Dr. Enrique P. Prini Estebecorena1 Introduction to US Securities Law EFFECT OF SOX ON LATIN AMERICAN CORPORATIONS ABA INTLAW FALL MEETING

Dr. Enrique P. Prini Estebecorena

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Introduction Introduction to US Securities Lawto US Securities Law

EFFECT OF SOX ON LATIN EFFECT OF SOX ON LATIN AMERICAN CORPORATIONS AMERICAN CORPORATIONS

ABA INTLAW FALL MEETING


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Please Fasten your seat Please Fasten your seat belt...!!belt...!!

• SOX LATAM WAYSOX LATAM WAY

• PROBLEMS AHEAD PROBLEMS AHEAD

• PLAN AND THEN... PLAN AGAINPLAN AND THEN... PLAN AGAIN

• IF YOU ARE NOT PART OF THE SOLUTION IF YOU ARE NOT PART OF THE SOLUTION YOU ARE PART OF THE PROBLEMYOU ARE PART OF THE PROBLEM

• WEB HELP WANTEDWEB HELP WANTED


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SOX LATAM WAYSOX LATAM WAY• Sarbanes-Oxley Act –SOX-. This law was passed on July Sarbanes-Oxley Act –SOX-. This law was passed on July

30, 2002 mandating far-reaching changes in US federal 30, 2002 mandating far-reaching changes in US federal securities regulation and accounting reformsecurities regulation and accounting reform..

• Latin America is too big & diverseLatin America is too big & diverse

• SOX draws some distinctions between U.S. and non-U.S. SOX draws some distinctions between U.S. and non-U.S. issuers based on the conflict with local legal issuers based on the conflict with local legal requirements, corporate governance standards and requirements, corporate governance standards and methods of providing auditor oversight in jurisdictions methods of providing auditor oversight in jurisdictions outside the United Statesoutside the United States

• SEC has made certain adjustments for non-U.S. issuers SEC has made certain adjustments for non-U.S. issuers to address specific concerns raised mainly by the time of to address specific concerns raised mainly by the time of the SEC comment process and has ruled on significant the SEC comment process and has ruled on significant transition relief in certain issues.transition relief in certain issues.


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SOX LATAM WAY SOX LATAM WAY Cont.Cont.

• Lat am corporationLat am corporations whos who face to comply with face to comply with SOX regulations are mainly related with seeking SOX regulations are mainly related with seeking for financing in the US market or offering for financing in the US market or offering securities to US based investorssecurities to US based investors

• WWays to be confronted with SOX rules, ays to be confronted with SOX rules, – BBy virtue of issuing an ADR program in an US y virtue of issuing an ADR program in an US

exchangeexchange

– IIssssuuinging notes fully registered with the Securities notes fully registered with the Securities & Exchange Commission –SEC- or& Exchange Commission –SEC- or

– UUnder registration exceptions nder registration exceptions tto avoid with the o avoid with the SEC- Regulation S of the SSEC- Regulation S of the SEEA, Rule 144AA, Rule 144A or or to to QIBs.QIBs.


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PROBLEMS AHEADPROBLEMS AHEAD The laundry list of issues that mainly SOX The laundry list of issues that mainly SOX

is imposing areis imposing are ..........

• CEO & CFO, certifications under Sections CEO & CFO, certifications under Sections 302 - Corporate Responsibility for Financial 302 - Corporate Responsibility for Financial Reports and Section 906 (Section 404 for Reports and Section 906 (Section 404 for US Issuers). US Issuers).

• Audit Committee-Charter, Independent Audit Committee-Charter, Independent Members Members

• Off Balance Sheet AgreementsOff Balance Sheet Agreements


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PROBLEMS PROBLEMS AHEADAHEAD(cont.)(cont.)

4.4. Independent DirectorsIndependent Directors

5.5. Non Management Directors meetingsNon Management Directors meetings

6.6. Compensation & Nominating And Corporate Compensation & Nominating And Corporate Governance CommitteesGovernance Committees

7.7. Exchanges special rules on corporate Exchanges special rules on corporate Governance Governance


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PROBLEMS AHEADPROBLEMS AHEAD (Cont.)(Cont.)• CEO-CFO CERTIFICATIONS CEO-CFO CERTIFICATIONS

Candidates for Jail Time WANTED!!!!!!!!!!Candidates for Jail Time WANTED!!!!!!!!!!

• This Criminal provision applies to each “periodic report containing This Criminal provision applies to each “periodic report containing financial statements” filed pursuant to Section 13 (a) or 15 (d) of the financial statements” filed pursuant to Section 13 (a) or 15 (d) of the Securities Exchange Act of 1934. Securities Exchange Act of 1934.

• The certification required must state that the periodic report “FULLY The certification required must state that the periodic report “FULLY COMPLIES” (without a materiality qualifier) COMPLIES” (without a materiality qualifier) with SEAwith SEA

• that “information contained in the periodic report fairly presents, in all that “information contained in the periodic report fairly presents, in all material respects, the financial condition and results of operations” of material respects, the financial condition and results of operations” of the issuer. the issuer.

• A CEO or CFO who certifies knowing that the periodic report does not A CEO or CFO who certifies knowing that the periodic report does not comport with all the requirements of the certification provision is comport with all the requirements of the certification provision is subject to a fine of up to $ 1 Million and imprisonment up to 10 years. subject to a fine of up to $ 1 Million and imprisonment up to 10 years.

• If the improper certification is made “willfully”, the maximum fine can If the improper certification is made “willfully”, the maximum fine can be up to $5 Million and imprisonment up to 20 years. be up to $5 Million and imprisonment up to 20 years.


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PROBLEMS AHEADPROBLEMS AHEAD• US SECURITIES MARKETUS SECURITIES MARKET

• NYSE-listed issuers are required to NYSE-listed issuers are required to comply with the new listing comply with the new listing standards no later than July 31, standards no later than July 31, 2005.2005.

• NASDAQ-listed issuers also have NASDAQ-listed issuers also have until July 31, 2005 to comply with until July 31, 2005 to comply with the new listing standards.the new listing standards.


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PROBLEMS AHEADPROBLEMS AHEAD (Cont.)(Cont.)

• The Public Company Accounting Oversight Board (PCAOB) a The Public Company Accounting Oversight Board (PCAOB) a quasi-governmental agency that oversees the audits of public quasi-governmental agency that oversees the audits of public companies, intending to protect the interests of investors and companies, intending to protect the interests of investors and other users of an “issuer’s” financial statements has recently other users of an “issuer’s” financial statements has recently approved Auditing Standard No. 2.approved Auditing Standard No. 2.

• Committee of Sponsoring Organizations of the Treadway Committee of Sponsoring Organizations of the Treadway Commission (COSO) Commission (COSO)

Control EnvironmentControl Environment

Risk AssessmentRisk Assessment

Control ActivitiesControl Activities

Information and CommunicationInformation and Communication

MonitoringMonitoring


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1.1. The recent history of corporate failures proves that The recent history of corporate failures proves that having good governance rules and rule-driven having good governance rules and rule-driven assessments is not sufficient to guarantee ethical assessments is not sufficient to guarantee ethical behaviors and stakeholder protection. “behaviors and stakeholder protection. “The big The big companies that resoundingly failed in the recent companies that resoundingly failed in the recent past would all pass the test aimed at ascertaining past would all pass the test aimed at ascertaining whether the board of directors was likely to do a whether the board of directors was likely to do a good jobgood job”. (Sonnenfeld, HBR, Sept. 2002)”. (Sonnenfeld, HBR, Sept. 2002)

2.2. Compliance to rules can reduce the risks of Compliance to rules can reduce the risks of unethical behaviors, but it is not, by any means, a unethical behaviors, but it is not, by any means, a recipe for excellence.recipe for excellence.

3.3. Excellent performance can be achieved only by Excellent performance can be achieved only by people who are committed to the company and people who are committed to the company and share the company’s values and vision.share the company’s values and vision.

PLAN AND THEN... PLAN AND THEN... PLAN AGAINPLAN AGAIN


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4.4. CCORPORATE GOVERNANCE SYSTEM. Not pre-dominance ORPORATE GOVERNANCE SYSTEM. Not pre-dominance of some stakeholder to the detriment of others, but of some stakeholder to the detriment of others, but commonality of purpose (being “a real team”). Self-commonality of purpose (being “a real team”). Self-assessment aimed at improving corporate governance assessment aimed at improving corporate governance while caring about rules, should give great importance to while caring about rules, should give great importance to value sharing, behaviors, cooperation at the top.value sharing, behaviors, cooperation at the top.

5.5. SELF-ASSESSMENTS, if properly conceived as part of a SELF-ASSESSMENTS, if properly conceived as part of a corporate disclosure cycle, are crucial for improving corporate disclosure cycle, are crucial for improving company performance, while providing the basis for company performance, while providing the basis for corporate transparency towards the investors.corporate transparency towards the investors.

6.6. THE FINAL GOAL is to convert the problems that have THE FINAL GOAL is to convert the problems that have emerged in the recent past into an opportunity to move emerged in the recent past into an opportunity to move from a “fix it” to a “prevent it” mentality, also in from a “fix it” to a “prevent it” mentality, also in corporate governance!.corporate governance!.



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• See the entire picture and not short team See the entire picture and not short team deadlinesdeadlines

• A third party independent advisor will be A third party independent advisor will be beneficial for the processbeneficial for the process

• Set Set up up the Teamthe Team

• Use internal peopleUse internal people

• Make Make Board of Directors, CEO and Audit Board of Directors, CEO and Audit Department and Independent Auditors regular Department and Independent Auditors regular updatesupdates


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PLAN AND THEN... PLAN AGAINPLAN AND THEN... PLAN AGAIN(Cont.)(Cont.)

• Tone from the topTone from the top

• US Counsel, local counsel and Internal US Counsel, local counsel and Internal Legal Department coordinationLegal Department coordination

• CommunicationsCommunications/Disclosure G/Disclosure Guidelinesuidelines:: Do your people have Guidelines?, Do Do your people have Guidelines?, Do they have access to counsel? What is an they have access to counsel? What is an example of a specific threshold for a example of a specific threshold for a triggering event of disclosure?triggering event of disclosure?


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PLAN AND THEN... PLAN AGAIN PLAN AND THEN... PLAN AGAIN (Cont.)(Cont.)

1.1. Problems in Corporate GovernanceProblems in Corporate Governance::

• Inadequate definition of rules, poor planningInadequate definition of rules, poor planning

• BBeyond rules and planning, lack of shared eyond rules and planning, lack of shared values, teamwork, cooperationvalues, teamwork, cooperation

• Inadequate delivery of the agreed upon values: Inadequate delivery of the agreed upon values: poor process control, lack of assessment culturepoor process control, lack of assessment culture

• Quality can help in all that, but we will only deal Quality can help in all that, but we will only deal in the following with assessment: both self-in the following with assessment: both self-assessment and mutual assessment,assessment and mutual assessment,


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2.2. Updated approach on Corporate GovernanceUpdated approach on Corporate Governance

• To get a clear view of the relationships that To get a clear view of the relationships that have to be explored in assessments, have to be explored in assessments, corporate governance should be sub-divided corporate governance should be sub-divided into its parts, for example:into its parts, for example:

1. Overall strategic guidance of the company1. Overall strategic guidance of the company

2. Oversight of the global company system2. Oversight of the global company system

3. Managing the company for excellence3. Managing the company for excellence

4. Monitoring the company for compliance with laws, 4. Monitoring the company for compliance with laws, ethicalethical behavior, social responsibility.behavior, social responsibility.



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1.1. Code of Conduct: drafting, web based, Code of Conduct: drafting, web based, signing by all employees, Officers and signing by all employees, Officers and Directors. No waiver allowedDirectors. No waiver allowed

2.2. Independent Members to the Audit Independent Members to the Audit Committee and to the Board of DirectorsCommittee and to the Board of Directors

3.3. D&O coverage: Premiums, find coverage at D&O coverage: Premiums, find coverage at allall

4.4. Whistblower: Whistblower: EEncourage employeesncourage employees. . Hot Hot line implementationline implementation.. TTollfree number or a ollfree number or a web-based e mail addressweb-based e mail address. C. Confidentialonfidentiality.ity.



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Audit CommitteeAudit Committee::

a.a. Independent MembersIndependent Members

b.b. Financial ExpertFinancial Expert

c.c. Related Parties transactionsRelated Parties transactions

d.d. Survillance of Independent External Survillance of Independent External AuditorsAuditors



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1.1. Audit Committee meetingsAudit Committee meetings: C: Cultural differences that the new ultural differences that the new regime createsregime creates. Make. Make pre-meetings and introduction of issues pre-meetings and introduction of issues beforehandbeforehand. R. Regular meetings with second line management and egular meetings with second line management and internal auditorsinternal auditors

2.2. Tone from the Top. Tone from the Top. IInvolvement of the senior management and nvolvement of the senior management and the Board of Directors have to be express and disclosed through the Board of Directors have to be express and disclosed through out the corporate ladder up to all the employees of the company. out the corporate ladder up to all the employees of the company. + I+ Internal memoranda which must describe the steps towards nternal memoranda which must describe the steps towards the implementation of the SOX compliance plan.the implementation of the SOX compliance plan.

3.3. By laws reformsBy laws reforms: I: Include the changes generated due to SOX nclude the changes generated due to SOX compliance.compliance. As the SOX rules compliance generates a set of As the SOX rules compliance generates a set of process and new institutions like the Audit Committee and process and new institutions like the Audit Committee and mandatory independent directors.mandatory independent directors.



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IF YOU ARE NOT PART OF IF YOU ARE NOT PART OF THE SOLUTIONTHE SOLUTION........

And the hits are keep on coming!!!!!....And the hits are keep on coming!!!!!....

On going evaluation eventsOn going evaluation events::

a.a. Forms 20-F, 6-K and all included in Mandatory Forms 20-F, 6-K and all included in Mandatory Electronic Filing and Website Posting of Section Electronic Filing and Website Posting of Section 16(a) Forms Effective June 30, 2003. 16(a) Forms Effective June 30, 2003.

b.b. Insider tradesInsider trades

c.c. Regulation FDRegulation FD

d.d. Market ManipulationMarket Manipulation


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IF YOU ARE NOT PART OF IF YOU ARE NOT PART OF THE SOLUTIONTHE SOLUTION.... .... (Cont.)(Cont.)

f.f. Auditor IndependenceAuditor Independence

g.g. Pre approval procedures foPre approval procedures forr non-audit non-audit serviceservicess

h.h. Officer’s Officer’s Loan ProhibitionLoan Prohibition

i.i. Attorney Up-the-ladder reporting Attorney Up-the-ladder reporting

j.j. Conflict of interestConflict of interest


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IF YOU ARE NOT PART OF IF YOU ARE NOT PART OF THE SOLUTIONTHE SOLUTION.... .... (Cont.)(Cont.)

• And the trend is not going back, SEC And the trend is not going back, SEC rules on Accelerated disclosures under rules on Accelerated disclosures under 8-K forms for US issuers. The rule 8-K forms for US issuers. The rule required by way of amending Form 8-K required by way of amending Form 8-K CCompanies to disclose eight broad ompanies to disclose eight broad categories of additional critical categories of additional critical information within four business days information within four business days of their occurrenceof their occurrence


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WWWWWEB HELP WANTEDWEB HELP WANTED• ExperienceKPMG's Audit Committee Insights & Audit Committee ExperienceKPMG's Audit Committee Insights & Audit Committee

Quarterly Quarterly

• Useful web: Useful web: www.www.usdojusdoj..govgov//dagdag//cftfcftf/corporate_guidelines_/corporate_guidelines_ htmhtm

• www.sec.www.sec.govgov/rules/rules and and www.www.pcaobpcaob..govgov

• Sentencing guidelines: Sentencing guidelines: www.www.ommomm.com/.com/webcodewebcode//mavigatemavigate.asp?.asp?nodehandlenodehandle=882=882

• www.www.nysenyse.com/.com/listedcompmanuallistedcompmanual

• www.www.complianceweekcomplianceweek .com.com

• queries on “SOX Solutions” at this web-sites: queries on “SOX Solutions” at this web-sites: www.www.coperniccopernic.com.com or or www.goggle.comwww.goggle.com

THANK YOU FOR FLTHANK YOU FOR FLYYING WITH US TODAY!...ING WITH US TODAY!...

Documents

Dr. Enrique P. Prini Estebecorena1 Introduction to US Securities Law EFFECT OF SOX ON LATIN AMERICAN CORPORATIONS ABA INTLAW FALL MEETING