SOX compliance: Title III ensures corporate financial responsibility

Title III of the Sarbanes-Oxley Act (SOX) Act of 2002 introduces comprehensive regulations aimed at bolstering corporate responsibility and transparency. It mandates stringent standards for public company audit committees, requires certification of financial reports by principal executives and financial officers, prohibits fraudulent influence on audits, and mandates forfeiture of certain bonuses and profits in cases of financial reporting misconduct.

It also amends standards for barring officers and directors, prohibits insider trading during pension fund blackout periods, and mandates rules of professional responsibility for attorneys representing issuers before the Securities and Exchange Commission (SEC). It introduces provisions for civil penalties to be added to disgorgement funds for victims of securities law violations.

Section 301: Public company audit committees

• Section 301 of SOX outlines crucial standards for public company audit committees, amending Section 10A of the Securities Exchange Act of 1934.
• These regulations mandate the SEC to direct national securities exchanges and associations to prohibit the listing of securities for issuers not complying with specified requirements.
• It imposes responsibilities on audit committees, emphasizing their direct oversight of registered public accounting firms, independence criteria for committee members, establishment of complaint procedures, authorization to engage independent advisers, and provision for adequate funding.
• These measures aim to enhance corporate governance, transparency, and accountability in financial reporting.

Section 302: Corporate responsibility for financial reports

• Section 302 of SOX mandates the SEC to establish regulations requiring principal executive officers, principal financial officers, or persons in similar roles to certify the accuracy and completeness of financial reports filed under the Securities Exchange Act of 1934.
• The certification includes confirmation of report review, absence of untrue statements or omissions, fair presentation of financial information, responsibility for internal controls, evaluation of control effectiveness, disclosure of deficiencies to auditors and the audit committee, and indication of any significant changes in internal controls.
• The provision prohibits any attempts by companies to diminish the legal force of these certifications through corporate relocations.
• These regulations were required to be effective within 30 days of the Act's enactment, aiming to enhance corporate accountability and transparency in financial reporting.

Section 303: Improper influence on the conduct of audits

• Section 303 of SOX prohibits any officer, director, or person acting under their direction from engaging in fraudulent actions to influence, coerce, manipulate, or mislead independent auditors conducting audits of an issuer's financial statements to make them materially misleading.
• The SEC is granted exclusive authority to enforce this provision and issue necessary rules and regulations, which are to be complementary to other existing laws without preempting them.
• The SEC is required to propose and finalize these rules within 90 and 270 days, respectively, from the enactment date of the Act, aiming to safeguard the integrity of financial audits and protect investors' interests.

Section 304: Forfeiture of certain bonuses and profits

• Section 304 of SOX mandates that if an issuer must issue an accounting restatement due to its material noncompliance resulting from misconduct, with any financial reporting requirement under securities laws, the chief executive officer and chief financial officer must reimburse the issuer.
• This reimbursement includes any bonuses, incentives, or profits received from the issuer during the 12-month period following the first public issuance or filing with the Commission of the document embodying the financial reporting requirement.
• The SEC is granted authority to exempt individuals from this provision as it sees fit.

Section 305: Officer and director bars and penalties

• Section 305 of SOX amends the Securities Exchange Act of 1934 and the Securities Act of 1933 by replacing substantial unfitness with unfitness regarding the standard for officer and director bars and penalties.
• It also empowers the SEC to seek and federal courts to grant equitable relief in any action or proceeding brought under the securities laws for the benefit of investors.

Section 306: Insider trades during pension fund blackout periods

• Section 306 of SOX prohibits directors or executive officers of an equity security issuer from trading such securities during blackout periods if they acquired them through their position.
• A blackout period is a temporary restriction on participants' ability to make changes to their retirement accounts, typically lasting more than three consecutive business days.
• The blackout period is defined as over three consecutive business days during which at least 50% of plan participants cannot trade equity securities due to issuer or fiduciary action.
• Profits from such trades are recoverable by the issuer, and if the issuer fails to act, shareholders may sue within two years.
• The SEC, in consultation with the Secretary of Labor, is tasked with issuing rules to clarify and prevent evasion of these rules.
• Notice of blackout periods must be provided to directors, officers, the SEC, and plan participants, meeting specific requirements, with exceptions for certain circumstances.
• Penalties are imposed for failure to provide notice, and compliance is required within 180 days of enactment, with retroactive application permitted under certain conditions.

Section 307: Rules of professional responsibility for attorneys

• Section 307 of SOX mandates the SEC to establish rules within 180 days that define minimum standards of professional conduct for attorneys representing issuers before the Commission.
• These rules include requirements for attorneys to report evidence of material securities law violations or breaches of fiduciary duty to the company's chief legal counsel or CEO.
• If these individuals fail to respond appropriately, attorneys are obligated to report the evidence to the issuer's audit committee or another independent committee of the board of directors, or directly to the board of directors.

Section 308: Fair funds for investors

• Section 308 of SOX introduces measures to benefit victims of securities law violations.
• It stipulates that in cases where the SEC obtains disgorgement orders alongside civil penalties against violators, the civil penalty amount can be added to the disgorgement fund for the benefit of the victims. The SEC is also authorized to accept donations to this fund.
• The section mandates a study by the SEC on enforcement actions related to civil penalties and disgorgement over the previous five years, aiming to identify ways to provide restitution to investors more efficiently.
• The findings of this study will inform potential regulatory or legislative actions.
• Finally, the section includes conforming amendments to several provisions of securities laws and defines the disgorgement fund as a fund established in relevant administrative or judicial proceedings.