[Federal Register Volume 67, Number 153 (Thursday, August 8, 2002)]
[Proposed Rules]
[Pages 51508-51509]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-20029]



[[Page 51508]]

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 232, 240 and 249

[Release No. 34-46300; File No. S7-21-02]
RIN 3235-AI54


Certification of Disclosure in Companies' Quarterly and Annual 
Reports

AGENCY: Securities and Exchange Commission.

ACTION: Supplemental information on proposed rule.

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SUMMARY: On July 30, 2002, President Bush signed into law the Sarbanes-
Oxley Act of 2002. Section 302 of the Act requires us to adopt rules 
implementing specified statutory certification requirements for 
principal executive officers and principal financial officers by August 
29, 2002. On June 14, 2002, we had proposed to require a specified 
certification by a company's principal executive officer and principal 
financial officer. In addition, we had proposed to 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 quarterly and annual reports, as well as current reports on 
Form 8-K, and also to require periodic review and evaluation of these 
procedures. This document contains supplemental information regarding 
those proposals in light of the enactment of the Sarbanes-Oxley Act of 
2002.

DATES: You should send us any comments so that they arrive at the 
Commission by August 19, 2002. This is the same date by which we 
originally requested comment on the proposals included in Release No. 
34-46079. In view of the statutory deadline by which we must adopt 
final rules, we encourage you to submit any comments as soon as 
possible since we do not expect to be able to consider comments that 
arrive after August 19, 2002.

ADDRESSES: Please send three copies of your comments to Jonathan G. 
Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, 
NW., Washington, DC 20549-0609. Alternatively, you may submit your 
comments electronically to the following electronic-mail address: [email protected]. To help us process and review your comments more 
efficiently, comments should be sent by one method (U.S. mail or 
electronic-mail) only. All comment letters should refer to File No. S7-
21-02; please include this file number in the subject line if you use 
electronic-mail. We will make all comment letters available for public 
inspection and copying in our public reference room at the same 
address. We will post electronically submitted comment letters on the 
Commission's Internet Web site (http://www.sec.gov ).\1\
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    \1\ We do not edit personal identifying information, such as 
names or electronic-mail addresses, from electronic submissions. You 
should only submit information that you wish to make publicly 
available.

FOR FURTHER INFORMATION CONTACT: Mark A. Borges, Special Counsel, or 
Elizabeth M. Murphy, Chief, Office of Rulemaking, Division of 
Corporation Finance, at (202) 942-2910, or, with respect to investment 
company matters, Tara L. Royal, Attorney, Office of Disclosure 
Regulation, Division of Investment Management, at (202) 942-0721, at 
the Securities and Exchange Commission, 450 Fifth Street, NW., 
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Washington, DC 20549-0312.

SUPPLEMENTARY INFORMATION:

I. Background

    On June 14, 2002, we proposed rules \2\ that would require a 
company's principal executive officer and principal financial officer 
each to certify the contents of the company's quarterly reports on 
Forms 10-Q \3\ and 10-QSB \4\ and annual reports on Forms 10-K \5\ and 
10-KSB \6\ filed pursuant to the Securities Exchange Act of 1934.\7\ 
The proposed rules also would require a company filing quarterly and 
annual reports on these forms to maintain procedures to provide 
reasonable assurance that the company is able to collect, process and 
disclose the information required in these reports and in current 
reports on Form 8-K.\8\ In addition, the proposed rules would require a 
periodic review and evaluation of these procedures. The annual 
evaluation would have to be presented to the company's principal 
executive officer and principal financial officer. They would have to 
certify in the company's annual report that they have reviewed the 
results of the evaluation.
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    \2\ See Release No. 34-46079 (June 14, 2002) [67 FR 41877].
    \3\ 17 CFR 249.308a.
    \4\ 17 CFR 249.308b.
    \5\ 17 CFR 249.310.
    \6\ 17 CFR 249.310b.
    \7\ 15 U.S.C. 78a et seq.
    \8\ 17 CFR 249.308.
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    On July 30, 2002, the Sarbanes-Oxley Act of 2002 was enacted.\9\ 
Section 302 of the Act, entitled ``Corporate Responsibility for 
Financial Reports,'' requires the Commission to adopt final rules that 
must be effective by August 29, 2002, 30 days after the date of 
enactment, under which the principal executive officer or officers and 
the principal financial officer or officers, or persons providing 
similar functions, must provide a specified certification in issuers' 
annual and quarterly reports. Under the statute, the certification must 
be provided by the officers of a broader group of issuers, particularly 
foreign issuers, and is different in certain respects from the 
certification requirements that we proposed in June. The requirements 
under section 302 of the Act are set forth in section II of this 
document, and the principal differences between the form of 
certification required pursuant to section 302 of the Act and the form 
of certification set forth in our proposed rules are discussed in 
section III of this document.
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    \9\ Pub. L. 107-204, 116 Stat. 745 (2002).
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    To satisfy the requirements of the Sarbanes-Oxley Act of 2002, we 
plan to issue and make effective final rules on or prior to August 29, 
2002 to require the certification mandated by the Act. However, given 
the specificity of the requirements of section 302, we wanted to alert 
interested parties to the rules that we will be required to adopt 
pursuant to section 302 and to the differences between those rules and 
our proposed rules.

II. Required Certification Under Section 302 of the Sarbanes-Oxley 
Act of 2002

    Section 302(a) of the Sarbanes-Oxley Act of 2002 provides that the 
Commission shall, by rules that become effective not later than August 
29, 2002, require, for each company filing periodic reports under 
section 13(a) or 15(d) of the Exchange Act,\10\ that:
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    \10\ 15 U.S.C. 78m(a) or 78o(d).
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    The principal executive officer or officers and the principal 
financial officer or officers, or persons performing similar functions, 
certify in each annual or quarterly report filed or submitted under 
either such section of such Act that--
    (1) The signing officer has reviewed the report;
    (2) based on the 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;
    (3) based on such 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 issuer as of,

[[Page 51509]]

and for, the periods presented in the report;
    (4) the signing officers--
    (A) are responsible for establishing and maintaining internal 
controls;
    (B) have designed such internal controls to ensure that material 
information relating to the issuer and its consolidated subsidiaries is 
made known to such officers by others within those entities, 
particularly during the period in which the periodic reports are being 
prepared;
    (C) have evaluated the effectiveness of the issuer's internal 
controls as of a date within 90 days prior to the report; and
    (D) have presented in the report their conclusions about the 
effectiveness of their internal controls based on their evaluation as 
of that date;
    (5) the signing officers have disclosed to the issuer's auditors 
and the audit committee of the board of directors (or persons 
fulfilling the equivalent function)--
    (A) all significant deficiencies in the design or operation of 
internal controls which could adversely affect the issuer's ability to 
record, process, summarize, and report financial data and have 
identified for the issuer's auditors any material weaknesses in 
internal controls; and
    (B) any fraud, whether or not material, that involves management or 
other employees who have a significant role in the issuer's internal 
controls; and
    (6) the signing officers 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.

III. Certain Differences From Our Certification Proposal

    There are several substantive differences between the form of 
certification mandated by section 302 of the Sarbanes-Oxley Act of 2002 
and the version that we proposed in June.\11\ As indicated above, we 
will adopt a form of certification that conforms to the statutory 
requirements. Both our proposed form of certification and that required 
by the Act address the material accuracy and completeness of the 
periodic reports that they cover. However, our proposed form of 
certification used a ``plain English'' approach to reflect the 
applicable disclosure standard for ``material'' information,\12\ while 
the Act uses the formulation found in Exchange Act Rules 10b-5(b)\13\ 
and 12b-20.\14\ In addition, the Act requires an additional attestation 
regarding the financial disclosure included in these reports. Further, 
while our proposed certification contains an attestation regarding the 
completion of a review of internal procedures and controls aimed at 
assuring adequate disclosure, the attestations required by the Act 
require additional information regarding certain aspects and results of 
that review.
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    \11\ Section 906 of the Sarbanes-Oxley Act of 2002 adds new 
section 1350 to chapter 63 of title 18 of the United States Code. 
Section 1350 requires a written statement to accompany all periodic 
reports filed with us that contain financial statements. This 
release does not relate to section 906 of the Act, which, by its 
terms, is effective on enactment of the Act, July 30, 2002.
    \12\ See Release No. 34-46079 at section II.2.
    \13\ 17 CFR 240.10b-5(b)
    \14\ 17 CFR 240.12b-20.
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    There is also a difference regarding the companies to whom the 
certification requirements are applicable, in respect of foreign 
issuers. Our proposed rules would only have applied to issuers subject 
to the reporting requirements of section 13(a) or 15(d) of the Exchange 
Act that filed annual reports on Forms 10-K and 10-KSB and quarterly 
reports on Forms 10-Q and 10-QSB. Thus, our proposed rules would have 
applied to U.S. companies and to companies domiciled in foreign 
jurisdictions that have a majority of U.S. security holders and U.S.-
based businesses or management. Section 302 of the Act, however, also 
applies to foreign private issuers.\15\ We, therefore, intend to adopt 
final rules that would apply the certification requirement to foreign 
private issuers filing annual reports on Form 20-F \16\ and Canadian 
issuers filing Form 40-F \17\ under the Commission's 
Multijurisdictional Disclosure System.\18\
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    \15\ For purpose of the Exchange Act, a ``foreign private 
issuer'' is any foreign issuer (other than a foreign government) 
except an issuer meeting the following conditions: (1) more than 50% 
of the issuer's outstanding voting securities are directly or 
indirectly held of record by residents of the U.S.; and (2) the 
majority of the executive officers or directors are U.S. citizens or 
residents; or more than 50% of the assets of the issuer are located 
in the U.S.; or the business of the issuer is administered 
principally in the U.S. See Exchange Act Rule 3b-4(c) [17 CFR 
240.3b-4(c)].
    \16\ 17 CFR 249.220f.
    \17\ 14 CFR 240.240f.
    \18\ Section 302(b) of the Sarbanes-Oxley Act of 2002 states 
that nothing in the section can be interpreted or applied in any way 
to allow any issuer to lessen the legal force of the certification 
required by the Act by an issuer that has reincorporated or engaged 
in any other transaction resulting in the transfer of the corporate 
domicile or offices of the issuer from inside of the United States 
to outside of the United States. Our rules as adopted will, of 
course, assure complaicne with this requirement by applying the 
certification requirement to all reporting companies, including any 
issuer that would seek to lessen the legal force of the 
certification as described above.
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    While section 302 of the Act requires the principal executive 
officer or officers and principal financial officer or officers to make 
specific attestations in their certifications as to the company's 
internal controls, it does not directly address the maintenance of 
these requirements. Our proposed rules would require maintenance of 
sufficient procedures to provide reasonable assurance that the company 
is able to collect, process and disclose, within the time periods 
specified in our rules and forms, the information, including non-
financial information, required to be disclosed in their periodic and 
current reports. We do not propose to modify, and continue to solicit 
comment on, our proposed Rules 13a-15(a) and 15d-15(a) that would 
impose this requirement.
    We are considering the manner of application of section 302 of the 
Act to registered investment companies. We ask commenters to address 
the manner in which the certification requirement should address 
registered investment companies, including the appropriate location for 
the certification (for example, Form N-SAR;\19\ reports to 
shareholders), the appropriate individuals to provide the certification 
(for example, officers of the investment company itself and/or the 
investment adviser, administrator or depositor of the registered 
investment company), how the rule should apply to different types of 
investment companies (for example, managed investment companies; unit 
investment trusts) and any other matters that are specific to 
registered investment companies.
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    \19\ 17 CFR.330; 17 CFR 274.101.
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IV. Request for Comment

    As indicated above, we continue to solicit comment on proposed 
Rules 13a-15(a) and 15d-15(a), as proposed on June 14, 2002 in Release 
No. 34-46079.

    Dated: August 2, 2002.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-20029 Filed 8-2-02; 4:48 pm]
BILLING CODE 8010-01-P