Broc Romanek is Editor of CorporateAffairs.tv, TheCorporateCounsel.net, CompensationStandards.com & DealLawyers.com. He also serves as Editor for these print newsletters: Deal Lawyers; Compensation Standards & the Corporate Governance Advisor. He is Commissioner of TheCorporateCounsel.net's "Blue Justice League" & curator of its "Deal Cube Museum."
Note that there is some debate – and lack of clarity in the SEC’s adopting release – about whether a company’s traditional “internal controls” (those that relate to financial reporting, as described in the AICPA Codification of Statements on Auditing Standards (AU § 319)) has to be evaluated every 90 days. Most practioners are viewing these traditional “internal controls” as a subset of the new “disclosure controls” requirement – and thus evaluation of these traditional “internal controls” would be required each quarter.
As with many of the issues being debated, it is quite possible that this sentiment among practitioners might change – or that the SEC might issue clarifying guidance to the contrary.
According to a speech last week by Commissioner Goldschmid, the SEC appears to be headed towards proposing more uniform – and stringent – regulations governing the conduct of analysts. These would supercede the ones adopted by the NYSE and the NASD earlier this year.
The speech is not on the SEC’s web site – but discussed in this Washington Post article – http://www.washingtonpost.com/wp-dyn/articles/A59218-2002Sep9.html.
The SEC finally has posted its adopting release regarding acceleration of periodic reports at http://www.sec.gov/rules/final/33-8128.htm.
The SEC also has released its new Form 4 at http://www.sec.gov/divisions/corpfin/forms/form4.htm.
You may notice that the Section 302 adopting release is silent as to the effective date of Item 307(b) of Regulation S-K (requires disclosure of whether there have been any changes in internal controls since evaluation). Although you might want to check directly with the SEC staff, it appears that the staff may not require companies that file periodic reports in the immediate future to conduct a disclosure review immediately so that they can provide the disclosure.
Obviously, if a company has conducted the review, this disclosure should be made. The SEC is likely to clarify this area when they adopt rules under Section 404 requiring that there be an evaluation of internal controls.
A little belated – the SEC’s adopting release on Section 302 certifications is now at http://www.sec.gov/rules/final/33-8124.htm.
On a completely unrelated – but pleasant matter – after 16 years of uselessness, the airlines are no longer required to ask you those two silly questions when you check in!
The SEC held a lengthy open meeting this morning – the 1st one before a full Commission since Chairman Pitt assumed his post. Here is a summary of the actions taken:
A. Section 16
1. There is no transition period – accelerated reporting commences this Thursday, the 29th (so an insider transaction on Thursday will be required to be reported by COB on Tuesday – because Monday is a holiday). The SEC is trying to post the release ASAP on its Web site since it takes effect so soon.
2. As noted in the SEC’s statement providing supplemental information and requesting comments on this topic a few weeks ago, transactions permitted to be filed on Form 5 under Rule 16b-3 will now be required to be filed within 2 business days of the transaction.
3. Also as proposed in the SEC’s statement, there are two categories of transactions that will be accorded deferred reporting (both because the transactions are not within the insider’s control):
– contracts, instructions or written plans under Rule 10b5-1
– discretionary transactions under Rule 16(a)-3(f)
The deadline for these two categories of transactions is 2 business days after the day that the executing broker informs the insider that there was a transaction (the “notice” date) – with an overall cap of 3 business days after the actual trade date. Form 4 will have a new column to allow insiders to specify when this “notice” date occurs.
4. The SEC intends to mandate EDGAR filing of these forms (and posting on corporate Web sites) within a few months – much earlier than the Congressionally mandated deadline of 7/31/03. In the upcoming release, they encourage companies to do both right now. When the SEC mandates e-filing, it expects to mandate a form that will enable the data to be tagged – so that the information can easily be placed into a database for quick and easy “splicing and dicing” by investors.
5. There are over 140k Form 4s filed annually before this rulemaking – it is expected that this number will go up dramatically.
B. Accelerated Filing of 10-Qs/10-Ks and Web Posting
1. The new requirements only apply to domestic companies with a $75 million float, that have reported for one year and filed at least one 10-K. They do not apply to small businesses nor foreign private issuers.
2. For the 10-K, the deadlines do not change for the upcoming year – and then beginning with fiscal year ends that end on 12/15/03 or later, the deadline is 75 days for the 1st year and then 60 days following that. In other words, the final deadline phases in over 3 years.
3. For the 10-Q, the deadlines do not change for the upcoming year – and then beginning with fiscal year ends that end on 12/15/03 or later, the deadline is 40 days for the 1st year and then 35 days following that. In other words, the final deadline phases in over 3 years.
4. For web posting, for companies that meet the thresholds in #1 above, beginning with fiscal year ends that end on 12/15/02, companies are required to disclose whether they post their periodic reports on their sites “as soon as is practicable.” There is no absolute deadline stated in the rule.
5. It was noted that over 300 comment letters were received – investors in favor and corporate, legal and accounting groups opposed. The resulting rules reflected the comments. Chairman Pitt stated that his vote in favor of this rules were predicated on passage of rules that mandated “current” reporting. It was also noted that the SEC wanted some experience with the new rules before applying them to small businesses and foreign private issuers.
C. Section 302 Certifications
1. There is no transition period – the rules are effective Aug 29 and apply to reports filed after that date. These rules apply to all public companies, including small businesses and foreign private issuers (and asset-backed issuers for whom there is a tailored form of certification).
2. As noted in the SEC’s statement providing supplemental information and requesting comments on this topic a few weeks ago, the rules that cover disclosure controls and procedures go beyond mere internal controls for financial information for financial statements. That type of internal controls has been required to be conducted since the adoption of the Foreign Corrupt Practices Act in the 70s. This new requirement will now require companies to adopt procedures specifically tailored to the disclosure requirements.
3. The precise nature of required controls is not mandated. The SEC recognizes the need for flexibility to address each company’s circumstances.
4. The SEC made clear that the new rules apply only to Section 302, and do not change the existing Section 906 certification. Commissioner Goldschmid expressed interest in having the Department of Justice or the SEC provide some guidance on SEction 906 sooner rather than later. Alan Beller, when asked by Commissioner Campos, said it was a difficult question whether the SEC has the ability to develop a single certification that would meet the requirements of both Section 302 and 906 – and that the SEC’s General Counsel office has not taken a position on this yet.
5. The Release has a discussion on the “fairly present” standard which applies to the financial statements and other financial information in the report. The Release will say it covers all financial statements, footnotes, MD&A and other financial information. The SEC did not add the “in accordance with GAAP” qualification for certifications under Section 302 – as the legislation intended something broader than GAAP. The fairly present standard is intended to cover whatever additional disclosure is required to give a complete picture.
6. Alan Beller addressed the consequences of a Section 302 certification. First, he made the point that aside from legal liability, Congress adopted this provision to ensure that executives knew that reading and understanding disclosure documents was a critical part of their job. Second, he noted that the SEC would be able to more easily wield its toolkit of weapons to personally go after someone who made the certification – which says “to my knowledge” – either under Section 13 or under Rule 10b-5 if the person had scienter. It was noted that recklessness was part of the scienter standard here – and that not having adequate disclosure controls noted in #3 above might contribute to showing recklessness.
On Tuesday, August 27th, the Commission is holding an open meeting at 10 am to consider adoption of three proposals: acceleration of deadlines for 10-Qs and 10-Ks; Section 302 certifications and acceleration of Form 4s and other Section 16 amendments. More info is at http://www.sec.gov/news/digest/08-20.txt.
The SEC has finished analyzing the 691certifications it received – or should have received. It reports that 16 companies did not provide the requisite certification. A list of the companies – with reasons why they did not comply is at http://www.washingtonpost.com/wp-dyn/articles/A46711-2002Aug21.html.
Now that companies have had their first experiences with the Section 906 certifications, they should turn their attention to the Section 302 certification which will be required for the next round of 10-Qs.
The Section 302 certification requires extensive representations as to the CEO’s and CFO’s responsibility for the issuer’s internal reporting controls – both financial and non-financial – including a representation that they have evaluated the effectiveness of those controls on a quarterly basis.
These representations are new and are not part of the Section 906 certification – so companies should start examining whether their CEOs and CFOs will be able to comfortably make these representations (and if not, begin to implement procedures so they can). As many practitioners recommended for the last round of certifications, companies may want to document their processes and procedures – so that there is tangible evidence underlying the certifications when they are made in mid-November.
Broc will be on vacation next week – without access to the Web – so my blogging will be limited. Enjoy the silence!
As widely reported, quite a few companies restated their financials as their CEO/CFO certifications were submitted to the SEC. The SEC was slammed with a deluge of 10-Qs and hard-copy certifications. It will take the SEC staff a few days to post the certifications mandated from the Section 21(a) order. See http://www.washingtonpost.com/wp-dyn/articles/A19753-2002Aug14.html.
