Although this new proposal has generated a number of headlines, the reality is that it is repetitive of current rules that already mandate the signature of corporate officers. The one possible exception is that the executive must vouch that as far as he or she is aware, the report includes all of the information "important to a reasonable investor."

One of the most significant changes is a new penal law, 18 U.S.C. §§ 1348, commonly known as the Sarbanes-Oxley Act of 2002 (the "SOA"). The SOA adds significant fines and longer jail time for corporate executives who improperly sign-off on the appropriateness of their financial statements, which are willing and knowing misstatements.

Unlike the new SEC rule concerning certification of reports by the CEO and CFO that contain financial statements, §§ 1348 applies to all reporting companies, instead of just the largest 1,000 reporting firms. It is a permanent, continuing requirement applicable to all periodic reports. It applies to foreign companies, as well as domestic ones, and it requires the chairman of the board, if that person is also an executive officer, to sign the certification. The certification required by §§ 1348 is broader than the SEC counterpart. The requirement that both the "financial statements and disclosures fairly present, in all material respects, the operations and financial condition of the issuer" is not qualified by the usual references to "in accordance with generally accepted principles." Accordingly, even if an issuer's financial statements comply with GAAP, they could easily violate the requirement of "fair presentation," thus imposing criminal liability on the CEO and CFO. The bill as reported out of conference also imposes criminal liability for the failure to file such certifications in accordance with the statutory time schedule.

The SOA also contains a longer statute of limitations for claims of "fraud, deceit, manipulation or contrivance in contravention of a regulatory requirement concerning the securities laws." Under the SOA the claim must be brought prior to the earlier of two years after discovery of the facts constituting such violation or five years after such violation. There is no exception for statutes with their own limitations periods. Accordingly, there is a question as to which statute of limitations is applicable to manipulation claims [Securities Exchange Act §§ 9(e)] and certain insider trading claims [Securities Exchange Act §§ 20A]. Also, are claims arising under Sections 11 and 12(a)(2) of the Securities Act, which do not require a proof of fraud but are sometimes deemed "sounding in fraud" now subject to the new and longer statute of limitations?

Another new level of bureaucracy appearing on the horizon is a five member oversight board for the accounting industry. The board would be able to raise money by assessing fees and would have the authority to subpoena documents from public companies. The oversight board's actions would be subject to review by the SEC and the SEC has the authority to assign additional responsibilities to the oversight board, including the investigation of accounting firms. The SOA envisions close cooperation between the boards investigatory personnel and the SEC's Division of Enforcement. The SOA prevents registered audit firms from providing the following services to their publicly owned audit clients:

• bookkeeping appraisal and actuarial services;
• financial information systems design and services;
• management functions or human resources work;
• internal audit outsourcing services;
• broker-dealer, investment advisor or investment banking services;
• legal services; and
• expert services, other than tax work, unrelated to auditing.

In anticipation of the passage of such legislation, many of the consulting arms of the major accounting firms have already been acquired by non-financial corporations.

The fourth new factor appearing on the financial landscape is the increased role of state prosecutors and attorneys general in enforcing the securities law. Basically, some of the states believe that the SEC has not been vigorous enough in its enforcement activities. Recent examples of a state's involvement in what has historically been the sole province of the SEC are numerous. One example is the action by the New York Attorney General's Office against Merrill Lynch concerning the alleged conflict of interest of its research analysts. Recently, the District Attorney's Office of New York County has been very active in prosecuting broker-dealers for violations of both federal and state law.

Although state participation in these areas may be viewed favorably by some, in the long run this could prove very detrimental. The SEC was conceived because Congress determined, after the Great Depression, that regulation of the securities industry, including the companies whose stocks were publicly traded, could not be left to the states. Having 50 states, each with their own statutes, personnel and political priorities, regulating an industry that is national and/or international made no sense in 1933 and makes no sense in 2002.

In connection with the audit oversight proposals, the SEC has again used the procedure of setting forth a list of detailed questions seeking comments from interested parties prior to finalizing the proposed regulation. See "Framework for Enhancing the Quality of Financial Information Through Improvement of the Oversight of the Auditing Process," Securities Act Release No. 8109 dated June 26, 2002. If you cannot easily obtain a copy of that release, please do not hesitate to contact my office and we will furnish a copy of the release to you. The release requires that comments be received on or before September 3, 2002.

It is difficult to determine what the long-range impact will be of these reactions to the tidal wave of financial scandals. However, one result will be that these new rules will be a fertile ground for new operating procedures, increased compliance procedures and litigation to resolve the issues raised by these new statutes and regulations over the next few years.