SOX (Sarbanes – Oxley Act 2002)
High Points and Clarity

How it came about:
• A result of the Enron Scandal

What does it do:
• Provides more regulation of securities trading and expands the Securities & Exchange Act of 1934

Securities and Exchange Commission (SEC) regulates the Securities Trading Industry and:
• General rule maker authority for SOX
• Established the Public Company Accounting Oversight Board PCAOB
• Reviews sanctions/penalties determined by PCAOB
• Final Authority on accounting standards
• Selects members of the PCAOB
• Approves rules of the PCAOB
• Public Company Accounting Oversight Board PCAOB
o This is an independent board that oversees audits of publicly traded companies
o Accounting firms
o Auditor independence – there may be no conflicts of interests for required auditors
o Every firm that audits a publicly traded company must be registered with the

PCAOB
o Has overlapping powers with SEC to investigate and initiate disciplinary proceedings against accounting firms

Financial Reporting:
• Form 8 K is used to notify of a material event of the organization and must be filed with the SEC within 4 business days of such material event via EDGAR
• Form 10 K is the annual reporting which provides for the organizations performance, organizational structure, executive compensation, equity, subsidiaries, and audited financial statements and it must be filed with the SEC within 60 days of the end of the fiscal year for the organization via EDGAR
• Form 10 Q is the Quarterly report filed with the SEC and must be within 35 days of the end of the quarter via EDGAR
• Public companies must post Insider Trading reports (Sect. 16a Reports) on their websites
• Rule 10A-3 requires that all SROs (Self Regulating Organizations) adopt listing standards that are acceptable in accordance with SOX/ 1934 Securities & Exchange Act

Board of Directors & Independence:
• All Stock Exchanges must require each listed company to have independent auditing committees
• The auditing committee members must be listed and their financial expertise noted in such filing
• The auditing committee is required to select the independent auditing firm/auditor
• The Board of Directors of public companies must be independent

Fraud
• Sect 302 & 304 changed the way companies detect, respond, and prevent fraudulent accounting practices
o The responsibility for Sect. 302 & 304 is at the highest levels of management:
o A manager who certifies a SEC periodic report that omits the FCPA (Foreign Corrupt Practices Act) faces serious criminal and financial penalties under SOX’s Section 906
• SOX extends statute of limitation period for securities fraud actions (but not Securities Act § 11 actions) to two years after the fraud should have been discovered and in any event within five years of the violation
• Private actions by the Organization or shareholder can be brought id there is insider trading during a pension black-out
• Judgments adjudicated from securities fraud shall not be included in bankruptcies

CEO & CFOs:
• must certify to:
 Quarterly and Annual Reports
 Responsibility for system of disclosure controls and procedures to gather information to be included in the periodic reports


 Financial reporting Internal controls

• Officers and Directors can be required to pay back equity-based compensation in the event of misconduct resulting in financial restatements just as Well Fargo board decided to do below:
** 4/10/17 Per the NY Times 2 Wells Fargo Executives (John Stumpf, frmr CEO and Carrie Tolstedt) were ordered to repay a whopping 75 million dollars for their mass failure in the Wells Fargo scandal (See website for full article)
• Executives may not take out personal loans from the organization
Whistleblowers/The Attorneys’ Fine Line
• Companies must create a whistleblower program and certify any disclosures as to such in reports
• Sect 307 requires an attorney be provided to reporter (whistleblower) of evidence of a material violation of securities laws, a breach of fiduciary duty, or similar violations by the company or any agent of the company
• Whistleblowers may be reinstated and compensated if discharged or discriminated against due to their reporting of securities fraud to the regulatory authorities or appropriate persons
• Under certain circumstances attorneys may disclose confidential information to the Commission
o But the Model Rules of Professional Conduct (“MRPC”) requires an attorney who knows of unlawful conduct that may result in substantial injury to an organization to inform the highest authority in the organization


o MRPC 1.6 DOES ALLOW AN ATTORNEY TO DISCLOSE CONFIDENTIAL INFORMATION TO PREVENT A CRIME FROM OCCURRING W/ A PRECONDITION THAT THE CLIENT USED OR IS USING THE LAWYER’S SERVICES IN FURTHERANCE OF SUCH CRIME OR FRAUD.