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SEC Issues Final Audit Committee Rule

APRIL 4, 2003


SEC Issues Final Audit Committee Rule

As required by the Sarbanes-Oxley Act, the SEC has adopted a final rule prohibiting the national securities exchanges from listing securities of any issuer that does not comply with the audit committee independence standards of the Act.

Under Sarbanes-Oxley, audit committees must: consist of "independent" directors; be responsible for the appointment, compensation and oversight of the external auditor; maintain anonymous complaint procedures; have authority to engage independent counsel and advisors; and receive appropriate funding from the issuer.

To be considered independent, audit committee members must not receive any consulting, advisory or compensatory fee from the issuer or any subsidiary, other than board or committee fees. Additionally, an audit committee member must not be an "affiliated person," e.g., an executive officer or controlling shareholder, of the issuer or any subsidiary. The rule contains a safe harbor where anyone who is not a 10 percent or greater shareholder is deemed not to be a controlling person. Under the SEC definition of independent, lending relationships between an audit committee member or related companies and a bank are not prohibited. However, the stock exchanges may impose more stringent independence standards that limit some banking relationships.

Issuers will be required to comply with the new listing rules by the date of the first annual shareholders meeting after Jan. 15, 2004, but no later than Oct. 31, 2004. "Small business issuers" must comply by July 31, 2005.