The Evolving Scope of the Exchange Act’s Internal Accounting Controls Provision

White & Case partners Maia Gez, Darryl Lew, Michelle Rutta, and Tami Stark, and associate Shuhang Liu, authored a byline in the New York Law Journal examining the US Securities and Exchange Commission's evolving interpretation of Section 13(b)(2)(B) of the Securities Exchange Act of 1934 – the internal accounting controls provision ("IAC Provision") – which requires "public companies to have 'internal accounting controls' that are sufficient to provide reasonable assurances that their financial statements are reliable."

The authors note that, "recent case law, and dissents from Commissioners in SEC enforcement actions, have called into question an expansive interpretation of the IAC Provision to regulate an increasingly broad array of public company policies and controls," adding that "there are now strong arguments for parties to challenge uses of the IAC Provision that may stray from its intended scope and purpose."

Originally enacted under the Foreign Corrupt Practices Act of 1977 to curb foreign bribery, the provision was intended to ensure that corporate funds "are adequately maintained within the corporation's system of financial accountability," according to the SEC's 1976 Report of the Securities and Exchange Commission on Questionable and Illegal Corporate Payments and Practices.

Although "the SEC long invoked the IAC Provision in a manner consistent with its terms and original intent," the authors argue that the SEC has been using the provision more broadly, targeting issues such as cybersecurity, employee hiring practices, third-party due diligence policies and procedures and insider trading, that are "arguably beyond the purpose of the statute."

Looking ahead, the authors conclude that the SEC v. SolarWinds Corp. case, the legislative history, and internal SEC dissents all "provide public companies with grounds to challenge alleged violations of the IAC Provision that fall outside the context of accounting controls directly related to financial transactions."

See the full New York Law Journal article here.

Press contact
For more information please speak to your local media contact.