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SEC Proposes Requiring Certification Of Quarterly And Annual Reports - Proposes New Form 8-K Disclosures And Filing Deadlines

Date 13/06/2002

The Securities and Exchange Commission yesterday proposed rules that would require a company's principal executive officer and principal financial officer to certify the contents of the company's quarterly and annual reports. The proposed rules are intended to enhance investor confidence in the quality of companies' periodic reports.

The Commission also proposed that several new items or events be reported on Form 8-K in an effort to improve the quality, amount and timeliness of public disclosure of extraordinary corporate events. In addition, the Commission proposed that Form 8-K reports, also known as current reports, be filed within two business days instead of the current five to 15 days.

Certification of Quarterly and Annual Reports

The proposed certification rules are consistent with a key provision of the President's 10-point "Plan to Improve Corporate Responsibility and Protect America's Shareholders," announced March 7, 2002. The plan states that CEOs should personally vouch for the veracity, timeliness and fairness of their companies' public disclosures, including financial statements.

As proposed, new Exchange Act Rule 13a-14 would require the principal executive officer and principal financial officer of a company each to certify, with respect to the company's quarterly and annual reports, that:

  • he or she has read the report;
  • to his or her knowledge, the information in the report is true in all important respects as of the last day of the period covered by the report; and
  • the report contains all information about the company of which he or she is aware that he or she believes is important to a reasonable investor as of the last day of the period covered by the report.
For purposes of the proposed certification, information is considered "important to a reasonable investor" if:
  • there is a substantial likelihood that a reasonable investor would view the information as significantly altering the total mix of information in the report; and
  • the report would be misleading to a reasonable investor if the information was omitted from the report.
In addition, proposed new Exchange Act Rule 13a-15 would require a company to maintain procedures to provide reasonable assurance that the company is able to collect, process and disclose the information required in the company's periodic and current reports pursuant to the Exchange Act, and also require a periodic review and evaluation of these procedures. This annual evaluation would need to be presented to the company's principal executive officer and principal financial officer, and these individuals would be required to certify in the company's annual report that they have reviewed the results of the evaluation.

The proposed rules would apply to any domestic company that is subject to the reporting requirements of the Securities Exchange Act of 1934. The Commission invites public comment on the proposed rules. Comments should be received within 60 days of publication of the proposed rules in the Federal Register.

For further information, please contact Elizabeth M. Murphy or Mark A. Borges, Office of Rulemaking, Division of Corporation Finance, at +1 202 942-2910.

New Form 8-K Disclosure Requirements and Deadlines

The proposals would require current reports on Form 8-K of 11 new items or events:

  • Entry into a material agreement not made in the ordinary course of business;
  • Termination of a material agreement not made in the ordinary course of business;
  • Termination or reduction of a business relationship with a customer that constitutes a specified amount of the company's revenues;
  • Creation of a direct or contingent financial obligation that is material to the company;
  • Events triggering a direct or contingent financial obligation that is material to the company, including any default or acceleration of an obligation;
  • Exit activities including any material write-off or restructuring;
  • Any material impairment;
  • A change in a rating agency decision, issuance of a credit watch or change in a company outlook;
  • Movement of the company's securities from one national securities exchange or inter-dealer quotation system of a registered national securities association to another, delisting of the company's securities from an exchange or quotation system, or a notice that a company does not comply with a listing standard;
  • Notice to the company from its currently or previously engaged independent accountant that the independent accountant is withdrawing a previously issued audit report or that the company may not rely on a previously issued audit report; and
  • Any material limitation, restriction or prohibition, including the beginning and end of lock-out periods, regarding the company's employee benefit, retirement and stock ownership plans.
The proposals would move two disclosure items that currently are required in companies' annual and quarterly reports to Form 8-K:
  • Unregistered sales of equity securities by the company;
  • Material modifications to rights of holders of the company's securities.
The proposals would amend several existing Form 8-K disclosure items to include
  • disclosure regarding the departure of a director for reasons other than a disagreement or removal for cause;
  • the appointment or departure of a principal officer, and the election of new directors; and
  • disclosure regarding any material amendment to a company's certificate of incorporation or bylaws.
In addition, the proposals would reorganize the disclosure items into logical categories; amend Exchange Act Rule 13a-11 to create a safe harbor for a categories; amend Exchange Act Rule 13a-11 to create a safe harbor for a company's late filing of Form 8-K if a company satisfies all conditions for reliance on the safe harbor, and amend Rule 12b-25 to grant a two business day extension of the Form 8-K filing deadline to a company that provides proper notice on Form 12b-25 of its inability to timely file a Form 8-K.

The proposals would also accelerate the current five business day deadline for disclosure about changes in a company's independent accountant and resignations of directors, and 15 calendar day deadline for other required disclosures, to two business days, so that there would be a uniform filing period for all of the mandated Form 8-K disclosure items.

The Commission invites public comment on the proposed rules. Comments should be received within 60 days of publication of the proposed rules in the Federal Register.

For further information, please contact Elizabeth M. Murphy, Division of Corporation Finance, at +1 202 942-2910.