Bar Officials Question SEC Authority to Issue Certification Order

The Chair and Vice-Chair of the American Bar Association’s Committee on Federal Regulation of Securities have written to SEC Chairman Harvey Pitt questioning the Commission’s June 27, 2002 order requiring chief executive and chief financial officers of 947 public companies to certify the accuracy of their company’s most recent annual report on Form 10-K and subsequent filings to the date of the certification. The certifications are to be filed with the SEC no later than the due date of the next report required to be filed on or after August 14, 2002. The letter, which does not represent the official position of the ABA, the Section of Business Law or the committee, said that a number of members do not believe that the order is an appropriate use of the Commission’s investigative powers under Section 21(a) of the Securities Exchange Act . There is concern that the order circumvents the rulemaking process and should not be viewed as either a normal, or preferred, avenue for future SEC directives.

On June 17, 2002, the Commission proposed Rules 13a-14 and 15d-14, which would require similar certifications on a going forward basis. The bar committee expects to comment on these proposals in due course. The notice and comment process ensures that the SEC receives information from the public regarding the potential impact of the proposed rules before they are enacted.

During the pendency of this comment period, the Commission issued the order pursuant to Section 21(a), which gives the agency discretion to make such investigations as it deems necessary to determine whether any person has violated, is violating, or is about to violate any provision of the Exchange Act. It also authorizes the Commission to publish information concerning any such violations, and to investigate any facts, conditions, practices, or matters which it may deem necessary or proper to aid in enforcement of the federal securities laws and related rules.

While acknowledging that Section 21(a) does provide broad authority, the bar members contend that legitimate questions exist as to whether that authority is sufficient to require more than 1,800 corporate officers to submit sworn statements in the form required by the order, and to publish those statements upon receipt. Although there have been recent reports of accounting irregularities at public companies, noted the members, even the Commission’s order does not suggest that the SEC has commenced an investigation into possible accounting irregularities at 947 companies. Moreover, the order does not appear to be designed to seek all the facts and circumstances concerning the matter to be investigated, as Section 21(a) authorizes, unless the officers choose to file such a statement in lieu of the requested form. In addition, the bar members say it is likely that many, if not most, of the forms filed in response to the order will not constitute information concerning any such violation, which is the Section 21(a) measure allowing the Commission to publish the statement.

While Section 21(a) investigations can provide important data for the Commission to use in evaluating whether to adopt new rules or seek legislation, emphasized the bar members, it is not clear that Section 21(a) sworn statements can be required outside the context of investigations of specific possible violations of federal securities laws or related rules. Finally, because of the importance of these issues, a task force of the committee has been formed, consisting of distinguished securities law practitioners and former SEC officials, to consider the scope of the Commission’s Section 21(a) authority. It is hoped that the task force report will be useful in defining that authority.