Sarbanes-Oxley
SARBANES-OXLEY ACT COMPLIANCE SUMMARY MATRIX By: Paul G. Castor Updated: December 10, 2003 611 Anton Boulevard Fourteenth Floor Costa Mesa, California 92626-1931 Telephone (714) 641-5100 Facsimile (714) 546-9035 www.rutan.com This memorandum is a summary provided by Rutan & Tucker, LLP for educational and informational purposes only. It is not a full analysis of the matters summarized and is not intended and should not be construed as legal advice. Although developments relating to the enactment of the Sarbanes-Oxley Act will likely occur on a frequent basis, this memorandum does not represent any undertaking to keep recipients advised as to all relevant legal developments. If you have any questions or would like any assistance regarding the matters discussed in this memorandum, please feel free to call Paul G. Castor or your regular contact person at Rutan & Tucker, LLP. TABLE OF CONTENTS Page Page I. OFFICER CERTIFICATIONS 1 A. Section 906 1 B. Section 302 1 C. Disclosure Controls and Procedures 2 D. SRO Certification 3 II. REGULATION OF OFFICERS AND DIRECTORS 4 A. Loans to Directors and Executive Officers 4 B. Section 16 5 C. Forfeiture of Bonuses and Profits Upon Restated Financials 6 D. Insider Trades During Pension Fund Blackout Periods 6 E. Related Party Transactions (Nasdaq Only) (See Section IV.A.7) 8 F. Improper Influence on Audits (See Section VII.B.3) 8 III. NEW DISCLOSURE REQUIREMENTS 8 A. Section 16 (See Section II.B) 8 B. Off-Balance Sheet Transactions 8 C. Aggregate Contractual Obligations 9 D. Non-GAAP Financial Measures 9 E. Material Correcting Adjustments 12 F. Management Assessment of Internal Accounting Controls 12 G. Code of Ethics (See Section IV.C) 13 H. Audit Committee Financial Expert (See Section IV.A.6) 13 I. Real Time Disclosure 13 1. Accelerated 10-K and 10-Q Deadlines 13 2. Form 8-K Amendments 14 (a) Code of Ethics Amendments and Waivers 14 (b) Pension Fund Blackout Periods 15 (c) Earnings Releases 15 J. SEC Review of Periodic Reports 16 IV. CORPORATE GOVERNANCE 16 A. Audit Committee Requirements 16 1. Responsibility 17 2. Independence (See also Section IV.B.1) 18 3. Whistleblower Procedures (See also Sections VII.A.2 and VII.C.2) 19 4. Engagement of Advisors 19 5. Payment of Expenses 19 6. Audit Committee Financial Expert 19 7. Related Party Transactions (Nasdaq Only) 20 B. Board Composition 20 1. Independence Definition (See also Section IV.A.2) 20 2. Compensation Committee 20 3. Nominating Committee 21 4. Tenure of Directors 21 5. Limit on Number of Directorships 21 6. Board Meetings 21 7. Continuing Education 22 C. Code of Ethics 22 D. Corporate Governance Guidelines (NYSE Only) 23 E. Internal Audit Function (NYSE Only) 23 F. Disclosure Controls and Procedures (See Section I.C) 23 G. Shareholder Approval of Equity Compensation Plans 23 H. Attorney Professional Responsibility 24 V. ACCOUNTING PROFESSION REFORMS 25 A. Public Company Accounting Oversight Board 25 B. Auditor Independence 25 1. Pre-Approval of Services 25 2. Non-Audit Services 25 3. Audit Partner Rotation 26 4. Communication with Audit Committee 26 5. Employment of Auditor Personnel 26 6. Audit Partner Compensation 27 7. Accountant Fees and Services 27 8. Accounting Firm Rotation 27 VI. SECURITIES ANALYSTS 27 A. Analyst Certifications 27 VII. CRIMINAL SANCTIONS, ENFORCEMENT AND LITIGATION 28 A. Criminal Sanctions 28 1. Destruction or Tampering of Records 28 2. Retaliation Against Whistleblowers (See also Sections IV.A.3 and VII.C.2) 29 3. New Securities Fraud Offense 29 4. Penalty Enhancements 29 B. SEC Enforcement 29 1. Power to Freeze Payments 29 2. Director and Officer Disqualification Standards 29 3. Improper Influence on Audits 29 C. Civil Litigation 30 1. Securities Fraud Statute of Limitations 30 2. Whistleblower Protection (See also Sections IV.A.3 and VII.A.2) 30 3. Non-Dischargeable Debts in Bankruptcy 30 TOPIC EFFECTIVE DATE SARBOX SECTION SARBOX SEC NASDAQ NYSE COMPLIANCE ACTIONS I. OFFICER CERTIFICATIONS A. Section 906 7/30/2002 906 Form of Certification: Each periodic report containing financial statements must be accompanied by a certification by its CEO and CFO that:1. The report fully complies with the applicable requirements of Sections 13(a) and 15(d) of the ‘34 Act; and 2. Information contained in the report “fairly presents,” in all material respects, the financial condition and results of operations of the company.Qualifiers:1. Material: No materiality qualifier in 1st element.2. Knowledge: Although there is no express knowledge qualifier, the penalties require a “knowing” ($1 MM and/or 10 years) or “willful” ($5 MM and/or 20 years) violation.Fairly Present: Compliance with GAAP is not a defense if the financial statements do not “fairly present” the financial condition and results of operations. Covered Reports: Applies to the following reports (but only if the report contains financial statements): 1. Form 10-K;2. Form 10-Q; and3. Amendments to Forms 10-K or 10-Q. See Section I.C. B. Section 302 8/29/2002 302 Form of Certification: SEC must adopt rules that require CEOs and CFOs to certify in each 10-K and 10-Q that:1. The officer reviewed the report.2. Based on the officer’s knowledge, the report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made not misleading.3. Based on the officer’s knowledge, the financial statements and other financial information included in the report fairly present in all material respects the company’s financial condition and results of operations.4. The officer:(a) is responsible for establishing and maintaining internal controls;(b) has designed such internal controls to ensure that material information is reported to the officer;(c) has evaluated the effectiveness of the internal controls within 90 days prior to the report; and(d) has presented in the report his conclusions about the effectiveness of the internal controls based on his evaluation.5. The officer has disclosed to the auditor and audit committee:(a) all significant deficiencies in the design or operation of the internal controls; and(b) any fraud that involves management or other employees who have a significant role in internal controls.6. The report discloses whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of evaluation (including corrective actions). Transition Period: Prior to the compliance date for Sarbox Section 404 (See Section III.F), a company may modify: (i) paragraph 4(b) of the certification; and (ii) the introductory language of paragraph 4 of the certification to eliminate references to internal control over financial reporting,Form of Certification: CEO and CFO must certify that:1. The officer reviewed the report.2. Based on the officer’s knowledge, the report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made not misleading.3. Based on the officer’s knowledge, the financial statements and other financial information fairly present in all material respects the company’s financial condition, results of operations and cash flows.4. The officer is responsible for establishing and maintaining “disclosure controls and procedures” and “internal control over financial reporting,” and has: (a) designed disclosure controls and procedures, or caused them to be designed under his supervision, to ensure that material information is made known to him. (b) designed internal control over financial reporting, or caused them to be designed under his supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP. (c) evaluated the effectiveness of the disclosure controls and procedures and presented his conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by the report.(d) disclosed any change in the internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the internal control over financial reporting.5. The officer has disclosed to the auditor and the audit committee: (a) all significant deficiencies and material weaknesses in the internal control over financial reporting; and (b) any fraud that involves management or other employees who have a significant role in the internal control over financial reporting. Covered Reports: 1. Applies to the following reports (regardless of whether the report contains financial statements): (a) Form 10-K;(b) Form 10-Q; and(c) Amendments to Forms 10-K or 10-Q.2. Caveat: “Disclosure controls and procedures” are required to be designed, maintained and evaluated to ensure full and timely disclosure in Form 8-K, definitive proxy materials and definitive information statements, even though there is no specific certification requirement relating to them.Fair Presentation of Financial Information: The certification requires a standard of overall material accuracy and completeness that is broader than financial reporting requirements under GAAP. A “fair presentation” encompasses:1. Selection of appropriate accounting policies;2. Proper application of appropriate accounting policies;3. Disclosure of financial information that is informative and reasonably reflects the underlying transactions and events; and4. The inclusion of any additional disclosures necessary to provide investors with a materially accurate and complete picture of financial condition, results of operations and cash flows. See Section I.C. C. Disclosure Controls and Procedures 8/29/2002 N/A Establishment of Disclosure Controls and Procedures: Companies are required to maintain “disclosure controls and procedures” (includes both financial and non-financial information), a new concept which is broader than the existing requirement for companies to maintain “internal controls” (limited to financial information only). The failure to maintain disclosure controls and procedures could result in enforcement action, even though a company’s disclosure may be accurate and complete. “Disclosure Controls and Procedures” Definition: Controls and other procedures that are designed to ensure that information required to be disclosed in the SEC reports (including Form 8-K and proxy materials, whether or not such reports are covered by certification requirements) is recorded, processed, summarized and reported, within the required time periods. Evaluation: Under the supervision of the CEO and CFO, each company must conduct an evaluation of the effectiveness of the design and operation of the disclosure controls and procedures within 90 days prior to the filing date of any 10-Q or 10-K. While the new rules do not provide detailed procedures for such an evaluation, the evaluation must, at a minimum, address the matters specified by the rules. Disclosure In Reports: 10-K and 10-Q forms require companies to disclose:1. The conclusions of the CEO and CFO about the effectiveness of the disclosure controls and procedures based on their evaluation of these controls and procedures; and2. Whether or not there were any significant changes in internal controls or on other factors that could significantly affect internal controls subsequent to the date of the evaluation (including any corrective actions). Disclosure Controls and Procedures: Disclosure controls and procedures will be important for:1. Section 302 certifications;2. Section 906 certifications;3. Accelerated 10-K and 10-Q deadlines;4. New Form 8-K triggering events and accelerated deadlines; and5. Reg FD.Disclosure controls and procedures should be designed to ensure timely collection and evaluation of information subject to disclosure under:1. Reg S-K;2. Reg S-X;3. Rule 12b-20, which requires material information necessary to make required statements not misleading.Disclosure Committee: Although Sarbox and the SEC do not specify any particular procedures that companies must adopt, the SEC recommends that companies create a disclosure committee. Composition: The disclosure committee may consist of: 1. Principal accounting officer or the controller;2. General counsel or other senior legal official with responsibility for disclosure matters;3. Principal risk management officer;4. Chief investor relations officer; and5. Other employees the company deems appropriate.Role: The role of the disclosure committee is to:1. Consider the materiality of information (materiality decisions should be left to the disclosure committee);2. Determine disclosure obligations; and3. Coordinate the gathering, evaluation and review of information. Role of CEO and CFO: Set the “tone at the top” by sending a message that:1. The company places a high priority on the best disclosure practices; and2. It is the responsibility of all employees to protect the integrity of the company’s procedures. Information Gathering:Identify Required Information: The disclosure committee should familiarize itself with the company’s disclosure obligations under:1. ‘34 Act reporting forms;2. Reg S-K; and3. Reg S-X. Identify Sources of Information: The disclosure committee should identify the sources of information by: 1. Individual;2. Department; and3. External sources. On-Going Procedures: The information flow should be continuous, not just at the end of each quarter.Preparing Disclosure Reports: The disclosure committee should take the lead role in organizing the drafting of the company’s disclosure documents. The disclosure committee should cross-check information from various sources.Internal Review Process: SEC reports should be drafted sufficiently in advance of their filing deadlines to allow review. Reviewers should review the entire report, not just the portions that they prepared, to ensure that information is cross-checked. Drafts should be circulated back down through the reporting channels, as well as up to senior management for their review. CEO/CFO Review and Certification: The CEO and CFO should be given ample opportunity to read the report and discuss it with the disclosure committee, management, the audit committee and counsel. 1. Material Discretionary Judgments: Review material discretionary judgments with the company’s senior accounting officers and the principal authors of MD&A. Review information excluded as well as included, with a focus on:(a) historical results;(b) possible trends;(c) forward looking disclosure;(d) critical accounting estimates; and (e) underlying assumptions.2. Reporting Channels: Review a list of individuals who contributed information and who reviewed drafts of the reports. Determine whether information was gathered from the individuals best able to provide it and whether the report was circulated to the individuals best able to review its accuracy and completeness. 3. Time: Assess the adequacy of the time and resources devoted to the preparation of the report.4. Issues: Consider issues identified:(a) by the auditor;(b) in SEC comments on past filings;(c) by the audit committee;(d) by employees responsible for maintaining internal controls; (e) by analysts; and(f) by other companies in the same industry.5. Auditor: Meet with the auditor to discuss:(a) adjustments that they have recommended;(b) alternative treatments;(c) SEC hot button issues; and(d) other issues in the company’s industry.6. Audit Committee: Meet with the audit committee to discuss:(a) financial systems;(b) reporting systems;(c) internal controls; (d) risk management policies;(e) auditor independence; and(f) financial statements.7. Records: Maintain records of the review process: (a) minutes of CEO and CFO review;(b) schedules or checklists;(c) list of the participants; and(d) list of the individuals who received and reviewed drafts of the reports.Evaluation of Procedures:Evaluation Process: No particular evaluation procedures are mandated. However, the evaluation must address at least the following:1. Material weaknesses;2. Deficiencies that would significantly adversely affect the company’s ability to collect, process or disclose required information on a timely basis; and 3. Material changes in the disclosure controls and procedures.Supervision of Evaluation: The new rules do not specify who should conduct the evaluation, just that the evaluation be supervised by management and with management’s participation (including the CEO and CFO). Areas of Inquiry: Areas of inquiry should include:1. Weaknesses identified by the auditor; 2. Inaccuracies or omissions identified during the reporting process;3. The company’s past disclosures with the benefit of 20-20 hindsight;4. SEC comments on past filings;5. Questions asked by investors and analysts;6. Evaluation of the people involved; and7. Adequacy of the time allowed. D. SRO Certification [NOT FINAL] N/A Form of Certification: CEO and chief compliance officer must certify that:1. The company has in place adequate compliance and supervisory policies and procedures reasonably designed to comport with applicable NASD rules, MSRB rules and federal securities laws.2. The officer has consulted with or relied on those employees, officers, outside consultants, lawyers and accountants as he considers appropriate in order to make in the certification.3. Notwithstanding the annual nature of the certification, the company has reviewed and will continue to review the adequacy of its compliance and supervisory policies and procedures on a periodic basis.Chief Compliance Officer: Each company must designate a chief compliance officer.No Liability: No personal liability for the certification as long as there was a reasonably basis to certify at the time of execution. Listing Certification: Each year, the CEO must certify that he is not aware of any violations of the NYSE listing standards. The SEC and NYSE certifications must be disclosed in the annual report to shareholders. See also Section IV.A. II. REGULATION OF OFFICERS AND DIRECTORS A. Loans to Directors and Executive Officers 7/30/2002 402 Personal Loans: Companies may not extend or maintain credit, “arrange” for the extension of credit or renew any extension of credit in the form of a “personal loan” to an officer or director. Exceptions:1. Any loan that existed on July 30, 2002, so long as it is not materially modified or renewed.2. [Companies that provide financial services in the ordinary course of their business.] Home improvement and manufactured home loans, consumer credit and credit extended under credit cards, provided that the loans are:(a) made in the ordinary course of the company’s credit business;(b) generally made available by the company to the public; and(c) market terms or terms no more favorable than those offered to the general public. Consistent with Sarbox, insider loans are prohibited. INTERPRETATION“Personal Loan” Meaning: The prohibitions of Section 402 apply only to an extension of credit “in the form of a personal loan,” which suggests 2 requirements:1. Loan: The transaction must take the form of a loan, not merely be an extension of credit. “Loan” is commonly understood to be narrower than “extension of credit.” 2. Personal: The loan must be a “personal” loan. Where a loan is made primarily for business purposes, but involves limited ancillary personal benefit, it should not be considered a “personal loan.” “Arrange” Meaning: The concept of “arranging” necessarily requires some level of company involvement in a loan made by a 3rd party. CASHLESS OPTION EXERCISESDescription of Typical Transaction: 1. The optionee advises a broker of his intent to exercise an option and instructs the broker to sell the option shares into the market. 2. At the same time, the optionee and the broker provide the company with:(a) an option exercise notice; and (b) an irrevocable assignment of the sale proceeds in an amount equal to the exercise price.3. The company instructs its transfer agent to issue the option shares and transfer them to the account of the broker. 4. The broker remits the option exercise price to the company and credits the optionee’s account with the balance of the sale proceeds following the settlement of the trade.Potential Violation: This procedure may violate Section 402 in the following ways:1. The company could be viewed as making a loan to the optionee when it instructs its transfer agent to issue the shares before it has received the exercise price from the broker. 2. The broker could be viewed as making a loan if it advances cash to the optionee or the company before it has received the shares from the transfer agent and the sale price from the buyer. The company could be viewed as “arranging” the loan if:(a) the transaction is handled by a “captive” broker; or(b) the company has facilitated the broker’s involvement in the transaction.Alternative Structures: Some types of cashless exercise procedures involve more risk than others. Least Risk: 1. On the date the option is exercised and the shares are sold (referred to as T), the optionee delivers to the company an irrevocable assignment of sale proceeds.2. On the trade settlement date (T+3), the broker receives the option shares, and the company and the optionee receive their respective portions of the sale proceeds. Increased Risk: 1. Prior to the company’s delivery of the shares on T+3, the broker advances cash to the optionee or advances the exercise price to the company.2. The company has not arranged the selection of the broker or otherwise participated in the transaction in a manner that would constitute “arranging” the advances. Greatest Risk: 1. Prior to the company’s delivery of the shares on T+3, the broker advances cash to the optionee or advances the exercise price to the company.2. The company selects the broker (or otherwise is deemed to have “arranged” the transaction).T+3 Settlement: The types of programs that are least likely to violate Section 402 are ones in which the delivery of shares to the broker and the distribution of sale proceeds to the optionee and the company all occur on the T+3 settlement date. Whether the Transaction Is “Arranged” By the Company: 1. Use of a Captive Broker: arrangement. 2. Action That a Company Takes to Facilitate the Transaction: probably an arrangement. 3. Optionee’s Selection of a Broker That is Recommended by the Company as its Preferred Broker: probably an arrangement. 4. Selection of a Broker From a List of Several Brokers That the Company Recommends as Being Qualified to Handle Cashless Exercises: probably not an arrangement. 5. Selection of a Broker Without Any Involvement by the Company: not an arrangement. Advantages of Captive Brokers: Maintaining a regular line of communication between the company and a single broker can help the company and its insiders meet the accelerated 2 day filing requirement for Form 4. If a company permits its executive officers to effect cashless exercises through a captive broker or a broker recommended as the company’s preferred broker, the program should require that all property be exchanged on T+3. B. Section 16 8/29/2002 (accelerated 2 day deadline);6/30/2003 (EDGAR filing and website posting) 403 Deadline: Form 4 deadline shortened to 2 business days after the transaction. EDGAR Filing and Website Posting: Section 16 reports must be filed via EDGAR and posted on company websites. Deadline: Form 4 must be filed before the end of the 2nd business day after the date of execution of a transaction. New Reportable Transactions: Rule 16b-3 transactions that were formerly reportable on Form 5 must now be reported on Form 4:1. Rule 16b-3(d): Grants, awards and other acquisitions from the company.2. Rule 16b-3(e): Dispositions to the company.3. Rule 16b-3(f): “Discretionary transactions” pursuant to employee benefit plans.Exceptions: The following transactions are not required to be reported on Form 4 within 2 days of business days of execution. Instead, the Form 4 must be filed within 2 business days of the “deemed execution date.”1. Rule 10b5-1 trading plans where the insider does not select the execution date.2. “Discretionary transactions” where the insider does not select the execution date. Rule 16b-3(b)(1) defines a “discretionary transaction” as a voluntary transfer of a portion of a participant’s account balance into or out of a company’s stock fund under a deferred compensation plan that is not on account of the participant’s death, disability, retirement or termination of employment.Deemed Execution Date: The execution date is deemed to be the earlier of:1. The date the insider receives notification from the broker, dealer or plan administrator (the broker, dealer or plan administrator can use any means to notify the insider: oral, paper or electronic); and2. The 3rd business day following the actual trade date. Mandatory Electronic Filing: All Section 16 reports must be filed electronically via EDGAR.1. Filing Hours: EDGAR filing hours for Section 16 reports extended from 5:30 p.m. EST to 10:00 p.m. EST. Thus, Section 16 reports submitted before 10:00 p.m. EST will be deemed filed on the same business day. 2. SEC Website: Insiders can file through the SEC’s website (https://www.onlineforms.edgarfiling.sec.gov) or continue to file through a 3rd party filing agent.Mandatory Website Posting: A company that maintains a website must post all Section 16 reports on its website by the end of the business day after the filing. 1. Hyperlinks: A company can satisfy the website posting requirements by hyperlinking to EDGAR or a 3rd party website if:(a) The reports are available in the required time frame;(b) Access is free;(c) Allows retrieval of all information in the reports;(d) Not too burdensome;(e) Access includes exhibits and attachments;(f) Access is through the company website address that the company normally uses for disseminating information to investors; and(g) The hyperlink is directly to the company’s Section 16 reports (or a list of the company’s reports) instead of just a home page or search page.2. Duration: Each Section 16 report must be remain accessible on the company’s website for a 12 month period beginning when the form is posted.Disclosure of Late Filings: Before June 30, 2004, companies will not be required to report a late Section 16 report in the proxy statement pursuant to Item 405 of Reg S-K if the Section 16 report is only one day late. MINIMUM PROCEDURESReminders: Advise insiders of accelerated deadlines. Send periodic preventative reminders and alerts.Pre-Clearance: Establish mandatory pre-clearance for all insiders and their family members. Transactions effected pursuant to a pre-cleared Rule 10b5-1 trading plan should not require further pre-clearance at the time of the transactions.Broker Interface: Establish coordinated broker interface procedures. Require brokerage firms to deliver notification of transactions to the company as well as the insiders. All notices should be delivered by email or fax to ensure timely filing of the Section 16 report. If the insider uses his own broker (rather than the company preferred broker), require brokers to sign a broker instruction/representation form, which requires brokers: 1. Not to enter any order without first confirming that the transaction was pre-cleared; and 2. Report immediately to the company via phone and in writing (email or fax) the details of the transaction.Power of Attorney: Have insiders sign a power of attorney authorizing company officials to sign Section 16 reports on behalf of unavailable insiders.Website Posting: To create a hyperlink directly to EDGAR, a company can use the following URL and insert the company’s CIK code for the string of 10 z’s: http://www.sec.gov/cgi-bin/browse-edgar?action=getcompany&CIK=zzzzzzzzzz&owner=onlyEDGAR Codes: Assist insiders in obtaining EDGAR CIK numbers as soon as possible by submitting a Form ID to the SEC. When submitting the form, the SEC has requested that applicants indicate whether the applicant is an insider with respect to any other companies and whether a CIK number has already been assigned to the applicant. This is important because filing to obtain a new EDGAR access code will automatically cancel the insider’s existing access code.Transfer Agent and Plan Administrator: The transfer agent and stock plan administrators should be provided with a list of Section 16 insiders and instructed to notify the company in advance of and immediately following a transaction. Stock plan administrators should deliver a Form 4 upon grant or exercise of an option by an insider.Family Members: Have an insider’s broker, family members and entities (the transactions of which may be attributed to the insider) agree to notify the insider and the company of contemplated and completed transactions.Insider Trading Policy: Review insider trading policies to ensure compliance with the new rules.Section 16 Insiders: Review persons designated as Section 16 insiders to ensure the group includes and excludes people based on careful consideration of the criteria.STRICTER PROCEDURESCertification: Require insiders to certify their intent to comply with the procedures.Legends: Place legends on stock certificates to notify brokers of pre-clearance policies.Captive Broker: Require all transactions to be executed through a single broker. C. Forfeiture of Bonuses and Profits Upon Restated Financials 7/30/2002 304 Material Noncompliance: If an accounting restatement is required due to “material noncompliance” of the company, as a result of “misconduct,” with any financial reporting requirement, the CEO and CFO must disgorge any profits realized based on the sale of the company’s securities, any bonus and other incentive or equity based compensation received during the 12 month period following the 1st public issuance or filing with the SEC (whichever is earlier) of the document embodying the noncompliant report. Misconduct: Nexus between restatement and officer’s misconduct is not required; CEO and CFO could be held responsible for the misconduct of any low level employee. Although “misconduct” is not defined, it implies an element of scienter rather than merely mistake. D. Insider Trades During Pension Fund Blackout Periods 1/26/2003 306 Insider Trades: Executive officers and directors are prohibited from engaging in any trading of the company’s equity securities during pension fund blackout periods. Executive officers and directors must forfeit any profits realized in violation of this provision. Blackout Period: Defined as any period of more than 3 consecutive business days during which at least 50% of the employees of the company are precluded from trading their interests in any equity security of the company held in all “individual account plans” as defined in ERISA. Reg BTR: Prohibits directors and executive officers from directly or indirectly acquiring or disposing of their company’s equity securities during a pension fund blackout period if they acquired the securities in connection with their service or employment. Persons Covered: Reg BTR applies to directors and “executive officers” (which is the equivalent of an “officer” under Section 16).Securities Covered: Reg BTR applies to transactions by a director or executive officer in any “equity security” of the company that the insider “acquired in connection with service or employment as a director or executive officer.” Equity and Derivative Securities: “Equity security” is defined broadly to include derivative securities and ADRs.“Acquired in Connection with Service or Employment as a Director or Executive Officer” Definition: Means equity securities, acquired directly or indirectly, by such person:1. At a time when he was an insider, under any compensation plan, contract or other arrangement;2. At a time when he was an insider, as a result of a “related party transaction” or similar transaction or relationship that is required to be disclosed pursuant to Item 404(a) and (b) of Reg S-K;3. At a time when he was an insider, as “qualifying shares” that he must hold to meet the company’s minimum ownership requirements to serve as a director or executive officer;4. Prior to becoming or while he was an insider, as an inducement to service or employment as a director or executive officer; or5. Prior to becoming or while he was an insider, where the equity security was received as a result of a business combination in respect of an equity security of an entity involved in the business combination that the insider acquired in connection with service or employment as an insider of that entity.Tracing Requirement (Rebuttable Presumption): Any disposition of an equity security of the company during a blackout period will be presumed to be a transaction involving an equity security “acquired in connection with service or employment as a director or executive officer,” unless the director or executive officer rebuts the presumption. Prohibited Transactions: Reg BTR prohibits all acquisitions or dispositions of covered securities during a blackout period, unless exempted.Exempt Transactions: 1. Acquisitions pursuant to dividend or interest reinvestment plans.2. Purchases or sales pursuant to Rule 10b5-1 trading plans so long as the insider is not aware of the beginning or ending dates of the blackout period at the time the insider enters or modifies the trading plan.3. Purchases or sales pursuant to 401(k) plans and other “tax-conditioned” plans, other than “discretionary transactions” (as those terms are defined under Section 16).4. Stock splits or stock dividends granted pro rata to all holders of the same class.5. Compensatory grants and awards pursuant to plans that provide for automatic awards and specify the terms of such awards.6. Certain non-volitional exercises, conversions or terminations of derivative securities that were not written or acquired during the blackout period, or while the director or executive officer was aware of the beginning or ending dates of a blackout period.7. Acquisitions or dispositions involving a gift, transfer by will or the laws of descent.8. Acquisitions or dispositions pursuant to a domestic relations order.9. Sales or dispositions compelled by law.10. Acquisitions or dispositions in connection with a merger, acquisition or similar transaction occurring by operation of law.Pecuniary Interest: An acquisition or disposition is subject to the prohibition if the insider has a “pecuniary interest” in the transaction (as defined in Section 16). “Pecuniary interest” is broadly defined and can include sales and other transactions by the insider’s immediate family members.“Blackout Period” Definition: Any period of more than 3 consecutive business days during which the ability of at least 50% of the U.S. participants or beneficiaries under all “individual account plans” maintained by a company to purchase, sell, acquire or transfer an equity security of the company held in such a plan is temporarily suspended by the company or a plan fiduciary.Exceptions: The following 2 trading suspensions are excluded from the definition of “blackout period”:1. A regularly scheduled trading suspension period if:(a) a description of the trading suspension period is incorporated into the individual account plan; and(b) is timely disclosed to employees either before they become participants or through a subsequent plan amendment.2. A trading suspension that is imposed solely in connection with a merger, acquisition, divestiture or similar transaction. Notice of Blackout Periods: Reg BTR requires that the company provide notice of an upcoming blackout period to both the insiders and to the SEC.Notice to Insiders: The notice to directors and executive officers must include the following information:1. Reasons for the blackout period;2. Plan transactions to be suspended during the blackout period;3. Class of equity securities subject to the blackout period;4. Actual or expected beginning and ending dates of the blackout period or the calendar week or weeks during which the blackout period is expected to begin and end; and 5. Person designated by the company to respond to inquiries about the blackout period.The company must provide notice of a blackout period to insiders within 5 business days after the company receives notice of the blackout period from the pension plan administrator. If the company does not receive this notice, the company must provide notice to its insiders at least 15 calendar days before the actual or expected beginning date of the blackout period. Notice to SEC: Companies must provide notice to the SEC by filing the notice on Form 8-K under Item 11 (“Temporary Suspension of Trading Under Registrant’s Employee Benefit Plans”). The content of the notice on Form 8-K must be the same as the content of the company’s notice to the insiders.