estimate that this disclosure will add a 
burden of 6 minutes, or 0.1 hour, per year per company choosing the 
posting or undertaking option. We do not have data to accurately 
estimate the number of companies that will make such elections. 
However, we believe that a significant number of companies currently 
make their ethics codes available to the public on their Web sites. 
Therefore, we estimate that 75% of companies subject to the 
requirements will choose to disclose this information on their Web 
sites. We further estimate that 10% of companies will choose to 
undertake to offer copies of its code of ethics upon request.
    Compliance with the revised disclosure requirements is mandatory. 
Responses to the disclosure requirements will not be kept confidential.

IV. Costs and Benefits

    The Sarbanes-Oxley Act requires us to adopt the new audit committee 
financial expert and code of ethics disclosure requirements. These 
changes will affect all companies reporting under Section 13(a) and 
15(d) of the Exchange Act, including foreign private issuers and small 
business issuers. We recognize that these requirements will result in 
costs as well as benefits and that they will have an effect on the 
economy.

A. Benefits

    One of the main goals of the Sarbanes-Oxley Act is to improve 
investor confidence in the financial markets. These rules are intended 
to achieve the Act's goals by providing greater transparency as to 
whether an audit committee financial expert serves on a company's audit 
committee and whether the company's principal executive officer and 
senior financial officers are subject to ethical standards. By 
increasing transparency regarding key aspects of corporate activities 
and conduct, the proposals are designed to improve the quality of 
information available to investors. Greater transparency should assist 
the market to properly value securities, which in turn should lead to 
more efficient allocation of capital resources.
    The new rules require a company to disclose the name of the audit 
committee financial expert serving on the audit committee and whether 
that person is independent of management if the company discloses that 
it has a financial expert. Investors should benefit from this 
disclosure by being able to consider it when reviewing currently 
required disclosure about all directors' past business experience and 
making voting decisions.\70\ The new rules also require a company to 
make copies of its code of ethics available to investors. This 
requirement will allow investors to better understand the ethical 
principles that guide executives of companies in which they invest.
---------------------------------------------------------------------------

    \70\ See Item 401 of Regulations S-K and S-B (17 CFR 229.401 and 
228.401).
---------------------------------------------------------------------------

B. Costs

    The new disclosure items require companies to make disclosure about 
two matters. First, a company must disclose whether it has at least one 
``audit committee financial expert'' serving on its audit committee, 
and if so, the name of the expert and whether the expert is independent 
of management. A company that does not have an audit committee 
financial expert must disclose this fact and explain why it has no such 
expert. Second, a company must disclose whether it has adopted a code 
of ethics that applies to the company's principal executive officer and 
senior financial officers. A company disclosing that it has not adopted 
such a code must disclose this fact and explain why it has not done so. 
A company also will be required to promptly disclose amendments to, and 
waivers from, the code of ethics relating to any of those officers. 
This information will be readily available to the company. For purposes 
of the Paperwork Reduction Act, we estimated these burdens to be 
$7,760,000.
    As stated above, in limited instances, the new rules require more 
disclosure than mandated by the Sarbanes-Oxley Act. For example, we 
expect that companies will incur added costs to disclose the name of 
the audit committee financial expert, to disclose whether that person 
is independent and to file or otherwise make available copies of their 
codes of ethics to investors. Companies electing to disclose changes 
in, and waivers from, their codes of ethics via their websites in lieu 
of publicly filing such disclosure on Form 8-K must disclose this 
election in their annual reports.
    The added burden associated with the requirements to name the audit 
committee financial expert and disclose whether the audit committee 
financial expert is independent should be minimal.\71\ We have added a 
safe harbor provision to clarify that we do not intend to increase or 
decrease the current level of liability of audit

[[Page 5123]]

committee members, or the audit committee member determined to be the 
expert, by requiring disclosure as to whether an audit committee 
financial expert serves on the audit committee. We also do not think 
that the requirement to name the audit committee financial expert 
should affect the expert's potential liability as an audit committee 
member.
---------------------------------------------------------------------------

    \71\ This added burden is included in the Paperwork Reduction 
Act estimate discussed above.
---------------------------------------------------------------------------

    Several commenters noted that a company may incur costs if it has 
to disclose that it does not have an audit committee financial expert 
on its audit committee. For example, a negative market reaction to this 
type of disclosure could hamper a company's ability to raise capital. 
In response to commenters' remarks, we have broadened the definition of 
the term ``audit committee financial expert'' so that more individuals 
will be able to qualify under the definition. For example, the final 
rules allow persons with experience preparing, auditing, analyzing or 
evaluating financial statements, or active supervision over those 
activities, to qualify. The proposals only permitted those with 
experience preparing or auditing financial statements to qualify as 
experts. Similarly, we have broadened the permissible means by which a 
person may acquire the requisite expertise. For example, we have added 
a clause that would permit a person to have acquired the attributes 
through experience overseeing or assessing the performance of companies 
or public accountants with respect to the preparation, auditing or 
evaluation of financial statements. We have also added a clause that 
allows a person to acquire the attributes through other relevant 
experience. While more companies will be able to disclose that they 
have an audit committee financial expert under the revised definition, 
we believe that definition still is consistent with the Act's objective 
to require an Exchange Act reporting company to disclose whether it has 
a person with a high level of financial expertise on its audit 
committee.
    With respect to the code of ethics provisions, a number of 
commenters stated that the benefits of filing copies of the code of 
ethics do not justify the anticipated costs. They argued that some 
companies have long codes which would be expensive to file. Moreover, 
many details in those codes may not be material to investors. They 
argued that it should be sufficient for a company to disclose whether 
it has a code satisfying the definition of the term ``code of ethics'' 
in our rule. Recognizing that a number of companies currently post 
copies of their code of ethics on their websites, we have revised the 
rule to provide two alternatives to the filing requirement. A company 
may either post its code of ethics on its website if it discloses that 
it intends to do so in its annual report or undertake in its annual 
report to provide investors with a copy of its code of ethics upon 
request. These alternatives should allow issuers to choose the most 
cost efficient method to meet the new requirements. We believe that 
these additional requirements benefit investors, impose minimal burden 
on companies, and are consistent with the objectives of the Sarbanes-
Oxley Act.

V. Effect on Efficiency, Competition and Capital Formation

    Section 23(a)(2) \72\ of the Exchange Act requires us, when 
adopting rules under the Exchange Act, to consider the impact that any 
new rule would have on competition. In addition, Section 23(a)(2) 
prohibits us from adopting any rule that would impose a burden on 
competition not necessary or appropriate in furtherance of the purposes 
of the Exchange Act.
---------------------------------------------------------------------------

    \72\ 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

    Section 2(b) \73\ of the Securities Act and Section 3(f) \74\ of 
the Exchange Act require us, when engaging in rulemaking where we are 
required to consider or determine whether an action is necessary or 
appropriate in the public interest, to consider, in addition to the 
protection of investors, whether the action will promote efficiency, 
competition, and capital formation. The purpose of the amendments is to 
increase transparency of certain aspects of a company's corporate 
governance. This should improve the ability of investors to make 
informed investment and voting decisions. Informed investor decisions 
generally promote market efficiency and capital formation. As noted 
above, however, the new disclosure items could have certain indirect 
consequences, which could adversely impact a company's ability to raise 
capital. The possibility of these effects and their magnitude if they 
were to occur are difficult to quantify.
---------------------------------------------------------------------------

    \73\ 15 U.S.C. 77b(b).
    \74\ 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

    Much of the new disclosure required by the final rules discussed in 
this release is explicitly mandated by the Sarbanes-Oxley Act. The new 
disclosure items are intended to increase transparency as to whether an 
audit committee financial expert serves on a company's audit committee 
and whether the company has a code of ethics that applies to its 
principal executive officer and senior financial officers. We 
anticipate that these disclosures will enhance the proper functioning 
of the capital markets by giving investors greater insight into certain 
aspects of a company's corporate governance activities. These 
enhancements should, in turn, increase the competitiveness of companies 
participating in the U.S. capital markets. However, because only 
companies subject to the reporting requirements of Sections 13 and 15 
of the Exchange Act must make the disclosures, competitors not subject 
to those reporting requirements potentially could gain an informational 
advantage.
    We requested comment on whether the proposed amendments, if 
adopted, would impose a burden on competition or, conversely, promote 
efficiency, competition and capital formation. A number of commenters 
expressed concern that the definition of the term ``audit committee 
financial expert'' may have anti-competitive effects. Specifically, 
they were concerned that the definition was so narrow that it might 
cause some companies, desiring to have an expert on their board, to 
recruit persons associated with a competitor. In response to these 
comments, we have clarified that this provision does not require the 
audit committee financial expert to have experience with issuers in the 
same industry as the company, or that the person's experience must have 
been with a company subject to the Exchange Act reporting requirements. 
Rather, we have included this provision to focus on the level of 
sophistication of the accounting issues with which the person has had 
experience. We think that a company's board of directors will have to 
make the sophistication assessment based on particular facts and 
circumstances.
    Other commenters expressed concern that the definition was so 
narrow that many companies would have trouble finding audit committee 
financial experts. They also feared that disclosure of the fact that a 
company does not have an audit committee financial expert could trigger 
an adverse market reaction. We have attempted to expand the definition 
of ``audit committee financial expert'' without sacrificing the quality 
of knowledge and experience required of such an expert. We believe that 
the revised definition, though expanded, is consistent with the 
purposes of the Act.
    Commenters also expressed concern that requiring disclosure of the 
names of audit committee financial experts would further hamper their 
efforts to find qualified persons willing to serve on their audit 
committees as experts by

[[Page 5124]]

exposing such persons to increased liability. In response to these 
comments, we have created a safe harbor from liability for audit 
committee financial experts. This safe harbor states that an audit 
committee financial expert is not deemed an expert for any purpose, 
including for purposes of Section 11 of the Securities Act, which 
imposes, in private actions, a liability standard that is more strict 
than typically imposed by the anti-fraud provisions of the Securities 
Act and the Exchange Act. In addition, the safe harbor states that a 
person's potential liability as a director does not change as a result 
of being designated an audit committee financial expert. That person 
will be subject to the same duties, obligations and liability to which 
he or she would have been subject, absent such designation. The safe 
harbor also clarifies that the designation of an audit committee 
financial expert does not affect the duties, obligations and liability 
of other directors and audit committee members.

VI. Final Regulatory Flexibility Analysis

    This Final Regulatory Flexibility Analysis has been prepared in 
accordance with 5 U.S.C. 603. It relates to revisions to Exchange Act 
Form 8-K, Form 10-K, Form 10-KSB, Form 20-F, Form 40-F, Regulation S-K 
and Regulation S-B.

A. Need for, and Objectives of, the Amendments

    We are adopting these disclosure requirements to comply with the 
mandate of, and fulfill the purposes underlying the provisions of, the 
Sarbanes-Oxley Act of 2002. The new disclosure items are intended to 
enhance investor confidence in the fairness and integrity of the 
securities markets by increasing transparency as to whether a company 
has an audit committee financial expert on its audit committee and 
whether a company has adopted a code of ethics that applies to its 
principal executive officer and senior financial officers. We believe 
that these rules will help investors to understand and assess certain 
aspects of a company's corporate governance.

B. Significant Issues Raised by Public Comment

    The Initial Regulatory Flexibility Analysis, or IRFA, appeared in 
the Proposing Release. We requested comment on any aspect of the IRFA, 
including the number of small entities that would be affected by the 
proposals, the nature of the impact, how to quantify the number of 
small entities that would be affected and how to quantify the impact of 
the proposals.
    A number of commenters expressed concern that small business 
issuers, including small entities, would be particularly disadvantaged 
by the proposed definition of ``audit committee financial expert,'' 
which they thought was too restrictive. Commenters believed that such 
entities may be more likely to be unable to attract qualified persons 
to serve on their audit committees and that a higher percentage of 
small companies than large companies would be compelled to state that 
they had no audit committee financial expert. They suggested that this 
problem would be exacerbated for companies whose operations are 
primarily conducted in relatively small geographic regions in which 
such expertise may not be available.

C. Small Entities Subject to the New Disclosure Requirements

    The new disclosure items affect issuers that are small entities. 
Exchange Act Rule 0-10(a) \75\ defines an issuer, other than an 
investment company, to be a ``small business'' or ``small 
organization'' if it had total assets of $5 million or less on the last 
day of its most recent fiscal year. We estimate that there are 
approximately 2,500 issuers, other than investment companies, that may 
be considered small entities. The new disclosure items apply to any 
small entity that is subject to Exchange Act reporting requirements.
---------------------------------------------------------------------------

    \75\ 17 CFR 240.0-10(a).
---------------------------------------------------------------------------

D. Projected Reporting, Recordkeeping, and Other Compliance 
Requirements

    The new disclosure items require companies to disclose information 
as to whether an audit committee financial expert serves on the 
company's audit committee and whether the company has adopted a code of 
ethics that applies to its principal executive officer and senior 
financial officers. All small entities that are subject to the 
reporting requirements of Section 13(a) or 15(d) of the Exchange Act 
are subject to these disclosure requirements. Because reporting 
companies already file the forms being amended, no additional 
professional skills beyond those currently possessed by these filers 
are necessary to prepare the new disclosure. We expect that these new 
disclosure items will increase costs incurred by small entities by 
requiring them to compile and report new information. In addition, to 
the extent that some small entities may have difficulty attracting 
qualified audit committee financial experts, disclosure that they have 
no audit committee financial expert may have a negative impact on the 
market price of their securities. We have calculated for purposes of 
the Paperwork Reduction Act that each company, including a small 
entity, would be subject to an added annual reporting burden of 
approximately 2.1 hours and an estimated annual average cost of 
approximately $206 for disclosure assistance from outside counsel as a 
result of the amendments. These burden estimates reflect only the 
burden and cost of the required collection of information. They do not 
reflect any potential burden or cost associated with recruitment of a 
qualified audit committee financial expert or creation of a code of 
ethics, neither of which is required by our rules.

E. Agency Action To Minimize Effect on Small Entities and Significant 
Alternatives

    The Regulatory Flexibility Act directs the Commission to consider 
significant alternatives that would accomplish the stated objective, 
while minimizing any significant adverse impact on small entities. In 
connection with the new disclosure items, we considered the following 
alternatives: (a) The establishment of differing compliance or 
reporting requirements or timetables that take into account the 
resources available to small entities; (b) the clarification, 
consolidation, or simplification of the reporting requirements for 
small entities; (c) the use of performance rather than design 
standards; and (d) an exemption from coverage of the requirements, or 
any part thereof, for small entities.
    We believe that different compliance or reporting requirements for 
small entities would interfere with the primary goal of increasing 
transparency of corporate governance. Although we generally believe 
that an exemption for small entities from coverage of the new 
disclosure requirements is not appropriate and would be inconsistent 
with the policies underlying the Sarbanes-Oxley Act, we have provided a 
deferred compliance date for small business issuers, including those 
that constitute small entities, with respect to the required audit 
committee financial expert disclosures.\76\ Under the adopted

[[Page 5125]]

rules, small business issuers need not make such disclosure until they 
file their annual reports for fiscal years ending December 15, 2003 or 
later. This deferral provides a small business issuer that does not 
currently have an audit committee member that would qualify as an audit 
committee financial expert under the new definition with more time to 
identify and recruit one. We note in this regard that our rules do not 
require any company to have an audit committee financial expert serving 
on its audit committee; they only require disclosure of whether such an 
expert serves on the company's audit committee.
---------------------------------------------------------------------------

    \76\ Item 10 of Regulation S-B (17 CFR 228.10) defines a small 
business issuer as a company that has revenues of less than $25 
million, is a U.S. or Canadian issuer, is not an investment company, 
and has a public float of less than $25 million. Also, if it is a 
majority owned subsidiary, the parent corporation also must be a 
small business issuer. Rule 0-10 of the Exchange Act (17 CFR 240.10) 
defines a small entity for purposes of the Regulatory Flexibility 
Act as a company that, on the last day of its most recent fiscal 
year, had total assets of $5 million or less.
---------------------------------------------------------------------------

    As explained in this release, we also have significantly expanded 
the definition of the term ``audit committee financial expert'' for all 
companies. Several commenters noted that small businesses, in 
particular, would have difficulty attracting qualified persons. By 
expanding the definition, the rules increase the pool of available 
experts and ease the burden for all companies, including small 
entities, interested in recruiting qualified persons.
    Also, we have revised our proposed requirement that all companies, 
including small entities, must file a copy of their code of ethics as 
an exhibit to their annual reports. As stated in the release, the 
adopted rules provide three different alternatives for a company to 
make its code of ethics publicly available. This revision allows 
companies to choose the least burdensome alternative.
    We believe that the new disclosure requirements are clear and 
straightforward. The new rules require only brief disclosure. 
Therefore, it does not seem necessary to develop separate requirements 
for small entities. Similarly, we believe that applying a different 
definition of ``audit committee financial expert'' in a rule applicable 
only to small entities would not be appropriate. The final rules 
clarify that factors such as the complexity of a company's business and 
the accounting issues involved in a company's financial statements 
affect the level of experience and understanding that an audit 
committee financial expert should have. Because small entities tend to 
have less complex businesses and accounting issues than large 
companies, the definition provides significant flexibility to small 
entities. We have used design rather than performance standards in 
connection with the new disclosure items because we want this 
disclosure to appear in a specific type of disclosure filing so that 
investors will know where to find the information. We do not believe 
that performance standards for small entities would be consistent with 
the purpose of the new rules.

VII. Statutory Basis

    We are adopting amendments to Securities Exchange Act Form 10-K, 
Form 10-KSB, Form 20-F, Form 40-F, Form 8-K, Regulation S-B and 
Regulation S-K pursuant to Sections 5, 6, 7, 10, 17, 19 and 28 of the 
Securities Act, as amended, Sections 12, 13, 15, 23 and 36 of the 
Securities Exchange Act, as amended, and Sections 3(a), 406 and 407 of 
the Sarbanes-Oxley Act of 2002.

Text of the Proposed Amendments

List of Subjects

17 CFR Part 228

    Reporting and recordkeeping requirements, Securities, Small 
businesses.

17 CFR Parts 229 and 249

    Reporting and recordkeeping requirements, Securities.


    For the reasons set out above, we amend title 17, chapter II of the 
Code of Federal Regulations as follows:

PART 228--INTEGRATED DISCLOSURE SYSTEM FOR SMALL BUSINESS ISSUERS

    1. The authority citation for Part 228 is amended by adding the 
following citations in numerical order to read as follows:

    Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s, 77z-2, 
77z-3, 77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77jjj, 77nnn, 
77sss, 78l, 78m, 78n, 78o, 78u-5, 78w, 78ll, 78mm, 80a-8, 80a-29, 
80a-30, 80a-37 and 80b-11.
* * * * *
    Section 228.401 is also issued under secs. 3(a) and 407, Pub. L. 
107-204, 116 Stat. 745.
    Section 228.406 is also issued under secs. 3(a) and 406, Pub. L. 
107-204, 116 Stat. 745.
    Section 228.601 is also issued under secs. 3(a) and 406, Pub. L. 
107-204, 116 Stat. 745.


    2. Amend Sec.  228.401 by adding paragraph (e) to read as follows:


Sec.  228.401 (Item 401)  Directors, Executive Officers, Promoters and 
Control Persons.

* * * * *
    (e) Audit committee financial expert. (1)(i) Disclose that the 
small business issuer's board of directors has determined that the 
small business issuer either:
    (A) Has at least one audit committee financial expert serving on 
its audit committee; or
    (B) Does not have an audit committee financial expert serving on 
its audit committee.
    (ii) If the small business issuer provides the disclosure required 
by paragraph (e)(1)(i)(A) of this Item, it must disclose the name of 
the audit committee financial expert and whether that person is 
independent, as that term is used in Item 7(d)(3)(iv) of Schedule 14A 
(240.14a-101 of this chapter) under the Exchange Act.
    (iii) If the small business issuer provides the disclosure required 
by paragraph (e)(1)(i)(B) of this Item, it must explain why it does not 
have an audit committee financial expert.

    Instruction to paragraph (e)(1) of Item 401. If the small 
business issuer's board of directors has determined that the small 
business issuer has more than one audit committee financial expert 
serving on its audit committee, the small business issuer may, but 
is not required to, disclose the names of those additional persons. 
A small business issuer choosing to identify such persons must 
indicate whether they are independent pursuant to Item 
401(e)(1)(ii).

    (2) For purposes of this Item, an audit committee financial expert 
means a person who has the following attributes:
    (i) An understanding of generally accepted accounting principles 
and financial statements;
    (ii) The ability to assess the general application of such 
principles in connection with the accounting for estimates, accruals 
and reserves;
    (iii) Experience preparing, auditing, analyzing or evaluating 
financial statements that present a breadth and level of complexity of 
accounting issues that are generally comparable to the breadth and 
complexity of issues that can reasonably be expected to be raised by 
the small business issuer's financial statements, or experience 
actively supervising one or more persons engaged in such activities;
    (iv) An understanding of internal controls and procedures for 
financial reporting; and
    (v) An understanding of audit committee functions.
    (3) A person shall have acquired such attributes through:
    (i) Education and experience as a principal financial officer, 
principal accounting officer, controller, public accountant or auditor 
or experience in one or more positions that involve the performance of 
similar functions;
    (ii) Experience actively supervising a principal financial officer, 
principal accounting officer, controller, public accountant, auditor or 
person performing similar functions;
    (iii) Experience overseeing or assessing the performance of 
companies

[[Page 5126]]

or public accountants with respect to the preparation, auditing or 
evaluation of financial statements; or
    (iv) Other relevant experience.
    (4) Safe Harbor. (i) A person who is determined to be an audit 
committee financial expert will not be deemed an expert for any 
purpose, including without limitation for purposes of section 11 of the 
Securities Act of 1933 (15 U.S.C. 77k), as a result of being designated 
or identified as an audit committee financial expert pursuant to this 
Item 401.
    (ii) The designation or identification of a person as an audit 
committee financial expert pursuant to this Item 401 does not impose on 
such person any duties, obligations or liability that are greater than 
the duties, obligations and liability imposed on such person as a 
member of the audit committee and board of directors in the absence of 
such designation or identification.
    (iii) The designation or identification of a person as an audit 
committee financial expert pursuant to this Item 401 does not affect 
the duties, obligations or liability of any other member of the audit 
committee or board of directors.

    Instructions to Item 401(e). 1. The small business issuer need 
not provide the disclosure required by this Item 401(e) in a proxy 
or information statement unless that small business issuer is 
electing to incorporate this information by reference from the proxy 
or information statement into its annual report pursuant to general 
instruction E(3) to Form 10-KSB.
    2. If a person qualifies as an audit committee financial expert 
by means of having held a position described in paragraph (e)(3)(iv) 
of this Item, the small business issuer shall provide a brief 
listing of that person's relevant experience. Such disclosure may be 
made by reference to disclosures required under paragraph (a)(4) of 
this Item 401 (Sec.  229.401(a)(4) or this chapter).
    3. In the case of a foreign private issuer with a two-tier board 
of directors, for purposes of this Item 401(e), the term board of 
directors means the supervisory or non-management board. Also, in 
the case of a foreign private issuer, the term generally accepted 
accounting principles in paragraph (e)(2)(i) of this Item means the 
body of generally accepted accounting principles used by that issuer 
in its primary financial statements filed with the Commission.
    4. A small business issuer that is an Asset-Backed Issuer (as 
defined in Sec.  240.13a-14(g) and Sec.  240.15d-14(g) of this 
chapter) is not required to disclose the information required by 
this Item 401(e).
    5. Following the effective date of the first registration 
statement filed under the Securities Act (15 U.S.C. 77a et seq.) or 
Securities Exchange Act (15 U.S.C. 78a et seq.) by a small business 
issuer, the small business issuer or successor issuer need not make 
the disclosures required by this Item in its first annual report 
filed pursuant to Section 13(a) or 15(d) (15 U.S.C. 78m(a) or 
78o(d)) of the Exchange Act after effectiveness.


    3. Add Sec.  228.406 to read as follows:


Sec.  228.406  (Item 406) Code of ethics.

    (a) Disclose whether the small business issuer has adopted a code 
of ethics that applies to the small business issuer's principal 
executive officer, principal financial officer, principal accounting 
officer or controller, or persons performing similar functions. If the 
small business issuer has not adopted such a code of ethics, explain 
why it has not done so.
    (b) For purposes of this Item 406, the term code of ethics means 
written standards that are reasonably designed to deter wrongdoing and 
to promote:
    (1) Honest and ethical conduct, including the ethical handling of 
actual or apparent conflicts of interest between personal and 
professional relationships;
    (2) Full, fair, accurate, timely, and understandable disclosure in 
reports and documents that a small business issuer files with, or 
submits to, the Commission and in other public communications made by 
the small business issuer;
    (3) Compliance with applicable governmental laws, rules and 
regulations;
    (4) The prompt internal reporting of violations of the code to an 
appropriate person or persons identified in the code; and
    (5) Accountability for adherence to the code.
    (c) The small business issuer must:
    (1) File with the Commission a copy of its code of ethics that 
applies to the small business issuer's principal executive officer, 
principal financial officer, principal accounting officer or 
controller, or persons performing similar functions, as an exhibit to 
its annual report;
    (2) Post the text of such code of ethics on its Internet website 
and disclose, in its annual report, its Internet address and the fact 
that it has posted such code of ethics on its Internet website; or
    (3) Undertake in its annual report filed with the Commission to 
provide to any person without charge, upon request, a copy of such code 
of ethics and explain the manner in which such request may be made.
    (d) If the small business issuer intends to satisfy the disclosure 
requirement under Item 10 of Form 8-K regarding an amendment to, or a 
waiver from, a provision of its code of ethics that applies to the 
small business issuer's principal executive officer, principal 
financial officer, principal accounting officer or controller, or 
persons performing similar functions and that relates to any element of 
the code of ethics definition enumerated in paragraph (b) of this Item 
by posting such information on its Internet website, disclose the small 
business issuer's Internet address and such intention.

    Instructions to Item 406. 1. A small business issuer may have 
separate codes of ethics for different types of officers. 
Furthermore, a code of ethics within the meaning of paragraph (b) of 
this Item may be a portion of a broader document that addresses 
additional topics or that applies to more persons than those 
specified in paragraph (a). In satisfying the requirements of 
paragraph (c), a small business issuer need only file, post or 
provide the portions of a broader document that constitutes a code 
of ethics as defined in paragraph (b) and that apply to the persons 
specified in paragraph (a).
    2. If a small business issuer elects to satisfy paragraph (c) of 
this Item by posting its code of ethics on its website pursuant to 
paragraph (c)(2), the code of ethics must remain accessible on its 
website for as long as the small business issuer remains subject to 
the requirements of this Item and chooses to comply with this Item 
by posting its code on its Web site pursuant to paragraph (c)(2).
    3. A small business issuer that is an Asset-Backed Issuer (as 
defined in Sec.  240.13a-14(g) and Sec.  240.15d-14(g) of this 
chapter) is not required to disclose the information required by 
this Item.


    4. Amend Sec.  228.601 by:
    a. Removing the ``reserved'' designation for exhibit (14) and 
adding ``Code of ethics'' in its place in the Exhibit Table;
    b. Removing ``N/A'' corresponding to exhibit (14) under all 
captions in the Exhibit Table;
    c. Adding an ``X'' corresponding to exhibit (14) under the caption 
``Exchange Act Forms'', ``8-K'' and ``10-KSB'' in the Exhibit Table; 
and
    d. Adding the text of paragraph (b)(14).
    The revisions and additions read as follows:


Sec.  228.601  (Item 601) Exhibits.

* * * * *
    (b) Description of exhibits. * * *
    (14) Code of ethics. Any code of ethics, or amendment thereto, that 
is the subject of the disclosure required by Item 406 of Regulation S-B 
(Sec.  228.406) or Item 10 of Form 8-K (Sec.  249.308 of this chapter), 
to the extent that the small business issuer intends to satisfy the 
Item 406 or Item 10 requirements through filing of an exhibit.
* * * * *

[[Page 5127]]

PART 229--STANDARD INSTRUCTIONS FOR FILING FORMS UNDER SECURITIES 
ACT OF 1933, SECURITIES EXCHANGE ACT OF 1934 AND ENERGY POLICY AND 
CONSERVATION ACT OF 1975--REGULATION S-K

    5. The authority citation for Part 229 is amended by adding the 
following citations in numerical order to read as follows:

    Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s, 77z-2, 
77z-3, 77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77iii, 77jjj, 
77nnn, 77sss, 78c, 78i, 78j, 78l, 78m, 78n, 78o, 78u-5, 78w, 
78ll(d), 78mm, 79e, 79n, 79t, 80a-8, 80a-29, 80a-30, 80a-31(c), 80a-
37, 80a-38(a) and 80b-11, unless otherwise noted.
* * * * *
    Section 229.401 is also issued under secs. 3(a) and 407, Pub. L. 
107-204, 116 Stat. 745.
    Section 229.406 is also issued under secs. 3(a) and 406, Pub. L. 
107-204, 116 Stat. 745.
    Section 229.601 is also issued under secs. 3(a) and 406, Pub. L. 
107-204, 116 Stat. 745.


    6. Amend Sec.  229.401 by adding paragraph (h) to read as follows:


Sec.  229.401  (Item 401) Directors, executive officers, promoters and 
control persons.

* * * * *
    (h) Audit committee financial expert. (1)(i) Disclose that the 
registrant's board of directors has determined that the registrant 
either:
    (A) Has at least one audit committee financial expert serving on 
its audit committee; or
    (B) Does not have an audit committee financial expert serving on 
its audit committee.
    (ii) If the registrant provides the disclosure required by 
paragraph (h)(1)(i)(A) of this Item, it must disclose the name of the 
audit committee financial expert and whether that person is 
independent, as that term is used in Item 7(d)(3)(iv) of Schedule 14A 
(240.14a-101 of this chapter) under the Exchange Act.
    (iii) If the registrant provides the disclosure required by 
paragraph (h)(1)(i)(B) of this Item, it must explain why it does not 
have an audit committee financial expert.

    Instruction to paragraph (h)(1) of Item 401. If the registrant's 
board of directors has determined that the registrant has more than 
one audit committee financial expert serving on its audit committee, 
the registrant may, but is not required to, disclose the names of 
those additional persons. A registrant choosing to identify such 
persons must indicate whether they are independent pursuant to Item 
401(h)(1)(ii).

    (2) For purposes of this Item, an audit committee financial expert 
means a person who has the following attributes:
    (i) An understanding of generally accepted accounting principles 
and financial statements;
    (ii) The ability to assess the general application of such 
principles in connection with the accounting for estimates, accruals 
and reserves;
    (iii) Experience preparing, auditing, analyzing or evaluating 
financial statements that present a breadth and level of complexity of 
accounting issues that are generally comparable to the breadth and 
complexity of issues that can reasonably be expected to be raised by 
the registrant's financial statements, or experience actively 
supervising one or more persons engaged in such activities;
    (iv) An understanding of internal controls and procedures for 
financial reporting; and
    (v) An understanding of audit committee functions.
    (3) A person shall have acquired such attributes through:
    (i) Education and experience as a principal financial officer, 
principal accounting officer, controller, public accountant or auditor 
or experience in one or more positions that involve the performance of 
similar functions;
    (ii) Experience actively supervising a principal financial officer, 
principal accounting officer, controller, public accountant, auditor or 
person performing similar functions;
    (iii) Experience overseeing or assessing the performance of 
companies or public accountants with respect to the preparation, 
auditing or evaluation of financial statements; or
    (iv) Other relevant experience.
    (4) Safe Harbor. (i) A person who is determined to be an audit 
committee financial expert will not be deemed an expert for any 
purpose, including without limitation for purposes of section 11 of the 
Securities Act of 1933 (15 U.S.C. 77k), as a result of being designated 
or identified as an audit committee financial expert pursuant to this 
Item 401.
    (ii) The designation or identification of a person as an audit 
committee financial expert pursuant to this Item 401 does not impose on 
such person any duties, obligations or liability that are greater than 
the duties, obligations and liability imposed on such person as a 
member of the audit committee and board of directors in the absence of 
such designation or identification.
    (iii) The designation or identification of a person as an audit 
committee financial expert pursuant to this Item 401 does not affect 
the duties, obligations or liability of any other member of the audit 
committee or board of directors.

    Instructions to Item 401(h). 1. The registrant need not provide 
the disclosure required by this Item 401(h) in a proxy or 
information statement unless that registrant is electing to 
incorporate this information by reference from the proxy or 
information statement into its annual report pursuant to general 
instruction G(3) to Form 10-K.
    2. If a person qualifies as an audit committee financial expert 
by means of having held a position described in paragraph (h)(3)(iv) 
of this Item, the registrant shall provide a brief listing of that 
person's relevant experience. Such disclosure may be made by 
reference to disclosures required under paragraph (e) of this Item 
401 (Sec.  229.401(e) or this chapter).
    3. In the case of a foreign private issuer with a two-tier board 
of directors, for purposes of this Item 401(h), the term board of 
directors means the supervisory or non-management board. Also, in 
the case of a foreign private issuer, the term generally accepted 
accounting principles in paragraph (h)(2)(i) of this Item means the 
body of generally accepted accounting principles used by that issuer 
in its primary financial statements filed with the Commission.
    4. A registrant that is an Asset-Backed Issuer (as defined in 
Sec.  240.13a-14(g) and Sec.  240.15d-14(g) of this chapter) is not 
required to disclose the information required by this Item 401(h).


    7. Add Sec.  229.406 to read as follows:


Sec.  229.406  (Item 406) Code of ethics.

    (a) Disclose whether the registrant has adopted a code of ethics 
that applies to the registrant's principal executive officer, principal 
financial officer, principal accounting officer or controller, or 
persons performing similar functions. If the registrant has not adopted 
such a code of ethics, explain why it has not done so.
    (b) For purposes of this Item 406, the term code of ethics means 
written standards that are reasonably designed to deter wrongdoing and 
to promote:
    (1) Honest and ethical conduct, including the ethical handling of 
actual or apparent conflicts of interest between personal and 
professional relationships;
    (2) Full, fair, accurate, timely, and understandable disclosure in 
reports and documents that a registrant files with, or submits to, the 
Commission and in other public communications made by the registrant;
    (3) Compliance with applicable governmental laws, rules and 
regulations;
    (4) The prompt internal reporting of violations of the code to an 
appropriate person or persons identified in the code; and
    (5) Accountability for adherence to the code.
    (c) The registrant must:
    (1) File with the Commission a copy of its code of ethics that 
applies to the registrant's principal executive officer,

[[Page 5128]]

principal financial officer, principal accounting officer or 
controller, or persons performing similar functions, as an exhibit to 
its annual report;
    (2) Post the text of such code of ethics on its Internet website 
and disclose, in its annual report, its Internet address and the fact 
that it has posted such code of ethics on its Internet Web site; or
    (3) Undertake in its annual report filed with the Commission to 
provide to any person without charge, upon request, a copy of such code 
of ethics and explain the manner in which such request may be made.
    (d) If the registrant intends to satisfy the disclosure requirement 
under Item 10 of Form 8-K regarding an amendment to, or a waiver from, 
a provision of its code of ethics that applies to the registrant's 
principal executive officer, principal financial officer, principal 
accounting officer or controller, or persons performing similar 
functions and that relates to any element of the code of ethics 
definition enumerated in paragraph (b) of this Item by posting such 
information on its Internet website, disclose the registrant's Internet 
address and such intention.

    Instructions to Item 406. 1. A registrant may have separate 
codes of ethics for different types of officers. Furthermore, a code 
of ethics within the meaning of paragraph (b) of this Item may be a 
portion of a broader document that addresses additional topics or 
that applies to more persons than those specified in paragraph (a). 
In satisfying the requirements of paragraph (c), a registrant need 
only file, post or provide the portions of a broader document that 
constitutes a code of ethics as defined in paragraph (b) and that 
apply to the persons specified in paragraph (a).
    2. If a registrant elects to satisfy paragraph (c) of this Item 
by posting its code of ethics on its website pursuant to paragraph 
(c)(2), the code of ethics must remain accessible on its Web site 
for as long as the registrant remains subject to the requirements of 
this Item and chooses to comply with this Item by posting its code 
on its Web site pursuant to paragraph (c)(2).
    3. A registrant that is an Asset-Backed Issuer (as defined in 
Sec.  240.13a-14(g) and Sec.  240.15d-14(g) of this chapter) is not 
required to disclose the information required by this Item.


    8. Amend Sec.  229.601 by:
    a. Removing the ``reserved'' designation for exhibit (14) and 
adding ``Code of ethics'' in its place in the Exhibit Table;
    b. Removing ``N/A'' corresponding to exhibit (14) under all 
captions in the Exhibit Table;
    c. Adding an ``X'' corresponding to exhibit (14) under the caption 
``Exchange Act Forms'', ``8-K'' and ``10-K'' in the Exhibit Table; and
    d. Adding the text of paragraph (b)(14).
    The revisions and additions read as follows:


Sec.  229.601  (Item 601) Exhibits.

* * * * *
    (b) Description of exhibits. * * *
    (14) Code of ethics. Any code of ethics, or amendment thereto, that 
is the subject of the disclosure required by Item 406 of Regulation S-K 
(Sec.  229.406) or Item 10 of Form 8-K (Sec.  249.308 of this chapter), 
to the extent that the registrant intends to satisfy the Item 406 or 
Item 10 requirements through filing of an exhibit.
* * * * *

PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934

    9. The authority citation for Part 249 is amended by revising the 
sectional authority for Sec. Sec.  249.220f, 249.240f, 249.308, 249.310 
and 249.310b to read as follows:

    Authority: 15 U.S.C. 78a et seq., unless otherwise noted.
    Section 249.220f is also issued under secs. 3(a), 302, 306(a), 
401(b), 406 and 407, Pub. L. 107-204, 116 Stat. 745.
    Section 249.240f is also issued under secs. 3(a), 302, 306(a), 
406 and 407, Pub. L. 107-204, 116 Stat. 745.
    Section 249.308 is also issued under 15 U.S.C. 80a-29, 80a-37 
and secs. 3(a), 306(a), 401(b) and 406, Pub. L. 107-204, 116 Stat. 
745.
* * * * *
    Section 249.310 is also issued under secs. 3(a), 302, 406 and 
407, Pub. L. 107-204, 116 Stat. 745.
    Section 249.310b is also issued under secs. 3(a), 302, 406 and 
407, Pub. L. 107-204, 116 Stat. 745.
* * * * *


    10. Amend Form 8-K (referenced in Sec.  249.308) by:
    a. Revising General Instruction B.1.; and
    b. Adding Item 10.
    The revision and addition read as follows:

    Note: The text of Form 8-K does not, and this amendment will 
not, appear in the Code of Federal Regulations.

Form 8-K--Current Report Pursuant to Section 13 or 15(d) of the 
Securities Exchange Act of 1934

* * * * *
General Instructions
* * * * *

B. Events To Be Reported and Time for Filing of Reports

    1. A report on this form is required to be filed upon the 
occurrence of any one or more of the events specified in Items 1-4, 6 
and 10 of this form. A report of an event specified in Items 1-3 is to 
be filed within 15 calendar days after the occurrence of the event. A 
report of an event specified in Item 4, 6 or 10 is to be filed within 5 
business days after the occurrence of the event; if the event occurs on 
a Saturday, Sunday, or holiday on which the Commission is not open for 
business then the 5 business day period shall begin to run on and 
include the first business day thereafter. A report on this form 
pursuant to Item 8 is required to be filed within 15 calendar days 
after the date on which the registrant makes the determination to use a 
fiscal year end different from that used in its most recent filing with 
the Commission. A registrant either furnishing a report on this form 
under Item 9 or electing to file a report on this form under Item 5 
solely to satisfy its obligations under Regulation FD (17 CFR 243.100 
and 243.101) must furnish such report or make such filing in accordance 
with the requirements of Rule 100(a) of Regulation FD (17 CFR 
243.100(a)). A report on this form pursuant to Item 11 is required to 
be filed not later than the date prescribed for transmission of the 
notice to directors and executive officers required by Rule 104(b)(2) 
of Regulation BTR (Sec.  245.104(b)(2) of this chapter).
* * * * *
Information To Be Included in the Report
* * * * *
Item 10. Amendments to the Registrant's Code of Ethics, or Waiver of a 
Provision of the Code of Ethics
    (a) The registrant must briefly describe the nature of any 
amendment to a provision of its code of ethics that applies to the 
registrant's principal executive officer, principal financial officer, 
principal accounting officer or controller, or persons performing 
similar functions and that relates to any element of the code of ethics 
definition enumerated in Item 406(b) of Regulations S-K and S-B (Sec.  
229.406(b) and Sec.  228.406(b) of this chapter).
    (b) If the registrant has granted a waiver, including an implicit 
waiver, from a provision of the code of ethics to one of these officers 
or persons that relates to one or more of the items set forth in Item 
406(b) of Regulations S-K and S-B (Sec.  229.406(b) and Sec.  
228.406(b) of this chapter), the registrant must briefly describe the 
nature of the waiver, the name of the person to whom the waiver was 
granted, and the date of the waiver.

[[Page 5129]]

    (c) The registrant does not need to provide any information 
pursuant to this Item if it discloses the required information on its 
Internet website within five business days following the date of the 
amendment or waiver and the registrant has disclosed in its most 
recently filed annual report its Internet address and intention to 
provide disclosure in this manner. If the registrant elects to disclose 
the information required by this Item through its website, such 
information must remain available on the website for at least a 12-
month period. Following the 12-month period, the registrant must retain 
the information for a period of not less than five years. Upon request, 
the registrant must furnish to the Commission or its staff a copy of 
any or all information retained pursuant to this requirement.

    Instructions. 1. The registrant does not need to disclose 
technical, administrative or other non-substantive amendments to its 
code of ethics.
    2. For purposes of this Item: a. The term ``waiver'' means the 
approval by the registrant of a material departure from a provision 
of the code of ethics; and
    b. The term ``implicit waiver'' means the registrant's failure 
to take action within a reasonable period of time regarding a 
material departure from a provision of the code of ethics that has 
been made known to an executive officer, as defined in Rule 3b-7 
(Sec.  240.3b-7 of this chapter) of the registrant.
* * * * *


    11. Amend Form 20-F (referenced in Sec.  249.220f) by:
    a. Redesignating Item 16 as Item 16A, adding text to Item 16A and 
adding Item 16B;
    b. Redesignating paragraph 11 of ``Instructions as to Exhibits'' as 
paragraph 12; and
    c. Adding new paragraph 11 to ``Instructions as to Exhibits.''
    The additions and revisions read as follows:

    Note: The text of Form 20-F does not, and this amendment will 
not, appear in the Code of Federal Regulations.

Form 20-F

* * * * *
Item 16A. Audit Committee Financial Expert
    (a)(1) Disclose that the registrant's board of directors has 
determined that the registrant either: (i) Has at least one audit 
committee financial expert serving on its audit committee; or
    (ii) Does not have an audit committee financial expert serving on 
its audit committee.
    (2) If the registrant provides the disclosure required by paragraph 
(a)(1)(i) of this Item, it must disclose the name of the audit 
committee financial expert.
    (3) If the registrant provides the disclosure required by paragraph 
(a)(1)(ii) of this Item, it must explain why it does not have an audit 
committee financial expert.

    Instruction to paragraph (a) of Item 16A: If the registrant's 
board of directors has determined that the registrant has more than 
one audit committee financial expert serving on its audit committee, 
the registrant may, but is not required to, disclose the names of 
those additional persons.
    (b) For purposes of this Item, an ``audit committee financial 
expert'' means a person who has the following attributes:
    (1) An understanding of generally accepted accounting principles 
and financial statements;
    (2) The ability to assess the general application of such 
principles in connection with the accounting for estimates, accruals 
and reserves;
    (3) Experience preparing, auditing, analyzing or evaluating 
financial statements that present a breadth and level of complexity 
of accounting issues that are generally comparable to the breadth 
and complexity of issues that can reasonably be expected to be 
raised by the registrant's financial statements, or experience 
actively supervising one or more persons engaged in such activities;
    (4) An understanding of internal controls and procedures for 
financial reporting; and
    (5) An understanding of audit committee functions.
    (c) A person shall have acquired such attributes through:
    (1) Education and experience as a principal financial officer, 
principal accounting officer, controller, public accountant or 
auditor or experience in one or more positions that involve the 
performance of similar functions;
    (2) Experience actively supervising a principal financial 
officer, principal accounting officer, controller, public 
accountant, auditor or person performing similar functions;
    (3) Experience overseeing or assessing the performance of 
companies or public accountants with respect to the preparation, 
auditing or evaluation of financial statements; or
    (4) Other relevant experience.
    (d) Safe Harbor
    (1) A person who is determined to be an audit committee 
financial expert will not be deemed an ``expert'' for any purpose, 
including without limitation for purposes of section 11 of the 
Securities Act of 1933 (15 U.S.C. 77k), as a result of being 
designated or identified as an audit committee financial expert 
pursuant to this Item 16A.
    (2) The designation or identification of a person as an audit 
committee financial expert pursuant to this Item 16A does not impose 
on such person any duties, obligations or liability that are greater 
than the duties, obligations and liability imposed on such person as 
a member of the audit committee and board of directors in the 
absence of such designation or identification.
    (3) The designation or identification of a person as an audit 
committee financial expert pursuant to this Item 16A does not affect 
the duties, obligations or liability of any other member of the 
audit committee or board of directors.
    Instructions to Item 16A: 1. Item 16A applies only to annual 
reports, and does not apply to registration statements, on Form 20-
F.
    2. If a person qualifies as an audit committee financial expert 
by means of having held a position described in paragraph (c)(4) of 
this Item, the registrant shall provide a brief listing of that 
person's relevant experience. Such disclosure may be made by 
reference to disclosures required under Item 6.A.
    3. In the case of a foreign private issuer with a two-tier board 
of directors, for purposes of this Item 16A, the term ``board of 
directors'' means the supervisory or non-management board. Also, the 
term ``generally accepted accounting principles'' in paragraph 
(b)(1) of this Item means the body of generally accepted accounting 
principles used by the foreign private issuer in its primary 
financial statements filed with the Commission.
    4. A registrant that is an Asset-Backed Issuer (as defined in 
Sec.  240.13a-14(g) and Sec.  240.15d-14(g) of this chapter) is not 
required to disclose the information required by this Item 16A.
Item 16B. Code of Ethics
    (a) Disclose whether the registrant has adopted a code of ethics 
that applies to the registrant's principal executive officer, principal 
financial officer, principal accounting officer or controller, or 
persons performing similar functions. If the registrant has not adopted 
such a code of ethics, explain why it has not done so.
    (b) For purposes of this Item 16B, the term ``code of ethics'' 
means written standards that are reasonably designed to deter 
wrongdoing and to promote:
    (1) Honest and ethical conduct, including the ethical handling of 
actual or apparent conflicts of interest between personal and 
professional relationships;
    (2) Full, fair, accurate, timely, and understandable disclosure in 
reports and documents that a registrant files with, or submits to, the 
Commission and in other public communications made by the registrant;
    (3) Compliance with applicable governmental laws, rules and 
regulations;
    (4) The prompt internal reporting of violations of the code to an 
appropriate person or persons identified in the code; and
    (5) Accountability for adherence to the code.
    (c) The registrant must:
    (1) File with the Commission a copy of its code of ethics that 
applies to the registrant's principal executive officer,

[[Page 5130]]

principal financial officer, principal accounting officer or 
controller, or persons performing similar functions, as an exhibit to 
its annual report;
    (2) Post the text of such code of ethics on its Internet Web site 
and disclose, in its annual report, its Internet address and the fact 
that it has posted such code of ethics on its Internet Web site; or
    (3) Undertake in its annual report filed with the Commission to 
provide to any person without charge, upon request, a copy of such code 
of ethics and explain the manner in which such request may be made.
    (d) The registrant must briefly describe the nature of any 
amendment to a provision of its code of ethics that applies to the 
registrant's principal executive officer, principal financial officer, 
principal accounting officer or controller, or persons performing 
similar functions and that relates to any element of the code of ethics 
definition enumerated in Item 16B(b), which has occurred during the 
registrant's most recently completed fiscal year.
    (e) If the registrant has granted a waiver, including an implicit 
waiver, from a provision of the code of ethics to one of the officers 
or persons described in Item 16B(a) that relates to one or more of the 
items set forth in Item 16B(b) during the registrant's most recently 
completed fiscal year, the registrant must briefly describe the nature 
of the waiver, the name of the person to whom the waiver was granted, 
and the date of the waiver.

    Instructions to Item 16B. 1. Item 16B applies only to annual 
reports, and does not apply to registration statements, on Form 20-
F.
    2. A registrant may have separate codes of ethics for different 
types of officers. Furthermore, a ``code of ethics'' within the 
meaning of paragraph (b) of this Item may be a portion of a broader 
document that addresses additional topics or that applies to more 
persons than those specified in paragraph (a). In satisfying the 
requirements of paragraph (c), a registrant need only file, post or 
provide the portions of a broader document that constitute a ``code 
of ethics'' as defined in paragraph (b) and that apply to the 
persons specified in paragraph (a).
    3. If a registrant elects to satisfy paragraph (c) of this Item 
by posting its code of ethics on its website pursuant to paragraph 
(c)(2), the code of ethics must remain accessible on its website for 
as long as the registrant remains subject to the requirements of 
this Item and chooses to comply with this Item by posting its code 
on its website pursuant to paragraph (c)(2).
    4. A registrant that is an Asset-Backed Issuer (as defined in 
Sec.  240.13a-14(g) and Sec.  240.15d-14(g) of this chapter) is not 
required to disclose the information required by this Item.
    5. The registrant does not need to provide any information 
pursuant to paragraphs (d) and (e) of this Item if it discloses the 
required information on its Internet website within five business 
days following the date of the amendment or waiver and the 
registrant has disclosed in its most recently filed annual report 
its Internet address and intention to provide disclosure in this 
manner. If the registrant elects to disclose the information 
required by paragraphs (d) and (e) through its website, such 
information must remain available on the website for at least a 12-
month period. Following the 12-month period, the registrant must 
retain the information for a period of not less than five years. 
Upon request, the registrant must furnish to the Commission or its 
staff a copy of any or all information retained pursuant to this 
requirement.
    6. The registrant does not need to disclose technical, 
administrative or other non-substantive amendments to its code of 
ethics.
    7. For purposes of this Item 16B:
    a. The term ``waiver'' means the approval by the registrant of a 
material departure from a provision of the code of ethics; and
    b. The term ``implicit waiver'' means the registrant's failure 
to take action within a reasonable period of time regarding a 
material departure from a provision of the code of ethics that has 
been made known to an executive officer, as defined in Rule 3b-7 
(Sec.  240.3b-7 of this chapter), of the registrant.
* * * * *

Instructions as to Exhibits

* * * * *
    11. Any code of ethics, or amendment thereto, that is the 
subject of the disclosure required by Item 16B of Form 20-F, to the 
extent that the registrant intends to satisfy the Item 16B 
requirements through filing of an exhibit.
* * * * *


    12. Amend Form 40-F (referenced in Sec.  249.240f) by adding 
paragraphs (8) and (9) to General Instruction B to read as follows.

    Note: The text of Form 40-F does not, and this amendment will 
not, appear in the Code of Federal Regulations.

Form 40-F

* * * * *
General Instructions
* * * * *

B. Information To Be Filed on This Form

* * * * *
    (8)(a)(1) Disclose that the registrant's board of directors has 
determined that the registrant either: (i) Has at least one audit 
committee financial expert serving on its audit committee; or
    (ii) Does not have an audit committee financial expert serving on 
its audit committee.
    (2) If the registrant provides the disclosure required by paragraph 
(8)(a)(1)(i) of this General Instruction B, it must disclose the name 
of the audit committee financial expert.
    (3) If the registrant provides the disclosure required by paragraph 
(8)(a)(1)(ii) of this General Instruction B, it must explain why it 
does not have an audit committee financial expert.

    Note to paragraph (8)(a) of General Instruction B: If the 
registrant's board of directors has determined that the registrant 
has more than one audit committee financial expert serving on its 
audit committee, the registrant may, but is not required to, 
disclose the names of those additional persons.

    (b) For purposes of paragraph (8) of General Instruction B, an 
``audit committee financial expert'' means a person who has the 
following attributes:
    (1) An understanding of generally accepted accounting principles 
and financial statements;
    (2) The ability to assess the general application of such 
principles in connection with the accounting for estimates, accruals 
and reserves;
    (3) Experience preparing, auditing, analyzing or evaluating 
financial statements that present a breadth and level of complexity of 
accounting issues that are generally comparable to the breadth and 
complexity of issues that can reasonably be expected to be raised by 
the registrant's financial statements, or experience actively 
supervising one or more persons engaged in such activities;
    (4) An understanding of internal controls and procedures for 
financial reporting; and
    (5) An understanding of audit committee functions.
    (c) A person shall have acquired such attributes through:
    (1) Education and experience as a principal financial officer, 
principal accounting officer, controller, public accountant or auditor 
or experience in one or more positions that involve the performance of 
similar functions;
    (2) Experience actively supervising a principal financial officer, 
principal accounting officer, controller, public accountant, auditor or 
person performing similar functions;
    (3) Experience overseeing or assessing the performance of companies 
or public accountants with respect to the preparation, auditing or 
evaluation of financial statements; or
    (4) Other relevant experience.
    (d) Safe Harbor
    (1) A person who is determined to be an audit committee financial 
expert will not be deemed an ``expert'' for any purpose, including 
without limitation for purposes of section 11 of the Securities Act of 
1933 (15 U.S.C. 77k), as a result of being designated or

[[Page 5131]]

identified as an audit committee financial expert pursuant to this 
paragraph (8) of General Instruction B.
    (2) The designation or identification of a person as an audit 
committee financial expert pursuant to this paragraph (8) of General 
Instruction B does not impose on such person any duties, obligations or 
liability that are greater than the duties, obligations and liability 
imposed on such person as a member of the audit committee and board of 
directors in the absence of such designation or identification.
    (3) The designation or identification of a person as an audit 
committee financial expert pursuant to this paragraph (8) of General 
Instruction B does not affect the duties, obligations or liability of 
any other member of the audit committee or board of directors.

    Notes to Paragraph (8) of General Instruction B: 1. Paragraph 
(8) of General Instruction B applies only to annual reports, and 
does not apply to registration statements, on Form 40-F.
    2. If a person qualifies as an audit committee financial expert 
by means of having held a position described in paragraph (8)(c)(4) 
of General Instruction B, the registrant shall provide a brief 
listing of that person's relevant experience. Such disclosure may be 
made by reference to disclosures in the annual report relating to 
the business experience of that director.
    3. In the case of a foreign private issuer with a two-tier board 
of directors, for purposes of this paragraph (8) of General 
Instruction B, the term ``board of directors'' means the supervisory 
or non-management board. Also, the term ``generally accepted 
accounting principles'' in paragraph (8)(b)(1) of General 
Instruction B means the body of generally accepted accounting 
principles used by the foreign private issuer in its primary 
financial statements filed with the Commission.
    4. A registrant that is an Asset-Backed Issuer (as defined in 
Sec.  240.13a-14(g) and Sec.  240.15d-14(g) of this chapter) is not 
required to disclose the information required by this paragraph (8) 
of General Instruction B.

    (9)(a) Disclose whether the registrant has adopted a code of ethics 
that applies to the registrant's principal executive officer, principal 
financial officer, principal accounting officer or controller, or 
persons performing similar functions. If the registrant has not adopted 
such a code of ethics, explain why it has not done so.
    (b) For purposes of this paragraph (9) of General Instruction B, 
the term ``code of ethics'' means written standards that are reasonably 
designed to deter wrongdoing and to promote:
    (1) Honest and ethical conduct, including the ethical handling of 
actual or apparent conflicts of interest between personal and 
professional relationships;
    (2) Full, fair, accurate, timely, and understandable disclosure in 
reports and documents that a registrant files with, or submits to, the 
Commission and in other public communications made by the registrant;
    (3) Compliance with applicable governmental laws, rules and 
regulations;
    (4) The prompt internal reporting of violations of the code to an 
appropriate person or persons identified in the code; and
    (5) Accountability for adherence to the code.
    (c) The registrant must:
    (1) File with the Commission a copy of its code of ethics that 
applies to the registrant's principal executive officer, principal 
financial officer, principal accounting officer or controller, or 
persons performing similar functions, as an exhibit to its annual 
report;
    (2) Post the text of such code of ethics on its Internet Web site 
and disclose, in its annual report, its Internet address and the fact 
that it has posted such code of ethics on its Internet Web site; or
    (3) Undertake in its annual report filed with the Commission to 
provide to any person without charge, upon request, a copy of such code 
of ethics and explain the manner in which such request may be made.
    (d) The registrant must briefly describe the nature of any 
amendment to a provision of its code of ethics that applies to the 
registrant's principal executive officer, principal financial officer, 
principal accounting officer or controller, or persons performing 
similar functions and that relates to any element of the code of ethics 
definition enumerated in paragraph (9)(b) of General Instruction B, 
which has occurred during the registrant's most recently completed 
fiscal year. File a copy of the amendment as an exhibit to the annual 
statement.
    (e) If the registrant has granted a waiver, including an implicit 
waiver, from a provision of the code of ethics to one of the officers 
or persons described in paragraph (9)(a) that relates to one or more of 
the items set forth in paragraph (9)(b) of General Instruction B during 
the registrant's most recently completed fiscal year, the registrant 
must briefly describe the nature of the waiver, the name of the person 
to whom the waiver was granted, and the date of the waiver.

    Notes to paragraph (9) of General Instruction B: 1. Paragraph 
(9) of General Instruction B applies only to annual reports, and 
does not apply to registration statements, on Form 40-F.
    2. A registrant may have separate codes of ethics for different 
types of officers. Furthermore, a ``code of ethics'' within the 
meaning of paragraph (9)(b) of this General Instruction may be a 
portion of a broader document that addresses additional topics or 
that applies to more persons than those specified in paragraph 
(9)(a). In satisfying the requirements of paragraph (9)(c), a 
registrant need only file, post or provide the portions of a broader 
document that constitutes a ``code of ethics'' as defined in 
paragraph (9)(b) and that apply to the persons specified in 
paragraph (9)(a).
    3. If a registrant elects to satisfy paragraph (9)(c) of this 
General Instruction by posting its code of ethics on its Web site 
pursuant to paragraph (9)(c)(2), the code of ethics must remain 
accessible on its Web site for as long as the registrant remains 
subject to the requirements of this paragraph (9) of General 
Instruction B and chooses to comply with this paragraph (9) of 
General Instruction B by posting its code on its Web site pursuant 
to paragraph (9)(c)(2).
    4. A registrant that is an Asset-Backed Issuer (as defined in 
Sec.  240.13a-14(g) and Sec.  240.15d-14(g) of this chapter) is not 
required to disclose the information required by this paragraph (9) 
of General Instruction B.
    5. The registrant does not need to provide any information 
pursuant to paragraphs (9)(d) and (9)(e) of General Instruction B if 
it discloses the required information on its Internet Web site 
within five business days following the date of the amendment or 
waiver and the registrant has disclosed in its most recently filed 
annual report its Internet address and intention to provide 
disclosure in this manner. If the registrant elects to disclose the 
information required by paragraphs (9)(d) and (9)(e) of General 
Instruction B through its Web site, such information must remain 
available on the Web site for at least a 12-month period. Following 
the 12-month period, the registrant must retain the information for 
a period of not less than five years. Upon request, the registrant 
must furnish to the Commission or its staff a copy of any or all 
information retained pursuant to this requirement.
    6. The registrant does not need to disclose technical, 
administrative or other non-substantive amendments to its code of 
ethics.
    7. For purposes of this paragraph (9) of General Instruction B:
    a. The term ``waiver'' means the approval by the registrant of a 
material departure from a provision of the code of ethics; and
    b. The term ``implicit waiver'' means the registrant's failure 
to take action within a reasonable period of time regarding a 
material departure from a provision of the code of ethics that has 
been made known to an executive officer, as defined in Rule 3b-7 
(Sec.  240.3b-7 of this chapter), of the registrant.

* * * * *

    13. Amend Form 10-K (referenced in Sec.  249.310) by revising Item 
10 in Part III to read as follows:

    Note: The text of Form 10-K does not, and this amendment will 
not, appear in the Code of Federal Regulations.


[[Page 5132]]



Form 10-K--Annual Report Pursuant to Section 13 or 15(d) of the 
Securities Exchange Act of 1934

* * * * *

Part III

* * * * *
Item 10. Directors and Executive Officers of the Registrant
    Furnish the information required by Items 401, 405 and 406 of 
Regulation S-K (Sec. Sec.  229.401, 229.405 and 229.406 of this 
chapter).
* * * * *

    14. Amend Form 10-KSB (referenced in Sec.  249.310b) by revising 
Item 9 in Part III to read as follows:

    Note: The text of Form 10-KSB does not, and this amendment will 
not, appear in the Code of Federal Regulations.

Form 10-KSB--[ ] Annual Report Pursuant to Section 13 or 15(d) of the 
Securities Exchange Act of 1934

* * * * *

Part III

* * * * *
Item 9. Directors and Executive Officers of the Registrant
    Furnish the information required by Items 401, 405 and 406 of 
Regulation S-B (Sec. Sec.  228.401, 228.405, and 228.406 of this 
chapter).
* * * * *

    By the Commission.

    Dated: January 23, 2003.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-2018 Filed 1-30-03; 8:45 am]
BILLING CODE 8010-01-P