Nearly 18 months after the adoption of the Sarbanes-Oxley Act, the initial flurry of new disclosure rules and corporate governance regulations has subsided and generally slipped from the public eye. However, public companies need to be aware that many of the rules and regulations adopted by the SEC and other regulatory bodies under Sarbanes-Oxley are just now coming into effect. These rules will result in significant changes and additional disclosures in the annual reports and/or proxy statements filed by companies this year.

Disclosure Controls and Procedures

In August 2003, the SEC revised its rules on disclosure regarding a company’s “disclosure controls and procedures.” The revised rules have resulted in a reformatting of the item numbers in the annual report. In addition, a company’s review of its disclosure controls and procedures must be completed as of the date of the period covered in the report, compared to “within 90 days of the filing date of the report” under the original rules. Although most companies implemented this new disclosure requirement beginning with their second quarter reports, the changes in the item numbers and the date of the evaluation are sure to catch more than a few companies off guard. In addition, the SEC also modified the language of the certification required by Section 302 of the Sarbanes-Oxley Act and specified that both the Sections 302 and 906 certifications be filed as exhibits to the annual report.

Although not required for most companies until 2005, companies should be taking the necessary steps to make the required disclosures on their internal control over financial reporting. The disclosures on a company’s internal control over financial reporting will require management not only to state whether or not such controls are adequate, but also to include an attestation report from their independent accountants. The process of documenting a company’s internal control over financial reporting so that the controls themselves can be audited may take some companies over 100,000 man-hours to complete. In addition, companies that have not yet engaged an accounting firm to help them document and test their internal control over financial reporting prior to the required attestation may find themselves hard-pressed to complete any testing before the disclosure is required.

Audit Committee Financial Expert

Beginning with either the 2003 annual report or the proxy statement delivered in connection with the 2004 annual meeting of shareholders, companies must now disclose whether or not they have an “audit committee financial expert.” If a company’s board of directors includes an audit committee financial expert, his or her name must also be disclosed. If a company does not have an audit committee financial expert, it must disclose the reasons why. Companies need to keep in mind that if the board of directors relies on the catchall of “other relevant experience” in determining that a member qualifies as an audit committee financial expert, the company must disclose what that “other relevant experience” is.

Code of Ethics

Companies must now disclose whether or not they have adopted a code of ethics applicable to their principal executive officer, principal financial officer and principal accounting officer, or persons serving in similar roles. The code of ethics, which is different than the code of conduct required under the new listing standards of the NYSE, generally must address items such as dealing with actual and apparent conflicts of interest and prompt internal reporting of violations of the code of ethics. Companies must publish their code of ethics by either filing it as an exhibit to the annual report, posting it on their Web site and including a statement to that effect (and their Web address) in their annual report, or including an undertaking to provide a copy to any person who requests it. In addition to the disclosure in the annual report, companies will now have an ongoing responsibility to disclose publicly amendments or waivers to their code of ethics. Companies that wish to avail themselves of the ability to make such disclosures only on their Web site (versus filing a Current Report on Form 8-K) must include a statement of their intention to do so in their annual report, along with the Web address where such information will be posted.

Principal Accountant Fees and Services

Although the SEC has required for some time now that companies disclose certain fees paid to their independent accountants, the required disclosure has been greatly enhanced beginning this proxy season. Companies must now disclose for each of the last two fiscal years (instead of only the previous year) the amounts billed to them for “audit fees,” “audit-related fees,” “tax fees” and “other services,” with a specific description of such services. In addition, companies must also disclose their newly required policies and procedures for pre-approval of such expenses by the audit committee and the percentage of services in each of the four categories that was approved by the audit committee under such policies and procedures. In drafting the pre-approval policies and procedures, companies must ensure that such policies are detailed as to the particular services to be provided and that they provide for the audit committee to be informed of each service provided.

Audit Committee Member Independence

Listed companies are now required to have an audit committee comprised entirely of “independent” directors. The independence standards for audit committee members are greater than that required for the general determination of board member independence under either the NYSE or NASDAQ revised listing standards. The heightened independence standards for audit committee members prohibit them from receiving any compensation from the company other than board and committee fees.

Director Nominating Procedures

In November 2003, the SEC adopted new disclosure requirements regarding a company’s procedures for nominating directors. The new disclosures, which must be in a company’s proxy statement mailed in connection with its 2004 annual meeting of shareholders, require the company to disclose whether or not it has a director nominating committee comprised of independent directors. If a company does not have a director nominating committee, it must disclose why. In addition, companies are also required to disclose, among other things, their procedures for nominating directors, the minimum qualifications sought in director nominees, and whether or not the company has a policy for considering shareholder nominations for directors.

Shareholder Communications With Directors

In connection with the new disclosure rules adopted in November 2003 regarding director nominations, the SEC also adopted new disclosure rules regarding a company’s process for shareholder communications directly with the board of directors. This new rule requires companies to describe their policies for handling shareholder communications to directors and describe any screening policy used by the company for such communications. This new disclosure requirement also requires the company to disclose its policy toward director attendance at the annual meeting of shareholders and to state the number of directors who attended the previous year’s annual meeting.

New Listing Standards

Although not directly related to the preparation of the annual report and proxy statement, companies listed on the NYSE or NASDAQ must also begin to take the steps necessary to comply with the new listing standards. The new listing standards, with some exceptions, are effective beginning with the listed company’s 2004 annual meeting of shareholders. These new listing standards may require some listed companies to make significant changes to their board composition and to adopt new corporate governance policies and procedures.

Although the public furor that surrounded the collapse of companies such as Enron and led to the adoption of the Sarbanes-Oxley Act has quieted, the new corporate governance and disclosure rules adopted in its wake promise to make this a very busy annual report and proxy season for public companies.