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The proposed rules supplement existing rules under Rule 13b-2 of the Securities Exchange Act of 1934 (the "Exchange Act") and, together with Rule 13b-2, are designed to ensure that management makes open and full disclosures to, and has honest discussions with, the auditor of the company's financial statements.
Under the proposed rules:
Types of Prohibited Conduct
The SEC views the word "fraudulently" as modifying the word "influence" only, such that an officer or director, or any person acting under the direction thereof, can seek to influence, but not "fraudulently influence" the company's independent auditors. It would seem that something less than fraud is sufficient to trigger the other types of prohibited conduct, that is, to "coerce,"manipulate" or "mislead" an auditor. Prohibited conduct is not dependent on whether it is successful in affecting the audit or review. Types of improper influence that the SEC described in the proposing release, include, but are not limited to, directly or indirectly:
As noted above, the proposed rule would cover the activities of not only officers and directors of a public company, but also any other person acting under the direction of an officer or director. Activities by such "other persons" currently may constitute violations of the anti-fraud or other provisions of the securities laws, or aiding, abetting or causing a public company's violations of the securities laws. However, Section 303 of the Act and the proposed rule provide the SEC with an additional means of policing efforts by persons acting under the direction of an officer or director to improperly influence the audit process and the accuracy of a public company's financial statements.
The SEC interprets Congress' use of the term "direction" in the Act to encompass a broader category of behavior than "supervision," including persons who do not directly report to the officer or director. Accordingly, persons acting under the "direction" of the directors and officers might include, not only the company's employees, but also customers, vendors or creditors who, under the direction of an officer or director, provide false or misleading confirmations, or other false or misleading information to auditors, or who enter into undisclosed "side agreements" that undermine the accuracy of a company's financial statements. In addition, under certain circumstances, the term also may include other partners or employees of the independent auditor, attorneys, securities professionals, or other advisers who act under the direction of an officer or director.
In the case of a registered investment company, persons acting under the direction of officers and directors of the investment company may include, among others, officers, directors, and employees of the investment company's investment adviser, sponsor, depositor, administrator, principal underwriter, custodian, transfer agent, or other service providers.
Whether the Proposed Rules Should Require Proof of a Particular Purpose or Intent
Section 303(a) of the Act states that conduct by an officer, director, or person acting under the direction of the officer or director, designed to improperly influence a public company's auditor is actionable if undertaken "for the purpose of" rendering a public company's financial statements materially misleading. Under the proposed rules, an officer, director, or person acting under the direction of the officer or director, who engaged in conduct to improperly influence an auditor would be culpable if he or she knew, or was unreasonable in not knowing, that the improper influence could, if successful, result in rendering financial statements materially misleading. The SEC proposes that proving a particular purpose or intent is not required.
No Private Right of Action
Section 303(b) of the Act provides the SEC with exclusive authority to enforce the Section and any rules or regulations issued under the Section. Accordingly, there will be no private right of action under final rules to be issued pursuant to Section 303 of the Act.
Anticipated Timeframe for Adoption
The deadline for public comment on the proposed rules is November 25, 2002. The Act mandates that final rules be adopted no later than April 26, 2003.
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