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SEC Staff Clarifies Order Giving More Time to File Internal Control Reports

The SEC staff has answered a number of questions that have arisen in the wake of a recent order giving certain accelerated filers an additional 45 days after their Form 10-K is due to file their management's report on the company's internal controls and the related auditor's report on management's assessment of the internal controls. Both reports are required under Section 404 of the Sarbanes-Oxley Act. A company taking advantage of the extended time period would file an amended Form 10-K that would include the omitted reports.

While the order allows companies to delay the filing of the internal control reports, the staff emphasized that it does not change the date of the assessment of effectiveness of the internal controls, which still must be as of the end of the company's fiscal year. In addition, the amended Form 10-K must contain more information than just the previously omitted internal control reports. Consistent with rule 12b-15, the amended 10-K must also contain at least the certifications of the financial statements, as well as all of the information required by Item 9A, which includes information on the effectiveness of disclosure controls and internal controls.

The staff also addressed the question of how the 45-day extension affects the filing of auditor consents. If the auditor's report on internal controls is to be incorporated by reference into a 1933 Act filing, the auditor's consent to the use of the internal control report should be filed with the Form 10-K amendment. However, if the Form 10-K amendment does not include an audit report on the financial statements, auditors are not required to provide a new consent for the use of their audit report on the financial statements incorporated by reference into a 1933 Act filing.

A company taking advantage of the extension would still be considered current in its 1934 Act reporting obligations during the 45 days so would be eligible to use Form S-8. Persons selling the company's securities could still rely on rule 144 during the 45-day period that the internal control reports are not on file.

However, because the Form 10-K would not be considered timely until it is amended to include the internal control reports, the staff said a company would not be eligible to use a currently effective Form S-3 during the time that internal control reports are not on file. Accordingly, offerings pursuant to Form S-3 will not be permissible during the time period when a company has not filed its internal control reports.

Form S-3 will be available during the 45-day period that internal control reports are not on file for some transactions commenced before the original due date of the 10-K, including continuous offerings by selling shareholders, dividend reinvestment plans and direct stock purchase plans. In addition, a company that delays the filing of internal control reports in accordance with the order may file a new registration statement on Form S-2 or S-3, but it may not request effectiveness during the time period that the internal control reports are not on file.

Late last year, the SEC staff encouraged companies to include both management's report on internal controls and the auditor's report on management's assessment of internal controls in the annual report to shareholders when their audited financial statements are included. In light of the policies underlying the recent SEC order, companies relying on the 45-day extension may disregard the earlier staff encouragement to include both internal control reports in the annual report to shareholders.