Most significantly, the board of directors of a NASDAQ-listed company must have a majority of independent directors. The standards also say who can serve on board audit and compensation committees, how board members are to be nominated and what code of conduct listed companies must adopt and enforce.
There is not much time to comply; the deadline for most companies is the first annual stockholders' meeting after Jan. 15, 2004 or Oct. 31, 2004, whichever applies to a particular company. Small business issuers -- those with a public float of less than $25 million -- have until July 31, 2005.
The standards for determining director independence may present a formidable obstacle for many companies. A director will not be considered independent if, at any time during the past three years, he or she, or any of his or her family members, has been:
* An employee of the company (as an executive officer, in the case of a family member) or of its parent or subsidiary
* The recipient of payments from the company, its parent or subsidiary of greater than $60,000 (excluding compensation for board or board committee service; payments from investments in the company's securities; compensation paid to a family member who is a nonexecutive employee of the company, its parent or subsidiary; benefits under tax-qualified retirement plans or nondiscretionary compensation; or loans that do not fall within the category of prohibited personal loans to directors and executives)
* A partner in, or a controlling shareholder or an executive officer of, any organization, including a charitable organization, to which the company made, or from which the company received, payments for property or services that exceed 5 percent of the recipient's consolidated gross revenue for that year, or $200,000, whichever is greater (excluding payments arising solely from investments in the company's securities or payments under nondiscretionary charitable contribution matching programs)
* An executive officer of another entity on whose compensation committee any executive officer of the company has served
* A partner of the company's outside auditor or an employee of the company's outside auditor who worked on the company's audit
Companies that don't have a majority of independent directors should get started implementing these changes. It may be difficult to recruit directors who meet these criteria and who are willing to make the commitment. Briar McNutt is a lawyer with Eckert Seamans Cherin & Mellott, LLC.
Anecdotal evidence suggests that the Pennsylvania Securities Commission is also aggressively investigating complaints involving private companies' securities offerings.
One of the first decisions a company faces after learning of an investigation is whether to cooperate with the government in the hope of avoiding prosecution or whether it should mount a defense. Conducting an internal investigation will help a company decide.
Ideally, the board or a committee of the board will be in charge of the investigation. If the suspected culprit is an executive, it must be.
An attorney, preferably an outside attorney specializing in securities law, should conduct the investigation. This will enable the company to rely on attorney-client privilege to keep information pertaining to its investigation out of the hands of government investigators and third-party plaintiffs such as stockholders.
The company should inform employees and instruct them not to talk about the investigation to third parties or government investigators unless the company attorney is present, to cooperate fully with the internal investigation and to preserve pertinent records. It should also assist the investigating attorney with coordinating employee interviews.
The company should request a report from the investigating attorney that includes only legal advice and discusses the company's legal position -- not business advice, which is not protected by attorney-client privilege.
Any document prepared in the course of an investigation, including the investigating attorney's report, should be marked "Privileged and Confidential: Attorney-Client/Work Product," and be disseminated to the fewest people possible.
If the investigation reveals misconduct, the company should consider disciplinary action against the responsible employee(s) and remedial actions, depending on the nature of the misconduct and the degree of harm it caused. A company seeking leniency from the government must take remedial action; for example, restate financial statements and compensate investors for losses attributable to the misconduct.
If the company decides to defend itself, it may take no disciplinary or remedial action.
Compliance with federal and state securities laws is the key to avoiding a government investigation.To ensure compliance, a company should confer with a qualified securities attorney any time it decides to offer or sell securities. Briar L. McNutt is an attorney with Eckert Seamans Cherin & Mellott LLC.