August 27, 2002 SEC ADOPTS NEW RULES REQUIRING OFFICER CERTIFICATIONS AND ACCELERATING REPORTING DEADLINES FOR FORMS 10-Q, 10-K AND SECTION 16 INSIDER REPORTS At its open meeting on August 27, 2002, the SEC adopted final rules relating to principal officer certifications and disclosure controls, accelerating the filing deadlines for Forms 10-Q and 10-K, and Section 16 insider reports. Brief summaries of the new rules follow. We will provide analyses of the final rules relating to principal officer certifications, disclosure controls and insider reports in White Papers that we will release once we have reviewed the SEC's adopting releases. Principal Officer Certifications and Disclosure Controls New Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), implement the principal officer certifications required by Section 302 of the Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act"). These rules require every public company that files periodic reports under Section 13(a) or 15(d) of the Exchange Act to include the certifications of its principal executive and financial officers, or persons performing similar functions (the "Principal Officers"), in each annual or quarterly report filed after August 29, 2002. The certification of each Principal Officer must state that: the Principal Officer has reviewed the report; based on the Principal Officer's knowledge, the report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading; based on the Principal Officer's knowledge, the financial statements, and other financial information included in the report, fairly present, in all material respects the financial condition and results of operations of the company as of, and for, the periods presented in the report (at the open meeting, the SEC Staff stated that this statement would also refer to the cash flows of the company);
the Principal Officers are responsible for establishing and maintaining "disclosure controls and procedures" (which is a new term that the SEC is defining in the new rules to mean both the financial and non-financial controls and procedures related to disclosure); the Principal Officers have designed such disclosure controls and procedures to ensure that material information relating to the company and its consolidated subsidiaries is made known to such officers by others within those entities, particularly during the period in which the periodic report is being prepared; the Principal Officers have evaluated the effectiveness of the company's disclosure controls and procedures as of a date within 90 days of the date of the report; the Principal Officers have presented in the report their conclusions about the effectiveness of the disclosure controls and procedures based on their evaluation as of that date; the Principal Officers have disclosed to the company's outside auditors and audit committee all significant deficiencies in the design or operation of the internal controls (a term which refers to the internal controls regarding financial reporting, not the more expansive "disclosure controls and procedures" referred to above) which could adversely affect the company's ability to record, process, summarize and report financial data, and any fraud involving management or other employees who have a significant role in the company's internal controls; the Principal Officers have identified for the outside auditors any material weaknesses in the internal controls; and the Principal Officers have indicated in the report whether or not there were significant changes in the 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. The part of the certification that relates to disclosure controls and procedures and internal controls is completely new. We hope that the SEC's adopting release will provide some guidance to assist the Principal Officers in providing the required statements. New Rules 13a-14 and 15d-14 will apply to all companies that file Exchange Act reports, including foreign private issuers, small business issuers, registered investment companies and unit investment trusts. The SEC is also proposing amendments to better implement the intent of the certification requirement for registered investment companies. These amendments would require all registered investment companies, including mutual funds, to file certified shareholder reports with the SEC on a new Form N-CSR (this requirement would apply regardless of whether the registered investment company previously filed periodic reports under the Exchange Act) and to maintain, and regularly evaluate,disclosure controls and procedures designed to ensure that the information required in all of its disclosure documents is collected, processed, and disclosed on a timely basis.
The SEC also adopted new Rules 13a-15 and 15d-15 to the Exchange Act, which affirmatively require companies to establish and maintain an overall system of disclosure controls and procedures that is adequate to meet its Exchange Act reporting obligations. The SEC clarified that new Rules 13a-15 and 15d-15 are in addition to, and not in lieu of, existing requirements in Section 13(b)(2)(B) of the Exchange Act that reporting companies establish and maintain systems of internal controls with respect to their financial reporting obligations. The SEC stressed that the certification requirements in new Rules 13a-14 and 15d-14, which implement the requirements of Section 302 of the Sarbanes-Oxley Act, are independent of the certifications required by Section 906 of the Sarbanes-Oxley Act. The SEC stated that it was currently in discussions with the Department of Justice regardingthe two certification requirements. Until further notice, however, companies should expect to include both certifications in their next quarterly or annual report. In our White Paper entitled "An Analysis of Selected Provisions of the Sarbanes-Oxley Act of 2002," (click through to the White Paper at http://www.morganlewis.com/wp0246.pdf) we provide some suggested procedures that companies should consider adopting to assist the Principal Officers in making these new quarterly and annual certifications to the SEC. Acceleration of Filing Deadlines for Forms 10-Q and 10-K The SEC announced amendments to its rules that will (i) shorten significantly the filing deadlines for many public companies' reports on Form 10-K and Form 10-Q and (ii) require disclosure about the availability of reports on public companies' corporate websites. The amended rules apply to each domestic company (referred to as an "accelerated filer") that (i) has a public float of at least $75 million, (ii) has been subject to the periodic reporting requirements of the Exchange Act for at least 12 months preceding the filing of the Form 10-K or Form 10-Q, and (iii) has filed previously at least one Form 10-K. The accelerated filing dates, which will be phased in beginning with reports filed after a company's first fiscal year ending on or after December 15, 2003, are as follows: For an interim report on Form 10-Q: For companies with fiscal years ending on or after December 15, 2003 and before December 15, 2004, the report will be due 40 days after the end of a quarter; and For companies with fiscal years ending on or after December 15, 2004, the report will be due 35 days after the end of a quarter. For an annual report on Form 10-K: For companies with fiscal years ending on or after December 15, 2003 and before December 15, 2004, the report will be due 75 days after the end of a fiscal year; and
For companies with fiscal years ending on or after December 15, 2004, the report will be due 60 days after the end of a fiscal year. The financial statements of an accelerated filer's public subsidiary, however, may be filed at a later date if the public subsidiary itself is not an accelerated filer. Failure to meet the accelerated filing deadlines will preclude a company from using a short-form registration statement, including a resale prospectus to be filed with Form S-8 relating to employee benefit plan securities. Further, shareholders of a company that fails to meet the new accelerated filing deadlines may not rely on Rule 144 for resales of restricted and control securities. In an effort to encourage each accelerated filer to make its periodic reports available on its corporate website, the SEC also will require each accelerated filer to disclose in its Form 10-K whether it makes its periodic and current reports available on its website free of charge as soon as reasonably practicable after the reports are filed with the SEC. These website disclosure requirements will become effective beginning with reports for fiscal years ending on or after December 15, 2002. These rule amendments do not affect the filing deadline for Form 20-F, the annual report form for foreign private issuers. Form 20-F annual reports will continue to be due within six months after the end of the foreign private issuer's fiscal year. Changes to Section 16 Reporting The SEC adopted changes to the insider trading reporting rules under Section 16(a) of the Exchange Act to implement the accelerated reporting required by Section 403 of the SarbanesOxley Act. The new rules require the executive officers, directors and 10% shareholders of most domestic public companies to file a report on Form 4 within two business days of any change in beneficial ownership, including as a result of a transaction between the reporting person and the company (such as, the receipt of an option or other award from the company or a disposition to the company). This reporting requirement will not apply to the following: (a) a transaction effected under the terms of a Rule 10b5-1(c) arrangement, or under circumstances where the defense in Rule 10b5-1(c) is otherwise available (such as certain transactions under employee benefit plans and dividend reinvestment plans), if the reporting person did not select the date of execution. This transaction will be reportable within two business days after the person receives notice of the execution but no later than five business days following the trade date; (b) a so-called "Discretionary Transaction," that is, a voluntary transaction under an employee benefit plan as defined in Rule 16b-3 under the Exchange Act, where the reporting person does not select the date of execution of the transaction. This transaction will be reportable within two business days after the person receives notice of the execution from the plan administrator but no later than five business days following the trade date;
(c) a transaction under a tax-conditioned plan (other than a Discretionary Transaction) as defined in Rule 16b-3(c), which is not required to be reported; (d) an acquisition of securities, other than from the company, not exceeding $10,000 in market value. This acquisition will continue to be reportable on a Form 5 filed within 45 days after the end of the company's fiscal year subject to certain continuing conditions; (e) any other transaction exempt under a rule adopted under Section 16(a); and (f) a gift or transfer by will or inheritance and any other transaction exempt under Section 16(b), except transactions discussed above and exercises and conversions of derivative securities. The gift, transfer or other eligible exempt transaction will continue to be reportable on a Form 5. The two business day reporting requirement applies to transactions executed on or after August 29, 2002. The SEC also announced that it will implement the requirement of Rule 403 of the Sarbanes-Oxley Act that electronic filings of Section 16(a) reports be required by July 30, 2003. In view of the two business day deadline, however, the SEC encourages reporting persons to file the reports electronically as soon as possible. Therefore, reporting persons who have not yet obtained EDGAR filing access codes should do so as soon as possible. The SEC is seeking comment on, among other things, whether to require a six-month holding period for options as a condition to the exemption from Section 16(b) for option grants. In our August 22, 2002 Law Flash (click through to the Law Flash at http://www.morganlewis.com/seclawflash9.htm), we suggested some procedures that all public companies should consider adopting to assist in compliance with these new Section 16 reporting deadlines. *** For more information, please contact Linda L. Griggs at 202.739.5245 (lgriggs@morganlewis.com), Alan Singer at 215.963.5224 (asinger@morganlewis.com), Thomas P. Conaghan at 202.739.5498 (tconaghan@morganlewis.com) or Ross H. Parr at 202.739.5682 (rparr@morganlewis.com). The Morgan Lewis Securities Practice is an interdisciplinary team of more than 150 regulatory, enforcement, corporate and trial lawyers who have extensive experience helping public companies and individual officers and directors navigate the rapidly changing political, legal and economic landscape. Our Securities Practice includes 35 lawyers with significant service at the SEC's Office of the Chief Accountant, Division of Corporation Finance and Division of Enforcement, as well as others who gained valuable experience at the Department of Justice or in the private sector.