After Alan Beller spoke on Friday at the ABA Spring Meeting, it remains unclear if Section 906 CEO/CFO certifications are required for Form 11-Ks. Alan merely noted that the staff has not taken a position (which makes sense as it is a DOL matter). Note that Section 302 certifications are not required for Form 11-Ks as the SEC made clear in its adopting release last summer. However, that release did not address 906 certifications (as again, it is a DOL matter).
Before the House Financial Services Committee, in a hearing yesterday, the SEC was criticized for lax oversight of the credit rating industry. See the Washington Post article at http://www.washingtonpost.com/wp-dyn/articles/A15116-2003Apr2.html.
Yesterday, at Chairman Donaldson’s 1st open Commission meeting, the SEC adopted rules regarding audit committee requirements and delisting standards. For the most part, the adopted rules are the same as the proposed rules. The following provides a snapshot certain aspects of the new rules regarding “independence” [thanks to Mike Holliday] – more details are in the SEC’s press release available below:
– Advisory and consulting fees – The new rules do not contain a de minimus amount exception.
– Safe harbor – The adopted safe harbor keeps the proposed ownership test at 10% (so that a person who is not an executive officer or 10% owner will not be an “affiliated person”). The final rules will indicate that failure to meet the safe harbor terms will not create an presumption that the person is affiliated, which will be subject to a facts and circumstances test.
– Outside director of company and subsidiary – The final rules contain the exemption that a director otherwise independent to both companies would be permitted to be on the audit committee of a listed company as well as an affiliate. There was no discussion as to whether any change was made to the proposal that the exemption applies to a consolidated, majority-owned subsidiary.
– IPO exemption – The proposed exemption was expanded to require at least one independent member on the audit committee at the time of listing, a majority of independent members within 90 days, and all independent members within a full year.
Companies must be in compliance with the new rules by their 1st annual meeting after January 15, 2004 (or by October 31, 2004 at the latest). Foreign issuers and small business issuers would have until July 31, 2005. As adopted, the transition period is about 6-7 months longer than the proposed period. This will be helpful for March 31, June 30 and September 30 fiscal year-end companies. However, because it does not add a complete annual cycle to the proposal, it will not really provide any additional lead time for calendar year fiscal year companies.
Yesterday, the PCAOB held its roundtable on foreign auditors and made its case for the outstanding proposal to require foreign firms auditing U.S.-traded companies to register with it (all of the SEC Commissioners attend to show their support). This has created quite a bit of controversy overseas.
As reported by the Washington Post, this meeting follows the SEC’s recent warning to British accountants that disclaimers of liability that they were slapping on audit opinions better not show up on U.S. financial statements. Here are other tidbits from the roundtable:
– David Wright, director of financial markets for the European Commission, argued that the PCAOB should wait one year before making foreign auditors register to give European countries time to work out conflicts between their laws and US laws. The PCAOB disagreed.
– The PCAOB plans to initially focus on about 6 key areas – with more than 1,200 pages of audit standards.
– The AICPA has tried to hold on to a role in the writing of audit standards. The PCAOB responded by informing the AICPA that Congress had given them control over audit standards and that the oversight board would not be required to follow the AICPA’s recommendations.
– The PCAOB is also replacing a widely criticized oversight system, in which accounting firms reviewed each other’s work. The board is hiring accountants — the number may grow to 100 by next year and is developing a code of conduct to prevent potential conflicts of interest by inspectors hired from Big Four firms. The new team is to start inspecting the Big Four this summer and smaller firms next year.
– Inspectors will operate differently as the new inspection team will examine audits under litigation – cases now exempt from the peer-review process. The board will also examine quality-control issues, such as how lead audit partners are paid, whether accounting firms have the right “tone at the top,” and whether audit work is sufficiently independent from tax and other services the firms offer.
The SEC has issued technical corrections in an adopting release to clarify that companies can provide their audit committee financial expert disclosure in its proxy or information statement and incorporate that disclosure into its annual report (if it complies with applicable rules for incorporation by reference). The original rule had stated that the disclosure was only permitted in annual reports. See http://www.sec.gov/rules/final/33-8177a.htm.
Mark Borges in the SEC’s Office of Rulemaking soon will be moving on to a new job at Mercer Consulting. Mark handled many of the staff’s executive compensation disclosure issues over the past few years and will be missed.
Because Edgar is not yet configured to handle the new 8-K items, the SEC issued a statement providing interim guidance regarding how to file new Item 11 (regarding notice of a pension fund blackout period) – and new Item 12 (regarding earnings releases).
For “would-be” Item 11 filings, companies should continue to disclose the information under Item 5 (Other Information) of Form 10-Q or 10-QSB in the first quarterly report filed by the company after commencement of the blackout period.
For “would-be” Item 12 filings, companies should furnish the information under Item 9 (Regulation FD Disclosure) of Form 8-K. A company must furnish the information within 5 business days after the occurrence of an event specified in Item 12. Information provided under Item 12 also may be required to be provided under the requirements of Regulation FD; in this case, any earlier deadline for Item 9 under Regulation FD would apply.
Regarding CEO/CFO certifications for asset-backed issuers, the SEC staff now intends to issue no-action responses in the very near future – and will allow issuers with similar asset classes to rely on these letters (rather than require each issuer to seek relief). Asset-backed issuers with novel asset classes (i.e. not previously addressed in these upcoming staff responses) will have to seek their own no-action letters.
As for modified reporting relief, asset-backed issuers may rely on previously issued no-action letters just as they always have for years.
In the wake of Sandy Weill (whose firm was recently fined $300 million in the analyst research case) recently taking himself out of the running to serve on the NYSE board, SEC Chair Donaldson has given the exchanges until mid-May to propose reforms to their own corporate governance structures. See the Washington Post article at http://www.washingtonpost.com/wp-dyn/articles/A34428-2003Mar26.html.
On April 1, the SEC is holding an open meeting to adopt the audit committee of exchange-listed companies rules. This comes a day after the PCAOB holds a roundtable at the SEC’s HQ in Washington to discuss registration of foreign audit firms (and for which the SEC issued a press release making a big deal of the fact that the SEC Commissioners would also attend the roundtable).
The SEC’s test website for Section 16 filings is up and running – don’t get confused if you play around on the site and it issues warnings that you are about to make a “live” filing. It really doesn’t mean it. The test site is at https://www.onlineforms.edgarfiling.sec.gov/.
We have also posted sample disclosure committee charters and D&O questionnaires under “Special Features” on the home page – as well as a more recent edition of the SEC Telephone Directory (Sept. 2002 version) at http://www.thecorporatecounsel.net/member/SEC/SEC2002PhoneBook.pdf.
In his second speech, SEC Chair Donaldson talked about corporate governance and going slow in mandating specific governance structures – but also railed about excessive executive compensation – see http://www.sec.gov/news/speech/spch032403whd.htm.
We have posted the April issue of E-Minders at http://www.thecorporatecounsel.net/E-minders/. In addition, we have announced two timely webcast programs – one on April 8th for Section16.net subscribers on “Comparing the Section 16 Filers – What You Need to Know Now.” This features key SEC staffers discussing the new test site – and nine service providers explaining how their products add value to what the SEC’s site will do. See http://www.section16.net/webcast0403/.
Late Friday, the SEC proposed amendments that would require certifications provided under Sections 302 and 906 of Sarbanes-Oxley be included as exhibits to the reports to which they relate. The purpose of the proposal is to make it easier for investors and regulators to locate the certifications.
The current rules require 302 certifications to be included at the end of the report immediately following the signature block. Companies have more flexibility for their 906 certifications, using one of the following methods: including them after the signature block, filing them as exhibits to the related reports or submitting them as paper or electronic correspondence, or “furnishing” them under Item 9 of Form 8-K.
As proposed, the 302 certification exhibits would be considered “filed” – but the 906 exhibits would merely be considered “furnished” (and thus not subject to Section 18 liability and not incorporated in registration statements unless the company took steps to include the certification in a registration statement). Both the new 302 and the 906 certification exhibits would be subject to Rule 302 of Regulation S-T – so companies would be required to retain originals of manually signed certifications.
Until the proposals become final, as interim guidance, the SEC is encouraging companies to submit the 906 certifications as exhibits to the periodic reports to which they relate. The guidance states how this should be handled in electronic filings, including a specific legend that should be inserted with the certification -and asking that companies retain a manual signature page or other authenticating document for each certification. A 906 certification submitted in the manner specified in the interim guidance will be treated as “accompanying” the periodic report to which it relates rather than being “filed.”
Yesterday, the SEC announced that it will soon have a new website for making test filings of Forms 3, 4 and 5 (the test site likely will be up and operational on Monday or Tuesday next week). The new filing system will allow filers to create and file a report directly on the SEC’s website – or to make filings through the new website using third-party software that has been adapted to conform to the new reduced content format.
We expect the test period to last for approximately one month, during which time the existing EDGARlink system will exist side-by-side with the new system. After the test period expires, the SEC will convert to the new system as the exclusive means for filing Forms 3, 4 and 5.
Electronic filing will remain voluntary for a period of time thereafter, but it is likely that by June (well ahead of the July 30 deadline imposed by Section 403 of the Sarbanes-Oxley) the SEC will make electronic filing mandatory for all Section 16 filers. The SEC’s announcement is at http://www.sec.gov/info/edgar/ednews/ownerfilesite.htm.
For Section16.net subscribers, there is a webcast program on “Comparing the Section 16 Filers” on April 8th. Learn how to best use the SEC’s test site from key SEC staffers and hear the pros and cons of nine different third party web filers. More information is at http://www.section16.net/webcast0403/.Those who are not yet Section16.net subscribers can access the webcast (or the transcript) by taking advantage of the no-risk trial at www.section16.net.
