August 27, 2002 SEC ADOPTS NEW RULES REQUIRING OFFICER by kennedyandstahl


									August 27, 2002

                      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 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

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;
               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

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 Sarbanes-
Oxley 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, we suggested some procedures that all public
companies should consider adopting to assist in compliance with these new Section 16 reporting


For more information, please contact Linda L. Griggs at 202.739.5245
(, Alan Singer at 215.963.5224 (,
Thomas P. Conaghan at 202.739.5498 ( or Ross H. Parr at
202.739.5682 (

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.

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