CBA Publications >> CBA Regulatory Compliance Bulletin >> Vol 2002 No.01 February 12, 2003

Vol 2003 No. 01 February 12, 2003

California Corporate Disclosure Act

Last year, the State of California passed AB 55, the California Corporate Disclosure Act, which is intended to give consumers greater access to important information about companies and their officers. The new law increases the amount of information that a California corporation needs to report in the now annual Statement of Domestic Stock Corporation. It also creates the Victims of Corporate Fraud Compensation Fund through an assessment of a new disclosure fee.

The coverage of AB 55 is broader than the federal Sarbanes-Oxley Act, also passed last year. AB 55 applies to publicly traded companies incorporated in California, or another state and qualified to transact intrastate business (but not foreign associations). A publicly traded company is defined as "a company with securities that are either listed or admitted to trading on a national or foreign exchange, or is the subject of two-way quotations, such as both bid and asked prices, that is regularly published by one or more broker-dealers in the National Daily Quotation Service or a similar service." Thus, AB 55 applies to companies traded on the Over the Counter Bulletin Board (OTCBB, soon to be converted to the Bulletin Board Exchange or BBX), whether or not they are registered within the meaning of Sarbanes-Oxley.

New disclosures. Statements of Domestic Stock Corporation now must be filed annually rather than biannually, and include the following new information if the company is publicly traded as defined:

• the name of the independent auditor used by the company and a description of other services performed by the auditor for the company during the previous 24 months, including by the auditor's parent company, or by a subsidiary or corporate affiliate of the auditor or of its parent company;

• the date of the last report prepared for the company by the independent auditor, along with a copy of the report;

• the annual compensation paid to each director and each executive officer, including the number of shares or options for shares that were not available to other employees of the company. (Executive officer is defined as the five most highly compensated officers of the company, but not including an officer who is also a member of the board of directors.);

• a description of loans made to a director by the company during the previous 24 months having a preferential loan rate, including the amount and terms of the loans;

• whether any bankruptcy had been filed by the company, its executive officers, or directors within the previous 10 years;

• whether any director or executive officer had been convicted of fraud during the previous 10 years;

• whether the company had violated any federal security laws or any state security or banking laws during the previous 10 years for which the company was found liable in federal or state court, regulatory agency, or a self-regulatory organization in which a judgment of over $10,000 was entered.

This last item may be the most problematic. For example, it is unclear whether violation of banking laws refers only to the Financial Code, or includes check claims under the commercial code.

A new $5 disclosure fee will be assessed each time a statement is filed. One half of this amount will be used to make the statements available to the public online by December 31, 2004. The other half will be used to establish and fund the Victims of Corporate Fraud Compensation Fund. The fund will be administered by Secretary of State's office for the purpose of providing restitution to the victims of corporate fraud.

According to the legislative analysis, this bill is part of a series of reforms designed to strengthen California's corporate accountability laws. Two elements of these initiatives are an increase in sanctions for violations of state securities laws, and establishment of an interagency task force. Other bills related to corporate reform include the following:

AB 2873: specifies information standards for audit documents and requires their retention for a minimum of seven years. The bill creates a rebuttable presumption that failure to meet the state standards constitutes unprofessional conduct.

AB 270: requires a public-member majority on the Board of Accountancy and strengthens accounting laws, including requiring mandatory reporting of civil judgments, settlements and arbitration awards of $30,000 or more. The bill eases the standard for taking enforcement action against accountants for repeated violations, grants the Board direct subpoena power, and requires mandatory reporting of restatements of financial statements.

AB 2970: prohibits an employee of an accounting firm from working for a client within 12 months of providing audit services.

AB 55 became effective on January 1, 2003.