Tough Act to follow?

Lawyers are agonising over the details of the Sarbanes-Oxley act, which sets out strict rules for their dealings with corporate bosses.

Scott Neilson explains how the act will play in the UK

You simply cannot get away from it.

As of July this year, the month that saw the US Congress approve the Sarbanes-Oxley Act, every chief executive officer (CEO) of an American-listed but nonetheless foreign-based corporate can now be held personally responsible for the accuracy of their business's books.

All of a sudden, individual executives are on the hook - as are the lawyers who advise them.

Sarbanes-Oxley is big news for any lawyer, in-house or external, British or American, who advises a corporate with a US listing.

Produced amid intense political and media pressure, the Act is designed to prevent a repeat of the American corporate accounting scandals that have rocked the global economy over the past year.

Its broad and far-reaching legislation marks a change of tack towards non-US companies on the part of Wall Street's traditionally laissez-faire Securities and Exchange Commission (SEC).

Suddenly, to take a hypothet-ical example, the head of legal at a dual listed company (DLC) - or even the law firm partner advising an in-house lawyer - could at least in theory be brought to book for not blowing the whistle on any suspicion of material departure from good practice regulations.

The Act also entitles the SEC to draw up the rules on lawyers' professional conduct - previously the realm of the judiciary rather than the executive in the US.

Wall Street's watchdog also now has the power to bar any lawyer who fails to comply with the so far sketchy rules that are emerging from the Act from appearing before it.

To put things in perspective, about 75 UK-listed companies have a listing on the New York Stock Exchange.

There is a limit to the number of UK-based lawyers affected by the Act.

Meanwhile, critics of the Act could be forgiven for wondering whether in-house lawyers even have the expertise to assess the rights and wrongs of a company's complex business dealings.

'This could be a problem for the in-house lawyers,' says Steve Durno, secretary to the Law Society's company law committee.

'In the event of suspected wrongdoing, the Act means that the lawyer incurs an obligation to report to the (proposed) audit committee, or some other part of the company,' says Mr Durno.

'But requiring lawyers to make subjective judgements about complex financial matters is a problem.

That's why a lot of the legal commentators are panic stricken.

Because accounting breaches are not that obvious to a lawyer.

It's not just black and white,' he says.

'Furthermore, if you do what the Act's regulations call for and bring a CEO's suspicious wrongdoings to his attention, then that is going to really destroy your firm's relationship with what in some cases may be your biggest client.

All of this places lawyers in a dreadful, dreadful dilemma.'

For the lawyers on the receiving end of Sarbanes-Oxley, many seem reluctant to venture an opinion at this stage - the Act is not scheduled to come into force until early next year - and the exact degree to which lawyers will be held accountable is still to be determined.

'It's a potential case of legislate in haste, repent at leisure,' says one UK head of legal at a FTSE 100 company, who prefers not to be named.

'But make no mistake.

This Act has teeth.'

However, professional advisers can be forgiven their reluctance to comment on the record.

Sarbanes-Oxley is currently the focus of much lobbying from Brussels, the UK government and European US-listed corporates.

All now want to win the ear of SEC chairman Harvey Pitt.

This month, has seen a stampede of trans-Atlantic horse-trading between the commission and the European Union's internal market commissioner, Frits Bolkestein (see [2002] Gazette, 17 October, 6).

'There's an awful lot of lobbying and horse-trading going on,' Mr Durno says.

'The SEC is proposing rules and thereby slowly adding flesh to the bones of the Act.'

'The EU and the Department of Trade and Industry are among many European organisations lobbying for some form of exemption for UK and European companies.

These companies will now have to meet two sets of requirements for two different stock exchanges.

They will have to pay double to meet the requirements.

There's a lot of lobbying going on in the background, to try and carve out some form of exemption for UK companies from among a complex range of possible outcomes,' he says.

In-house lawyers are already experiencing a jump in their compliance burden.

AstraZeneca assistant company secretary Adrian Kemp says the Act's as-yet-unclarified nature has his legal team on its toes.

'We are working hard to keep up with the legislation that is emerging and to make sure that this company is in a position to comply,' Mr Kemp says.

The Act's impact on the external securities lawyers who advise US-listed corporates may be of a more profitable nature.

Allen & Overy securities partner Bart Capeci says his DLC clients are already awake to the implications of Sarbanes-Oxley, 'almost to the point of paranoia'.

He points out that while European CEOs may feel confident that their own staff are meeting corporate governance standards here in Britain, they are worried that this may not be the case when it comes to an organisation's operations overseas.

In point of fact, German car-maker Porsche has already pulled its proposed New York Stock Exchange flotation, stating concerns about the subsequent liability of its top executives to the actions of employees throughout the entire company.

'From the perspective of US litigation, even if your accounts do give a true and fair view, you may still be liable.

Nobody knows,' says Mr Capeci.

'The question is how much hand-slapping will we see before the big stick gets broken out,' he adds.

Meanwhile, many UK lawyers and executives are hanging their hopes on the prospect of temporary, jurisdictional or sectional exemptions for non-US corporates.

Hence the current lobbying frenzy.

However, it is the issues surrounding enforcement, which are perhaps posing one of the greater enigmas of the Sarbanes-Oxley legislation.

Quite how the Act's $5 million fines and 20-year prison sentences could be enforced against the CEO of a UK company is unclear.

'What's the SEC going to do?' Mr Capeci asks.

'Wait until the chief executive goes to Disneyland? Having said that, no director wants a warrant issued for him or her.

The bad PR, the displeasure of the share-holders and not being able to travel freely are the way that sanctions will work,' he adds.

Ultimately, like many controversial new laws, Sarbanes-Oxley may amount to little.

One head of legal at a major British energy multinational says most of the UK's DLCs would already comply with at least the spirit of the Act.

'What they may have to do is just tweak some of their procedures and change a bit of the language.

But a lot of the Act's principles are already present in the UK's code of corporate governance,' says the lawyer.

Meanwhile, Mr Kemp is convinced that the SEC cannot afford to ignore the needs of foreign corporates listing on the markets it regulates.

'We do have some leverage, in terms of the SEC wanting to continue to attract listings.

Besides, you probably won't even see a great deal of enforcement activity that is aimed at individual executives.

What you will see is a greater, closer and more frequent scrutiny of a company's disclosures.

That's no bad thing.

'You've just got to steadily assess the rules as they come out, steadily work your way through them and adjust your actions accordingly.

We're just getting our heads down and doing whatever is necessary to comply.'

But before that compliance becomes necessary next year, the arguments about what exactly it entails will rage on.

Scott Neilson is a freelance journalist