SEC Adopts Rules on Certification of Financial Statements, Accelerated Disclosure, and Insider Reporting

Action is Intended to Satisfy Sarbanes-Oxley Act Mandates

Implementing Section 302 of the Sarbanes-Oxley Act, the SEC has adopted rules requiring a company’s principal executive and financial officers to certify the company’s quarterly and annual financial statements filed with the SEC. The certification rules will also apply to the principal executive and financial officers of foreign private issuers and small business issuers. The Commission has also accelerated the filing deadlines for quarterly reports on Form 10-Q, and annual reports on Form 10-K. Finally, implementing the dramatically accelerated insider reporting deadline mandated by Sarbanes-Oxley, the SEC has generally required, with narrow exceptions, that insider transactions in the issuer’s securities be reported by the end of the second business day following the transaction.

The principal executive and financial officers will have to certify that they reviewed the report and that, based on their knowledge, it does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances, not misleading. Similarly, they must also certify that, based on their knowledge, the financial statements, and other financial information included in the report, fairly present in all material respects the company’s financial condition and results of operations.

The senior officers will also have to certify that they are responsible for maintaining corporate ``disclosure controls and procedures,’’ which is a new term reflecting the concept of controls and procedures related to disclosure, and have designed the controls and procedures to ensure that material information is made known to them, particularly during the time in which the periodic report is being prepared. Moreover, the officers must certify that they have evaluated the effectiveness of the controls and procedures within 90 days of the date of the report and have presented in the report their conclusions about their effectiveness based on the required evaluation.

Further, the principal officers must certify that they have disclosed to the auditors and to the board audit committee all significant deficiencies in the design or operation of internal controls that could adversely affect the company’s ability to record and report financial data and have identified for the auditors any material weaknesses in internal controls, as well as any fraud, whether or not material, that involves management or other employees who have a significant role in the company's internal controls.

Finally, the officers must certify that they have indicated in the report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Insider Reporting

Implementing Section 403 of Sarbanes-Oxley, the SEC will require that officers and directors report transactions in the securities of their companies on Form 4 within two business days of the transaction. For example, if a transaction is executed any time on Tuesday, September 3, the Form 4 will be due by the close of business (5:30 p.m. Eastern time) at the Commission on Thursday, September 5.

There are two narrow exceptions to the general rule.

The first exception relates to transactions pursuant to Rule 10b5-1(c) plans. An officer or director generally cannot know whether such a transaction will be executed immediately. Where they have not selected the date of execution, they will not control when the transaction actually will occur.

The second exception is for discretionary transactions in employee benefit plans where the logistics of plan administration may prevent an officer or director from selecting the date of execution.

It should be noted that the exceptions will not be available if the insider has selected the date of trade execution, for example where a Rule 10b5-1(c) arrangement provides for a sale on the first business day of each month.

The Form 4 reporting deadline for both of the exceptions is by the end of the second business day following the date of execution, which the SEC defines as the date the insider is notified of the trade but in no event more than three business days after the trade. Defining the date of execution as the notification date enables insiders to report on Form 4 a transaction of which they otherwise would not have notice.

The two exceptions where granted by the SEC under authority in the Sarbanes-Oxley Act that allows the Commission to extend the two-day filing deadline where such is not feasible.

It can be seen that the two exceptions involve instances where the insider does not control and cannot reasonably be expected to know immediately the precise transaction date. The rules therefore allow reasonable additional time so that reporting is feasible, while requiring expeditious reporting consistent with the Sarbanes-Oxley Act's purpose to effect immediate disclosure of reporting persons' transactions.

Acquisitions pursuant to tax qualified plans, excess benefit plans, stock purchase plans and the reinvestment of dividends or interest pursuant to broad-based plans will remain exempt from Section 16(a) reporting. In contrast, transactions pursuant to non-qualified deferred compensation plans and other dividend or interest reinvestment plan transactions (such as acquisitions pursuant to voluntary contributions of additional funds) will be reportable on Form 4 within two business days after the date of execution. However, to the extent that such a transaction satisfies the affirmative defense conditions of Rule 10b5-1(c), the date of execution for Form 4 reporting purposes may be calculated on the modified basis.

The SEC plans to publish new forms implementing these amendments as soon as possible. Until amended forms are available, insiders should continue to use the current versions, but should modify box 4 on Form 4 to state the month, day and year of the transaction. When using the current forms to report one of the excepted transactions with a longer than two-day deadline, that is those with a deemed execution date, an insider should include an asterisk next to the trade date in the transaction date column, and add a footnote to disclose the deemed execution date.

Because the Sarbanes-Oxley Act does not change the due date for Form 3, situations may arise where a reporting person is required to file a Form 4 before the Form 3 is due. In this situation, the SEC advises the insider to file the Form 3 along with the Form 4 at the time the Form 4 is due.

Sarbanes-Oxley mandates electronic filing within one year. The SEC will begin rulemaking to mandate electronic filing. In the meantime, the SEC encourages insiders to file electronically. To facilitate EDGAR conversion under the current filing system, the SEC will accept electronically-filed Section 16(a) reports that are not presented in the standard box format and omit the horizontal and vertical lines separating information items, so long as the captions of the items and all required information are presented in the proper order.

Insiders who plan to file electronically should submit Forms ID requesting EDGAR access codes as soon as possible to minimize processing delays. When making a request, they should indicate whether the person for whom codes are requested is a reporting person with respect to any other companies, and whether a CIK number already has been assigned to that person.

Accelerated Disclosure

The SEC has mandated the accelerated filing of quarterly and annual reports., as well as new disclosure regarding access to reports on company web sites. The changes accelerate reports for domestic companies that:

• Have a public float of at least $75 million;
• Have been reporting for at least 12 months;
• Have previously filed one annual report; and
• Are not eligible to use the Commission's special forms for small business issuers.

The changes to filing deadlines will be phased in over three years, with no change for the first year. The annual report deadline will remain 90 days for the first year, change to 75 days for year two, and change to 60 days for year three and thereafter. The quarterly report deadline will remain 45 days for the first year, change to 40 days for year two, and change to 35 days for year three and thereafter.

Regarding disclosure of web site access to reports, an accelerated filer will be required to disclose in its Form 10-K, beginning with reports for fiscal years ending on or after Dec.15 of this year, whether the company makes its periodic and current reports available, free of charge, on its web site as soon as reasonably practicable after such material is electronically filed with the Commission.