(The news featured below is a selection from the news covered in the Federal Securities Report Letter, which is distributed to subscribers of the Federal Securities Law Reports.)

Internal Controls, Certification Rules Adopted

The SEC approved rules requiring companies to include in their annual reports an explanation of the company's internal controls, as required by Section 404 of the Sarbanes-Oxley Act. The reports must state that management is responsible for maintaining internal controls, as well as include an assessment of the effectiveness of the internal controls. SEC Commissioner Harvey J. Goldschmid said this rule is a "landmark" and the most important item that the Commission has tackled within the last year.

Section 404 requires the Commission to adopt rules to require that the annual reports of all companies except registered investment companies that are filed under Section 13(a) or 15(d) of the Exchange Act include an internal control report. Section 404 also requires that the accounting firm that audited the company must attest to, and report on the management's assessment of the adequacy of the internal controls, in accordance with procedures established by the Public Company Accounting Oversight Board. The PCAOB recently adopted interim measure on this matter.

Under the final rules, the annual internal control reports need to have a number of specific items, including: a statement of the management's responsibility over internal controls and reporting; a statement on the framework used to evaluate the effectiveness of the controls; management's assessments of the effectiveness of these controls over the past year, with any material weaknesses that management has identified; a statement that the firms registered accounting firm has audited the financial statements included in the annual report, and attested to the management assessment of the internal controls.

The rules prohibit management from concluding that the internal controls are effective if there is one or more material weakness in the controls. The rules define "internal control over financial reporting" as a procedure supervised by top management, and effected by the company's board, to provide for assurance that the financial statements are accurate and in accordance with Generally Accepted Accounting Principles. Companies must maintain records dealing with the transactions and assets of the company; provide assurances that transactions were recorded properly, in accordance with GAAP, and must ensure that expenditures are only made with management and board authorization. Assurance must also be given that the company has procedures in place to prevent, or deal with on a timely basis, unauthorized acquisition, use, or disposition of assets, if the result could be a material change to the company's financial situation.

Companies, other than foreign private issuers, meeting the definition of an "accelerated filer" in Exchange Act Rule 12b-2 will be required to comply with the management report on internal control over financial reporting requirements for fiscal years ending on or after June 15, 2004. All other issuers, including small business issuers and foreign private issuers, will be required to comply for their fiscal years ending on or after April 15, 2005.

Certification Provisions

The rules also require that the certifications required by Sections 302 and 906 of the Sarbanes-Oxley Act be added to the list of exhibits that must be included in reports filed with the SEC. Section 302 certification will be done by the methods set forth in the periodic report filing, while the final rule does not outline the form and content for Section 906 certification.

Section 906 is a criminal section, and the final rule permits companies to " furnish" rather that " file" the Section 906 certifications. As a result, these certifications are not subject to liability under Section 18 of the Exchange Act. In addition, since the certifications will not be " filed," they will not be automatically incorporated into Securities Act registration statements. Accordingly, the issuer would be shielded from Securities Act Section 11 liability, unless the issuer decided to include the Section 906 certifications in the registration statements. The rules and form amendments concerning Section 302 and Section 906 certifications generally will become effective 60 days after their publication in the Federal Register.

¨ The adopting release will be published in a forthcoming REPORT.