April, 2003

SEC Adopts New Rules Requiring Independent Auditor Committees

The Securities and Exchange Commission ("SEC") has adopted a new rule which will require most publicly traded companies to have their audit functions overseen by audit committees comprised of independent directors.

New Rule 10A-3 under the Securities Exchange Act requires the national securities exchanges and national securities associations (such as the New York Stock Exchange, the American Stock Exchange and Nasdaq) to adopt rules prohibiting the listing of any security of an issuer who has not complied with the following standards:

Each member of the audit committee (or the board of directors if there is no audit committee) must be "independent"
The audit committee must be directly responsible for the appointment, compensation, retention and oversight of the public accounting firm engaged to audit the issuer
The audit committee must establish procedures for the receipt, retention and treatment of complaints regarding accounting, internal accounting controls or auditing matters, including procedures for the confidential, anonymous submission by employees of the issuer of concerns regarding questionable accounting or auditing matters
The audit committee must have the authority to engage independent counsel and other advisors as it determines necessary to carry out its duties
The issuer must provide appropriate funding for the audit committee.

The new rule was adopted by the SEC pursuant to the Sarbanes-Oxley Act, which directed the SEC to direct, by rule, the national securities exchanges and national securities associations to prohibit the listing of any security of an issuer that is not in compliance with the enumerated standards regarding issuer audit committees. The New York Stock and American Stock Exchanges have already submitted proposed new listing rules to the SEC.

Most listed issuers must comply with the new requirements by the earlier of (1) their first annual meeting after January 15, 2004 or (2) October 31, 2004. Foreign private issuers and listed small business issuers (companies with less than $25 million in revenue) must comply with the new listing rules by July 31, 2005. Newly listed issuers must have at least one independent director at the time of the issuer's initial listing and must have a fully independent audit committee within one year after listing. Companies that trade on the OTC Bulletin Board, the Pink Sheets and the Yellow Sheets are not affected by the new rules.

Independence Requirement

For directors to be considered "independent" they may not be "affiliates" of the issuer and may not accept, directly or indirectly, any consulting, advisory or other compensatory fee from the issuer or any of its subsidiaries. However, they may receive compensation for serving as a director or a member of any committee of the board.

Affiliated directors include executive officers of the issuer and persons who directly or indirectly control, are controlled by, or are under common control with the director. A director who is not an executive officer and who owns less than ten percent of the voting stock of the issuer is presumed to not be an affiliate of the issuer. The SEC has provided some exemptions from the independence requirement for some foreign private issuers who have conflicting legal requirements or corporate governance standards.

Indirect compensation includes payments for services to law firms, consulting firms, investment banks, etc in which the audit committee member is a partner, member or executive officer, as well as payments to family members of the board member.

Required Disclosure Regarding Audit Committees

A listing issuer must disclose, in its annual report and proxy statement which directors serve on its audit committee, or if the board does not have an audit committee, that the entire board is acting as the audit committee. In addition, if one or more directors fall within any of the limited exemptions from independence, the issuer must disclose that it has relied on an exemption and must discuss how the reliance on the exemption will materially adversely affect the ability of the audit committee to act independently.

Under the proxy rules, the audit committee must continue to provide a report disclosing whether the audit committee has reviewed and discussed the issuer's audited financial statements with management and must disclose whether the audit committee is governed by a separate audit committee charter.

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