Member Article

On Wednesday, January 15, 2003, the SEC adopted rules implementing Section 406 of the Sarbanes-Oxley Act of 2002 (the “Act”). The SEC’s new rules under the Act require public companies to disclose in each annual report on Form 10-K (U.S. companies), Form 40-F (Canadian companies) or Form 20-F (non-U.S. companies) whether they have adopted a code of ethics that applies to their principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. If the company does not have a code of ethics that meets the requirements of the new rules, the company must disclose in its annual report the reasons why it has not adopted a code of ethics. If a public company has a code of ethics that meets the SEC’s requirements, the company must make its code of ethics available to the public. In addition, changes to, or waivers of, the code of ethics that apply to the officers or activities subject to the new rules must be publicly disclosed. Definition of “Code of Ethics” Under the new rules, a “code of ethics” is defined in new Item 406 of Regulation S-K and new Item 406 of Regulation S-B as a codification of standards that is reasonably designed to deter wrongdoing and to promote Honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; Full, fair, accurate, timely and understandable disclosure in SEC reports and in other public communications; Compliance with applicable governmental laws, rules and regulations; Prompt internal reporting of violations of the code of ethics to appropriate person or persons identified in the code of ethics; and Accountability for adherence to the code of ethics. A public company must have a code of ethics in place that addresses all of the above items in order to be able to state that it has a code of ethics that complies with Section 406 of the Act and avoid having to explain in its annual report why it does not have a code of ethics that meets the new requirements. The SEC believes that codes of ethics should vary from company to company and that decisions regarding the exact contents of a company’s code of ethics, compliance procedures and disciplinary measures are best left to each individual company. Therefore, the new rules do not specify every detail that must be addressed in a code of ethics or prescribe any specific language that must be included in a code of ethics. The SEC strongly encourages companies to adopt codes of ethics that are broader and more comprehensive then the minimum necessary to meet the new disclosure requirements. Making the Code of Ethics Publicly Available The new rules require each public company that claims to have in place a code of ethics that meets the above requirements to make its code of ethics available to the public by one of the following methods: Filing the code of ethics as an exhibit to the company’s annual report; Posting the code of ethics on the company’s website and disclosing in the company’s annual report a notice containing the company’s website address and stating that the code of ethics has been posted on the website; or Providing in the company’s annual report that a copy of the code of ethics can be obtained without charge, upon request, and explaining how to make such a request. If a company has in place a document that meets the SEC’s requirements for a code of ethics and that applies to a broader range of activities and broader class of persons than is addressed by the SEC’s rules, the company need only file, post or provide the portions of the document that address the ethical considerations contained in the SEC’s definition of “code of ethics” and that apply to the company’s principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. Disclosure of Changes to, and Waivers of, the Code of Ethics The new also rules require each public company to disclose any change to its code of ethics that applies to any officer in the group that is covered by the rules or any grant of a waiver of the code of ethics to any such officer. A company must disclose only those changes or waivers that relate to one of the elements of a code of ethics that is contained in the SEC’s definition of a code of ethics. A company is not required to disclose technical, administrative or other non-substantive amendments to its code of ethics. For purposes of the rules, the term “waiver” means the approval of a material departure from a provision of the code of ethics. An implicit waiver is deemed to be a waiver. An “implicit waiver,” is defined as the 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 of the company. Changes to, and waivers of, the code of ethics that require disclosure must be disclosed on Form 8-K or on the company’s website. If a company desires to use its website to disclose changes to, or waivers of, its code of ethics, then the company must Have disclosed in its most recently filed annual report that the company intends to disclose any such changes to, or waivers of, its code of ethics on its website and included the address for its website in such annual report; Make the information regarding the change or waiver available on its website for a period of at least 12 months; and Retain the disclosure regarding the change or waiver for a period of no less than five years and make the disclosure available to the SEC upon its request. Whether the disclosure is made on Form 8-K or on the company’s website, the company must make the required disclosure within five business days of the change to, or waiver of, its code of ethics. The disclosure must include the nature of the amendment or the nature of the waiver, the name of the person to whom the waiver was granted and the date of the waiver. A foreign private issuer must disclose any changes to, or waivers of, its code of ethics in its annual report on Form 20-F or 40-F. Although a foreign private issuer is not required to disclose changes to, or waivers of, its code of ethics on Form 6-K or on its website, the SEC strongly encourages foreign private issuers to use those means to disclose such changes or waivers.

 

Link to article