Deputizing directors.

• Author: FERRARA, RALPH C.

New SEC rules create new duties for directors. A few safeguards for your consideration.

LAST DECEMBBR, the Securities and Exchange Commission issued a series of new rules regarding audit committees. While the new rules purport to require only additional disclosures from and about corporate audit committees, they effectively create new duties for corporate directors -- a traditional province of state rather than federal law.

Perhaps nowhere will the influence of these new rules be more sharply felt than in the litigation that tends to follow audit problems and other corporate crises. What follows are a few points, from a board counselor's perspective, on how companies and their boards might do well in responding to these new SEC requirements.

Meaningful Oversight of the Financial Reporting Process. The SEC said that its new rules are meant to enhance the audit committee's "critical" role in overseeing the participation of management and the auditors in the financial reporting process. Most notably, they require that the annual proxy statement include a report from the committee naming each member and stating whether it reviewed the audited financial statements and discussed them with management, addressed financial reporting process and independence issues with the auditors (per SAS 61 and ISB 1), and recommended that the board include the audited financial statements in the company's annual report. To be sure, the documents called for by these new rules will broaden the record upon which future plaintiffs may rely in claiming some failure by the audit committee in discharging its now more varied array of duties.

Perhaps the most efficient way of protecting the committee given these new federal requirements is to ensure that it is doing all that it should to protect itself under state law provisions. Specifically, under prevailing Delaware court decisions, directors are obligated by their duties to the company to attempt in good faith to assure themselves that information and reporting systems are in place and reasonably designed to provide them with sufficient data to make informed decisions on behalf of the company. Put another way, by ensuring that they are sufficiently informed to merit protection under the business judgment rule, directors may also go a long way in complying with the essence of the SEC's new rules.

Further, the new rules appear consistent with state law provisions permitting directors to place reasonable reliance on...