On January 23, 2003, the Securities and Exchange Commission (the "SEC") adopted final rules (the "Final Rules") relating to the Code of Ethics provisions of Section 406 of the Sarbanes-Oxley Act of 2002 (the "Act"). [1] The Final Rules require companies subject to the reporting requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, to disclose whether or not, and if not why not, they have adopted a written code of ethics for their principal financial officer, principal accounting officer or controller, or persons performing similar functions (collectively, "senior financial officers") and their principal executive officer. The instructions to the code of ethics disclosure item (new Item 406 of Regulations S-K and S-B) provides that companies may have separate codes of ethics for different types of officers. In addition, the Final Rules require companies to publicly disclose certain amendments made to, or waivers granted from, their code of ethics and require companies to make their code of ethics publicly available.

The Final Rules apply not only to domestic companies but also to foreign private issuers. In addition, in a separate final release dated January 27, 2003, the SEC adopted amendments to Form N-CSR and N-SAR to implement Section 406 of the Act with respect to registered management investment companies. [2]

Timeline for Compliance

Companies, including small business issuers and foreign private issuers, must comply with the disclosure requirements related to their code of ethics in their annual reports for fiscal years ending on or after July 15, 2003. Accordingly, companies have a substantial period of time in which to determine their approach to this aspect of compliance with the Act. We anticipate that many companies will defer the decision to adopt a code of ethics for their senior financial officers and their principal executive officer until the rule proposals of the New York Stock Exchange ("NYSE") and the Nasdaq Stock Market ("Nasdaq") are finalized with respect to codes of conduct of broader application.

Code of Ethics - Domestic Companies and Foreign Private Issuers

The Final Rules supplement the requirements of Section 406 of the Act and define the term "code of ethics" to mean written standards that are reasonably designed to deter wrongdoing and to promote: [3]

• 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 reports and documents that a company files with, or submits to, the SEC and in other public communications made by the company;
• Compliance with applicable governmental laws, rules and regulations;
• The prompt internal reporting to an appropriate person or persons, identified in the company's code of ethics, [4] of violations of the code's provisions; and
• Accountability for adherence to the company's code of ethics.

In the Release, the SEC indicated that ethics codes do, and should vary among companies, and encouraged companies to adopt codes of ethics that are broader and more comprehensive than necessary to meet the new disclosure requirements. [5] The provisions that comply with the SEC requirements may be part of this broader ethics code. The SEC has therefore left decisions as to the specific code of ethics provisions, compliance procedures and disciplinary measures for ethical breaches to each company to establish. Given the broader scope of the code of conduct requirements proposed by the NYSE and Nasdaq and the fact that many companies already have rather detailed codes of conduct for employees generally, we anticipate that many companies will adopt a code of ethics for their senior financial officers and their principal executive officer as a subpart of the more comprehensive code of conduct required to satisfy the listing rules of their applicable Self-Regulatory Organization.

If a company does not have a code of ethics, or if a company's code of ethics does not satisfy all parts of the SEC's definition of "code of ethics," the company is required to disclose in its annual report why it does not have a code of ethics or why the terms of its code differs from the SEC's required provisions.

Disclosure Requirements

Pursuant to new Item 406 of Regulations S-K and S-B, Item 15(c) of Form 20-F or Instruction B.(9) of Form 40-F, the Final Rules require companies to disclose:

• Whether the company has adopted a written code of ethics that applies to the company's principal executive officer and senior financial officers; and
• If the company has not adopted a code of ethics, the reasons why it has not done so.

The Final Rules permit companies to make the required disclosure on a Schedule 14A or 14C prepared in connection with the annual stockholders' action to elect directors and incorporate those disclosures by reference into their annual reports.

In order to help investors better understand the ethical principles that govern the executives of the companies in which they invest, the Final Rules require each company to either:

• File a copy of its code of ethics as an exhibit to its annual report on Form 10-K, 10-KSB, 20-F or 40-F;
• Post the text of such code of ethics on the company's website [6] and disclose in its annual report its website address and the fact that it has posted its code of ethics on such website; or
• Undertake in its annual report filed with the SEC to provide to any person without charge, upon request, a copy of such code of ethics and explain the manner in which such request may be made.

Disclosure Regarding Amendments to, or Waivers from, the Code of Ethics

Pursuant to the Final Rules, a company must make "immediate" public disclosure of amendments made to, or waivers granted, including an implicit waiver, from, any provision of the code of ethics that applies to its principal executive officer or senior financial officers. [7] For purposes of the Final Rules, the term "waiver" means the approval by the company of a material departure from a provision of the code of ethics, and the term "implicit waiver" means the company's 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, as defined in Rule 3b-7 of the Exchange Act.

The disclosure must briefly describe the nature of the amendment or waiver, and in the case of a waiver, the name of the person to whom the waiver was granted and the date of the waiver. Such disclosure must be made under new Item 10 to Form 8-K, or on the company's website, within five business days after the amendment was made or the waiver was granted. [8] A company that chooses to disclose the amendments or the grant of a waiver on its own website, in lieu of a Form 8-K filing, must have previously disclosed in its most recently filed annual report on Form 10-K or 10-KSB that it intends to disclose these events on its website and must specify its website address. This website disclosure is required to be made available on the company website for at least twelve months after the company initially posts the disclosure and must be retained by the company for at least five years.

In contrast to domestic companies, foreign private issuers will not have to make "immediate disclosure" of any amendment to, or waiver from, their code of ethics on a current report. Instead, foreign private issuers must disclose such amendments or waivers that have occurred during the past fiscal year in their annual reports on Form 20-F or 40-F. However, in the Release, the SEC noted that foreign private issuers are encouraged to make these disclosures promptly on Form 6-K or on their company website.

NYSE and NASDAQ Proposals

The NYSE and Nasdaq have submitted corporate governance rules to the SEC for approval (the "SRO Proposals"). The SRO Proposals would require a listed company to, among other things, (1) adopt a code of conduct, [9] which would apply to all directors, officers and employees of the listed company; (2) make the code publicly available; [10] and (3) promptly disclose any waiver of the code granted to a director or executive officer. [11] In addition, the SRO Proposals would require that a listed company's code contain compliance standards and procedures that would facilitate the effective operation of the code. It is important to note that listed companies need to comply with the Final Rules and, once approved by the SEC, the applicable SRO Proposal as finally adopted.