Responsibilities of Independent Directors Increases in Response to Sarbanes Oxley

by Laura Anthony, Esq. on November 10, 2009 in SEC Guidance, Uncategorized

Serving as an independent director carries serious obligations and responsibilities.

Following the passage of the Sarbanes Oxley Act of 2002 (SOX), the role of independent directors has become that of securities monitor. They must be informed of developments within the company, ensure good processes for accurate disclosures and make reasonable efforts to assure that disclosures are adequate. Independent directors, like inside directors, should be fully aware of the company’s press releases, public statements and communications with security holders and sufficiently engaged and active to questions and correct inadequate disclosures.

Disclosure and Transparency

The basic premise of federal securities laws is disclosure and transparency. The theory behind this regulatory structure is that if a Company is forced to disclose information about particular transactions, plans or programs, the company and its officers and directors will take greater care in making business decisions. If a director knows or should know that his or her company’s statements concerning particular issues are inadequate or incomplete, he or she has an obligation to correct that failure.

It is the Securities and Exchange Commission’s (SEC) viewpoint that independent directors should play a significant role in the direction of a company’s affairs, particularly when they have relevant expertise, experience and sophistication. According to the SEC, independent directors must not only be familiar with their company’s communications to the public, but must also compare these communications with what they know to be the facts. Additionally, they are then responsible to follow up and practice vigilance in ensuring that communications are complete and accurate.

Internal Systems Protect Company Operations

All independent directors have an obligation to question employees or legal counsel as to the background of issues or the need for disclosure of specific information. If they are aware of specific non-disclosures, they must inquire into the situation. All independent directors should insist on internal systems so that they have regular and sufficient information about the company’s affairs. Moreover, directors who review, approve, or sign their company’s proxy statements and periodic reports must take steps to ensure the accuracy and completeness of the statements, or face personal regulatory liability for the failure to do so.

The SEC has the power to bring actions against independent directors for misstatements or omissions in offering documents under the Securities Act of 1933, as amended, for fraud under Section 10 of the Securities Exchange Act of 1934, as amended or for aiding and abetting Company securities laws violations. SOX specifically authorizes the SEC to seek “any equitable relief that may be appropriate or necessary for the benefit of investors.” The SEC often utilizes this power to pursue injunctive relief such as a prohibition to act as a public company director in the future, which reputational damage potential can act as a motivator.

Although all directors have direct personal liability for statements made in a registration statement or other filing signed by such directors, Rule 176 promulgated under the Securities Act of 1933, as amended, provides a due diligence defense to such actions. To invoke the due diligence defense the defending director needs to be diligent and verify facts and statements.

Better Compliance Limits Exposure

Even though independent directors are not responsible for every single company statement or even all of the company’s securities compliance, certain directors may be well situated to achieve better compliance, such as members of the audit committee or directors who sign company filings. The SEC has indicated that it intends to utilize its powers to require directors to take their role as securities monitors seriously. To date, however, the SEC has pursued very few cases against independent directors, and most of such cases have been settled without fanfare and generally involve injunctive relief. Moreover, successful private litigation against independent directors is rare.

Securities attorney Laura Anthony provides expert legal advice and ongoing corporate counsel to small public Companies as well as private Companies seeking to go public on the Over the Counter Bulletin Board Exchange (OTCBB). Ms. Anthony counsels private and small public Companies nationwide regarding reverse mergers, due diligence on public shells, corporate transactions and all aspects of securities law.

Ms. Anthony is the Founding Partner of Legal & Compliance, LLC, a national corporate, securities and civil litigation law firm based in West Palm Beach, Florida. The firm’s corporate and securities attorneys provide technical legal services to small and mid-size private and public (OTCBB) Companies, entrepreneurs, and business professionals nationwide. Contact us today for a FREE consultation!


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