August 20, 2003

As evident from the number

As evident from the number of emails I received, it looks like yesterday’s blog struck a nerve; the one about a SEC staffer’s comment regarding exhibits listed under Item 7 and disclosed pursuant to Item 12 (i.e. earnings releases) being deemed “filed.” One community member noted that he got what was tantamount to contrary advice from a staffer – so this could be one of those areas where inconsistent guidance is being provided by different members of the staff.

However, I got quite a few emails from members who had gotten the same guidance from staffers that I blogged yesterday – and they were quick to point out the weaknesses of the staff’s approach, including:

1. As I pointed out, Item 7(c) says that “the exhibits shall be furnished in accordance with the provisions of Item 601 of Regulation S-K.”

2. Item 601(b)(99)(i) says that “any additional exhibits which the registrant may wish to file shall be so marked as to indicate clearly the subject matters to which they refer.” If the SEC recommends including the earnings release as an Exhibit 99, this language would question the conclusion that the release was merely “furnished” (under the SEC’s strict reading of the language used).

3. Instruction B.6. to Form 8-K indicates that “information in a report furnished pursuant to Item 12 shall not be deemed “filed” for purposes of Section 18 . . . unless the registrant specifically states that the information is to be considered “filed”under the Exchange Act . . . .” (the same language is used in Instruction B.2. for Item 9 disclosures) Surely the SEC couldn’t be implying that the introductory language in Item 7 alone deems the issuer to have “specifically stated” that the exhibits are to be considered “filed.”

4. All the language used in all of the above pre-dates the SEC’s use of the “furnished” vs. “filed” terminology that was introduced in its Regulation FD release, so the concept of liability for “filed” information existed earlier, but the language used in Item 7 when Form 8-K was adopted was clearly never intended to make these distinctions.

5. Item 601(a)(2) of Reg S-K and Rule 102 of Regulation S-T only contemplate the listing of exhibits “filed” in the exhibit index. So, based on the staff’s position, one would not list exhibits furnished in the exhibit list either.

One member noted that if the SEC is worried about being able to distinguish between “filed” and “furnished” exhibits in an 8-K that includes more than Item 9 and/or Item 12 disclosures, perhaps it could either clarify its position (and clean up the forms) or take its Instructions B.2. and B.6. as literally as it is taking the one use of the word “filed” in Item 7. He notes that the impact of this position is obviously troubling, given that most companies have been listing their Item 9 exhibits under Item 7 for years.

Another member grumbled about how does this staff position help transparency or help investors locate Item 12 information? Investors will pull up filings, look at the exhibit list, and then wonder why the issuer didn’t provide the information contemplated.

We hope that all of the SEC staff will get on the same page and accept something reasonable, like the practice of listing exhibits “furnished,” so long as the company expressly notes in the Item 7 exhibit list that they are furnished rather than filed.

Yesterday, the SEC’s enforcement division settled the first case that relies upon false CEO and CFO certifications provided under Section 302 of Sarbanes-Oxley.
According to the SEC’s Complaint, Rica Foods filed a Form 10-K containing a purported unqualified independent auditor’s report from Deloitte & Touche. The audit report represented that Rica Foods’ consolidated financial statements were presented fairly and in conformity with GAAP. At the time of the filing, however, Deloitte had not provided the company with a signed audit report, and the company’s financial statements contained material classification errors – yet the CEO and CFO included the standard 302 certifications in the 10-K.

For subscribers, we have posted an interview with David Kaufman of Duane Morris with bulleted notes on what transpired at the Recent ABA Annual Meeting.