[Federal Register Volume 67, Number 210 (Wednesday, October 30, 2002)]
[Proposed Rules]
[Pages 66208-66250]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: X02-11030]
[[Page 66207]]
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Part II
Securities and Exchange Commission
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17 CFR Parts 210, 228, et al.
Disclosure Required by Sections 404, 406 and 407 of the Sarbanes-Oxley
Act of 2002; Proposed Rule
Federal Register&thnsp;/&thnsp;Vol. 67, No. 210&thnsp;/
&thnsp;Wednesday, October 30, 2002&thnsp;/&thnsp;Proposed Rules
[[Page 66208]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 210, 228, 229, 240, 249, 270 and 274
[Release Nos. 33–8138; 34–46701; IC–25775; File No.
S7–40–02]
RIN 3235–AI66
Disclosure Required by Sections 404, 406 and 407 of the Sarbanes-
Oxley Act of 2002
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule.
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SUMMARY: We propose to require companies to include a number of new
disclosures in their Exchange Act filings. First, companies would be
required to disclose the number and names of persons that the board of
directors has determined to be the “financial experts”
serving on the company's audit committee and whether they are
independent of management, and if not, an explanation of why they are
not. Second, companies would be required to include an annual internal
control report of management stating the following: management's
responsibilities for establishing and maintaining adequate internal
controls and procedures for financial reporting for the company;
management's conclusions about the effectiveness of the company's
internal controls and procedures for financial reporting as of the end
of the company's most recent fiscal year; and that the company's
registered public accounting firm has attested to, and reported on,
management's evaluation of the company's internal controls and
procedures for financial reporting. Third, companies would be required
to disclose whether they have adopted a code of ethics that covers
their principal executive officers and senior financial officers, or if
they have not, an explanation of why they have not, as well as
amendments to, and waivers from, the code of ethics relating to any of
those officers. These proposed rules would implement the requirements
in sections 404, 406 and 407 of the Sarbanes-Oxley Act of 2002. We also
propose to make revisions to our recently adopted rules requiring a
company's principal executive and financial officers to certify the
company's quarterly and annual reports and requiring the company to
conduct quarterly evaluations of its disclosure procedures and
controls. These rules would be amended to require quarterly and annual
certifications and quarterly evaluations of internal controls and
procedures for financial reporting. We also would amend the form of the
principal officers' certification contained in the quarterly and annual
report forms.
DATES: Comments should be received on or before November 29, 2002.
ADDRESSES: To help us process and review your comments more
efficiently, comments should be sent by hard copy or e-mail, but not by
both methods.
Comments sent by hard copy should be submitted in triplicate to
Jonathan G. Katz, Secretary, U.S. Securities and Exchange Commission,
450 Fifth Street, NW., Washington, DC 20549–0609. Comments also
may be submitted electronically at the following e-mail address: rule-
comments@sec.gov. All comment letters should refer to File No.
S7–40–02; if e-mail is used, this file number should be
included in the subject line. Comment letters will be available for
inspection and copying in the Commission's Public Reference Room, 450
Fifth Street, NW., Washington, DC 20549–0102. Electronically
submitted comment letters will be posted on the Commission's Internet
Web site (http://www.sec.gov).\1\
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\1\&thnsp;We do not edit personal information, such as names or
electronic mail addresses, from electronic submissions. You should
submit only information that you wish to make available publicly.
FOR FURTHER INFORMATION CONTACT: Ray Be, Special Counsel, or N. Sean
Harrison, Special Counsel, Division of Corporation Finance, at (202)
942–2910, with respect to registered investment companies, Katy
Mobedshahi, Senior Counsel, Division of Investment Management, at (202)
942–0721, or with respect to accounting issues, Michael Thompson,
Professional Accounting Fellow, Office of Chief Accountant, at (202)
942–4400, U.S. Securities and Exchange Commission, 450 Fifth
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Street, NW., Washington, DC 20549.
SUPPLEMENTARY INFORMATION: We are proposing amendments to Form
8–K,\2\ Form 10–K,\3\ Form 10–KSB,\4\ Form
10–Q,\5\ Form 10–QSB,\6\ Form 20–F,\7\ Form
40–F,\8\ Form 12b–25,\9\ Rule 12b–25,\10\ Rule
13a–14,\11\ Rule 13a–15,\12\ Rule 15d–14,\13\ and
Rule 15d–15\14\ under the Securities Exchange Act of 1934,\15\
Regulation S–B,\16\ Regulation S–K&thnsp;\17\ and
Regulation S–X.\18\ We are also proposing amendments to Form
N–SAR&thnsp;\19\ and proposed Form N–CSR&thnsp;\20\ under
the Securities Exchange Act of 1934 and the Investment Company Act of
1940,\21\ and Rule 30a–2&thnsp;\22\ and proposed Rule 30a–3
under the Investment Company Act of 1940.
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\2\&thnsp;17 CFR 249.308.
\3\&thnsp;17 CFR 249.310.
\4\&thnsp;17 CFR 249.310b.
\5\&thnsp;17 CFR 249.308a.
\6\&thnsp;17 CFR 249.308b.
\7\&thnsp;17 CFR 249.220f.
\8\&thnsp;17 CFR 249.240f.
\9\&thnsp;17 CFR 249.322.
\10\&thnsp;17 CFR 240.12b–25.
\11\&thnsp;17 CFR 240.13a–14.
\12\&thnsp;17 CFR 240.13a–15.
\13\&thnsp;17 CFR 140.15d–14.
\14\&thnsp;17 CFR 240.15d–15.
\15\&thnsp;15 U.S.C. 78a et seq.
\16\&thnsp;17 CFR 228.10 et seq.
\17\&thnsp;17 CFR 229.10 et seq.
\18\&thnsp;17 CFR 210.1–01 et seq.
\19\&thnsp;17 CFR 249.330; 17 CFR 274.101.
\20\&thnsp;17 CFR 249.331; 17 CFR 274.128.
\21\&thnsp;15 U.S.C. 80a–1 et seq.
\22\&thnsp;17 CFR 270.30a–2.
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I. Background
The strength of the U.S. financial markets depends on investor
confidence. Recent events involving allegations of misdeeds by
corporate executives, independent auditors and other market
participants have undermined that confidence.\23\ In response to this
threat to the U.S. financial markets, Congress passed, and the
President signed into law, the Sarbanes-Oxley Act of 2002 (the
“Sarbanes-Oxley Act”),\24\ which effects sweeping corporate
disclosure and financial reporting reform.
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\23\&thnsp;See, for example, John Waggoner and Thomas A.
Fogarty, “Scandals Shred Investors” Faith: Because of
Enron, Andersen and Rising Gas Prices, the Public Is More Wary Than
Ever of Corporate America,” USA Today, May 5, 2002, and Louis
Aguilar, “Scandals Jolting Faith of Investors,” Denver
Post, June 27, 2002.
\24\&thnsp;Pub. L. 107–204, 116 Stat. 745 (2002).
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This release is one of several that the Commission is required to
issue to implement provisions of the Sarbanes-Oxley Act. In this
release we propose rules to implement the following three provisions of
the Sarbanes-Oxley Act:
&sbull; Section 407, requiring the Commission to adopt rules:
(1) requiring a company to disclose whether its audit committee
includes at least one member who is a financial expert; and (2)
defining the term “financial expert”;
&sbull; Section 406, requiring the Commission to adopt rules
requiring a company to disclose whether it has adopted a code of ethics
for the company's senior financial officers, and if not, the reasons
therefor, as well as any changes to, or waiver of any provision of,
that code of ethics; and
&sbull; Section 404, requiring the Commission to adopt rules
requiring a company's management to present an internal control report
in the company's annual report containing: (1) A
[[Page 66209]]
statement of the responsibility of management for establishing and
maintaining an adequate internal control structure and procedures for
financial reporting; and (2) an assessment, as of the end of the
company's most recent fiscal year, of the effectiveness of the
company's internal control structure and procedures for financial
reporting. Section 404 also requires the company's registered public
accounting firm&thnsp;\25\ to attest to, and report on, management's
assessment.
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\25\&thnsp;The term “registered public accounting
firm” is defined in section 2(a)(12) of the Sarbanes-Oxley Act
to mean a public accounting firm registered with the Public Company
Accounting Oversight Board (the “PCAOB”) in accordance
with the Sarbanes-Oxley Act.
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In connection with our proposed rules to implement the internal control
report requirements included in section 404 of the Sarbanes-Oxley Act,
we also propose several conforming revisions to our recently adopted
certification rules and related requirements.\26\
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\26\&thnsp;These include Exchange Act Rules 13a–14,
13a–15, 15d–14, 15d–15, Investment Company Act
Rules 30a–2 and 30a–3, Item 307 of Regulations S–B
and S–K and the forms of certification included in Forms
10–Q, 10–QSB, 10–K, 10–KSB, 20–F,
40–F, N–SAR and N–CSR.
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II. Discussion of Proposals
A. Proposed Disclosure About Financial Experts Serving on a Company's
Audit Committee
Many of the recent corporate scandals have centered on the quality
of a company's financial disclosure. These events have, among other
things, highlighted problems that can occur as a result of inadequate
oversight of a company's management and auditors by the company's board
of directors or audit committee. The Commission historically has
encouraged companies to establish independent audit committees to
oversee the work and independence of auditors. For example, in 1972 the
Commission recommended that companies establish audit committees
composed of outside directors.\27\ Others have expressed their support
for independent audit committees, including the National Commission on
Fraudulent Financial Reporting, also known as the Treadway
Commission,\28\ and the General Accounting Office.\29\ In 1999, we
adopted rules requiring companies to disclose whether their audit
committee members are independent, as defined by the relevant listing
standards.\30\
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\27\&thnsp;Accounting Series Release (ASR) 123 (March 23, 1972).
\28\&thnsp;See the Report of the National Commission on
Fraudulent Financial Reporting (1987). This commission, also known
as the Treadway Commission, was sponsored by the AICPA, the American
Accounting Association, the Financial Executives Institute (now
Financial Executives International), the Institute of Internal
Auditor and the National Association of Accountants. Collectively,
these groups were known as the Committee of Sponsoring
Organizations, or COSO.
\29\&thnsp;GAO, “CPA Audit Quality: Status of Actions
Taken to Improve Auditing and Financial Reporting of Public
Companies,” at 5 (GAO/AFMD–89–38, March 1989).
\30\&thnsp;Release No. 34–42266 (Dec. 22, 1999) [64 FR
73389]. This release addressed numerous issues related to auditor
independence.
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In 1998, the New York Stock Exchange, Inc. (the “NYSE”)
and the National Association of Securities Dealers, Inc. (the
“NASD”) sponsored a committee to study the effectiveness of
audit committees. This committee became known as the Blue Ribbon
Committee on Improving the Effectiveness of Corporate Audit Committees
(the “Blue Ribbon Committee”). In its 1999 report, the Blue
Ribbon Committee recognized the importance of the audit committee in
overseeing the corporate accounting and financial controls and
reporting of companies.\31\ The Blue Ribbon Committee noted that,
because of this important role, an audit committee has “a more
recognizable need for members with accounting and/or related financial
expertise.” Without some level of financial competence, members
of an audit committee may be unable to adequately perform their vital
corporate duties. In response to this report, the NYSE, the NASD,\32\
the American Stock Exchange, Inc. (the “AMEX”) and the
Pacific Exchange, Inc. (the “PCX”) adopted rules regarding
the composition of listed companies” audit committees.\33\
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\31\&thnsp;See Report and Recommendations of the Blue Ribbon
Committee on Improving the Effectiveness of Corporate Audit
Committees (1999).
\32\&thnsp;The NASD rules referred to herein apply to NASDAQ
listed companies.
\33\&thnsp;NYSE Rule 303.01, NASD Rule 4350(d)(2), AMEX Company
Guide §&thnsp;121 and PCX Equities Rule 5.3(b). See also
Release No. 34–42233 (December 14, 1999) [64 FR 71529],
Release No. 34–42231 (December 14, 1999) [64 FR 71523],
Release No. 34–42232 (December 14, 1999) [64 FR 71518], and
Release No. 34–43941 (February 7, 2001) [66 FR 10545]
respectively.
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The NYSE's and the PCX's rules require at least one member of a
listed company's audit committee to have “accounting or related
financial management expertise, as the Board of Directors interprets
such qualification in its business judgment.”&thnsp;\34\ The NASD
and the AMEX have similar rules that require each listed company to
certify that it has, and will continue to have, at least one member of
the audit committee that has past employment experience in finance or
accounting, a professional certification in accounting, or comparable
experience or background that demonstrates the individual's financial
sophistication.\35\ These rules provide, by way of example, that a
person who is or has been a chief executive officer, chief financial
officer or other senior corporate officer with financial oversight
responsibilities satisfies this criterion. In addition, all four self-
regulatory organizations require all members of the audit committee to
be independent and to be (or soon become) financially literate, subject
to limited exceptions.\36\ While the NYSE and PCX rules permit a
company's board of directors to interpret the financial literacy
requirements, the NASD and AMEX rules define financial literacy as
“the ability to read and understand fundamental financial
statements, including a company's balance sheet, income statement, and
cash flow statement.”&thnsp;\37\
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\34\&thnsp;NYSE Rule 303.01 and PCX Rule 5.3(b).
\35\&thnsp;NASD Rule 4350(d)(2) and AMEX Company Guide
§&thnsp;121.
\36\&thnsp;For example, the NASD Manual states that audit
committee members must become able to read and understand
fundamental financial statements within a reasonable time after
being appointed to the audit committee. Similarly, the NYSE listing
standard require such appointees to become financially literate, as
that term is interpreted by the board of directors, within a
reasonable period of time after appointment. Therefore, these rules
do not require that members be so qualified at the time of
appointment. Also, in general, with respect to foreign private
issuers, the self-regulatory organization rules accommodate
differences in home country practices regarding, among other things,
audit committee composition. The Sarbanes-Oxley Act does not exempt
foreign private issuers from the financial expert disclosure
requirements. Our proposed rules similarly do not include an
exemption for foreign private issuers.
\37\&thnsp;Id.
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Although the NYSE, NASD, AMEX and PCX already have rules regarding
the financial expertise of audit committee members, not all companies
that are required to file reports under Sections 13(a) and 15(d) of the
Exchange Act are subject to these requirements. Furthermore, the
Sarbanes-Oxley Act directs us to adopt rules defining the term
“financial expert” and specifies several attributes that we
must consider in crafting the definition. These attributes are more
detailed and rigorous than those reflected in the current self-
regulatory organization rules. Therefore, it is possible that a person
who previously qualified as a financial expert under the broader
guidelines included in the rules of the self-regulatory organizations
may not have sufficient expertise and experience to be considered a
financial expert under our proposed rules.\38\ In particular, our
[[Page 66210]]
proposed rules would require a financial expert to have experience
preparing or auditing financial statements of a company that files
reports with us and experience with internal controls and procedures
for financial reporting (or similar expertise and experience in the
board of directors' judgment). The proposed disclosure requirements
regarding audit committee financial experts are described below.
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\38\&thnsp;The NYSE has indicated that it will await the
Commission's interpretation of the definition of the term
“financial expert” before proposing amendments to its
rules. See File No. SR–NYSE–2002–33 (pending
before the Commission). The NASD has indicated that it intends to
file rule proposals for the Nasdaq Stock Market with the Commission
addressing similar issues. Although we will continue to work with
the self-regulatory organizations to reconcile to the extent
possible the various definitions of expert.
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1. Proposed Disclosure Requirements
We propose to add new Item 309 to Regulations S–K and
S–B. In addition, we propose to add new Item 15(b) to Form
20–F and new Instruction B.(8) to Form 40–F. These proposed
items would be identical in substance and entitled, “Audit
Committee Financial Experts.” The proposed items would require
companies to disclose:
&sbull; The number and names of persons that the board of
directors has determined to be the financial experts serving on the
company's audit committee; and
&sbull; Whether the financial expert or experts are
“independent,” as that term is used in section 10A(m)(3) of
the Exchange Act, and if not, an explanation of why they are not.\39\
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\39\&thnsp;15 U.S.C. 78j–1(m)(3). The Sarbanes-Oxley Act
amended the Exchange Act to add this section.
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If the company does not have a financial expert serving on its audit
committee, the company must disclose that fact and explain why it has
no financial expert. For purposes of the proposed disclosure, the term
“audit committee” would be defined by section 3(a)(58) of
the Exchange Act.\40\
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\40\&thnsp;Section 3(a)(58) of the Exchange Act, as amended by
the Sarbanes-Oxley Act, defines the term “audit
committee” as “a committee (or equivalent body)
established by and amongst the board of directors of an issuer for
the purpose of overseeing the accounting and financial reporting
processes of the issuer and audits of the financial statements of
the issuer; and * * * if no such committee exists with
respect to an issuer, the entire board of directors of the
issuer.” 15 U.S.C. 78c(a)(58).
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Although the Sarbanes-Oxley Act does not specifically require
disclosure of the number or names of the financial experts,\41\ we
believe that it is appropriate to propose these requirements. Investors
likely would be interested in knowing how many financial experts a
company's board has determined are serving on its audit committee, or
whether it has determined that all of the audit committee members are
financial experts. Furthermore, disclosure of the names of the
company's financial expert or experts would assist investors in
evaluating the company's annual report and proxy or information
statement disclosure that describes the background and business
experience of the company's directors.\42\
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\41\&thnsp;The Sarbanes-Oxley Act only directs the Commission to
adopt rules requiring disclosure of whether or not the audit
committee has at least one member who is a financial expert and, if
not, why. See section 407 of the Sarbanes-Oxley Act.
\42\&thnsp;See Item 401(e) of Regulation S–K and Item
401(a)(4) of Regulation S–B [17 CFR 229.401(e) and
228.401(a)(4)].
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The primary benefit of having a financial expert serving on a
company's audit committee is that the person, with his or her enhanced
level of financial sophistication or expertise, can serve as a resource
for the audit committee as a whole in carrying out its functions.\43\
The mere designation of the financial expert should not impose a higher
degree of individual responsibility or obligation on a member of the
audit committee. Nor do we intend for the financial expert designation
to decrease the duties and obligations of other audit committee members
or the board of directors. Furthermore, in order to avoid any confusion
in the context of section 11 of the Securities Act,\44\ we do not
intend for such a person to be considered an expert for purposes of
section 11 solely as a result of his or her designation as a financial
expert on the audit committee. The role of the financial expert is to
assist the audit committee in overseeing the audit process, not to
audit the company. A conclusion that a financial expert is an
“expert” for purposes of section 11 might suggest a higher
level of due diligence than is consistent with the audit committee's
oversight responsibilities.
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\43\&thnsp;See Report and Recommendations of the Blue Ribbon
Committee on Improving the Effectiveness of Corporate Audit
Committees (1999).
\44\&thnsp;15 U.S.C. 77k.
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Section 407 of the Sarbanes-Oxley Act does not require disclosure
of whether the financial expert is independent. However, we believe
that such disclosure may be important to investors. Investors may be
interested to know, for example, if the only financial expert on the
audit committee is the company's chief financial officer or another
individual who is responsible for, or participates in, the preparation
of the company's financial statements. Therefore, we propose to require
disclosure of whether the identified financial expert or experts on the
audit committee are independent, as that term is used in section
10A(m)(3) of the Exchange Act, and if not, an explanation of why they
are not. In addition, we intend to propose rules directing the national
securities exchanges and national securities association to require a
company to have a completely independent audit committee as a condition
to listing.\45\
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\45\&thnsp;See section 301 of the Sarbanes-Oxley Act.
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Some companies do not have boards of directors and therefore do not
have board audit committees. For example, some limited liability
companies and limited partnerships that do not have a corporate general
partner may not have an oversight body that is the equivalent of an
audit committee. It may be important to investors to be aware that such
entities do not have such oversight bodies. Therefore, we do not
propose to exempt these entities from the proposed financial expert
disclosure requirements. If a limited liability company or limited
partnership does not have a similar oversight body, it must explain
that its organizational structure does not provide for such a body and
that it therefore does not have an audit committee. We do, however,
propose to exempt asset-backed issuers from this proposed disclosure
requirement. Because of the nature of these entities, such issuers are
subject to substantially different reporting requirements. Most
significantly, such issuers are not required to file financial
statements like other companies. Therefore, we do not believe
disclosure of whether such companies have a financial expert on its
audit committee would be of interest to investors.
Request for Comment
&sbull; Would investors benefit from disclosure of the number
of the financial experts serving on the company's audit committee? Or
would it suffice to require disclosure only of whether at least one
financial expert serves on the audit committee?
&sbull; Do investors need to know the names of the financial
experts on the audit committee? Would disclosure of the names
discourage people from serving as financial experts on an audit
committee?
&sbull; Should the Commission specifically address the issue
of the degree of individual responsibility, obligation or liability
under state or federal law of a person designated as a financial expert
as a result of the designation? If the Commission should address this
issue, how should it do so?
&sbull; Should we use a term other than “financial
expert”? For example, would
[[Page 66211]]
the term “audit committee financial expert” be a more
appropriate title?
&sbull; Is there other relevant information about the
financial expert or experts that a company should have to disclose? For
example, should we expand the disclosure required under Item 401(e) of
Regulations S–K and S–B, as it relates to directors that
the company has determined to be financial experts? If so, how?
&sbull; Should we require disclosure of whether the financial
experts are independent, as proposed? If so, should we define
“independent” in the same manner as the term is used in
section 10A(m)(3) of the Exchange Act?
&sbull; Should we incorporate an independence requirement into
the definition of “financial expert” so that any designated
financial expert must be independent to qualify under the definition?
2. Proposed Definition of “Financial Expert”
The Sarbanes-Oxley Act requires the Commission, in defining the
term “financial expert,” to consider whether a person has,
through education and experience as a public accountant or auditor or a
principal financial officer, controller,\46\ or principal accounting
officer of an issuer, or from a position involving the performance of
similar functions:
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\46\&thnsp;The Sarbanes-Oxley Act uses the term
“comptroller.” It is our understanding that a
comptroller position generally is the position in a government
agency or non-profit organization with oversight responsibilities
for the agency's or organization's primary accounting function. We
believe that for-profit organizations typically use the term
“controller” to describe this function. Therefore,
throughout this release, we have used the term
“controller” instead of the term
“comptroller.”
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(1) An understanding of generally accepted accounting principles
and financial statements;
(2) Experience in: (a) The preparation or auditing of financial
statements of generally comparable issuers; and (b) the application of
such principles in connection with the accounting for estimates,
accruals, and reserves;
(3) Experience with internal accounting controls; and
(4) An understanding of audit committee functions.
The “financial expert” definition included in the
proposed rules incorporates these four “attributes” with
several modifications.\47\ We also propose to require the financial
expert's experience to be related to companies that were, at the time
he or she held the position, publicly reporting companies. We believe
this requirement is appropriate because a person with experience as a
principal financial officer or principal accounting officer of a
private company may not have been exposed to the reporting requirements
of public companies.
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\47\&thnsp;See Instructions 1–4 to proposed Item 309 of
Regulations S–K and S–B. In particular, we propose to
break the four attributes into five attributes and several changes
to clarify that the required attributes include experience applying
generally accepted accounting principles in connection with the
accounting for estimates, accruals and reserves that are generally
comparable to those, if any, used in the company's financial
statements, and experience preparing or auditing financial
statements that present accounting issues that are generally
comparable to those raised by the company's financial statements.
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Moreover, the proposed definition states that the board of
directors can conclude that a person is a financial expert if, in lieu
of having experience as a public accountant, auditor, principal
financial officer, principal accounting officer, or controller, or
experience in a position involving the performance of similar
functions, the person has experience in a position that results, in the
judgment of the board of directors, in the person having similar
expertise and experience. If the board makes such a determination, it
would be required to disclose the basis for that determination. To
qualify as a financial expert, a person would, in all cases, have to
possess all of the attributes listed in the proposed definition.
The instructions to proposed Item 309 of Regulations S–K and
S–B would therefore define the term “financial
expert” to mean a person who has, through education and
experience as a public accountant or auditor or a principal financial
officer, controller, or principal accounting officer of a company that,
at the time the person held such position, was required to file reports
pursuant to section 13(a) or 15(d) of the Exchange Act, or experience
in one or more positions that involve the performance of similar
functions (or that results, in the judgment of the company's board of
directors, in the person's having similar expertise and experience),
the following attributes:
a. An understanding of generally accepted accounting principles and
financial statements;
b. Experience applying such generally accepted accounting
principles in connection with the accounting for estimates, accruals,
and reserves that are generally comparable to the estimates, accruals
and reserves, if any, used in the registrant's financial statements;
c. Experience preparing or auditing financial statements that
present accounting issues that are generally comparable to those raised
by the registrant's financial statements;
d. Experience with internal controls and procedures for financial
reporting;&thnsp;\48\ and
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\48\&thnsp;Section 407 of the Sarbanes-Oxley Act states that,
among other attributes, the SEC, in defining the term
“financial expert,” should consider whether a person has
experience with internal accounting controls. This release proposes
rules under section 404, which would require an annual report by
management evaluating the effectiveness of its internal controls and
procedures for financial accounting (a defined term). We believe
that this term has substantially the same meaning as “internal
accounting controls” in section 407. Therefore, we propose to
use the newly defined term for consistency.
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e. An understanding of audit committee functions.
In determining whether a potential financial expert has all of the
requisite attributes, the board of directors&thnsp;\49\ must evaluate
the totality of an individual's education and experience.\50\ The
company should consider a variety of factors in making that evaluation,
including:
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\49\&thnsp;See section II.A.3., Determination by the Board of
Directors of Who Is a Financial Expert, below.
\50\&thnsp;This approach is consistent with the approach taken
in NASD and NYSE rules. The NASD requires each issuer to have
“at least one member of the audit committee that has past
employment experience in finance and accounting, requisite
professional certification in accounting, or any other comparable
experience or background which results in the individual's financial
sophistication, including being or having been a chief executive
officer, chief financial officer or other senior officer with
financial oversight responsibilities.” NASD Rule
4350(d)(2)(A). Similarly, the NYSE requires at least one member who
has “accounting or related financial management
expertise.” NYSE Listed Company Manual 303.01. Both of these
provisions focus on the level of expertise without providing any
mechanical formula for determining whether an individual has the
requisite expertise.
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&sbull; The level of the person's accounting or financial
education, including whether the person has earned an advanced degree
in finance or accounting;
&sbull; Whether the person is a certified public accountant,
or the equivalent, in good standing, and the length of time that the
person actively has practiced as a certified public accountant, or the
equivalent;
&sbull; Whether the person is certified or otherwise
identified as having accounting or financial experience by a recognized
private body that establishes and administers standards in respect of
such expertise, whether that person is in good standing with the
recognized private body, and the length of time that the person has
been actively certified or identified as having this expertise;
&sbull; Whether the person has served as a principal financial
officer, controller or principal accounting officer of a company that,
at the time the person held such position, was required to file reports
pursuant to section 13(a) or 15(d) of the Exchange Act, and if so, for
how long;
[[Page 66212]]
&sbull; The person's specific duties while serving as a public
accountant, auditor, principal financial officer, controller, principal
accounting officer or position involving the performance of similar
functions;
&sbull; The person's level of familiarity and experience with
all applicable laws and regulations regarding the preparation of
financial statements that must be included in reports filed under
section 13(a) or 15(d) of the Exchange Act;
&sbull; The level and amount of the person's direct experience
reviewing, preparing, auditing or analyzing financial statements that
must be included in reports filed under section 13(a) or 15(d) of the
Exchange Act;
&sbull; The person's past or current membership on one or more
audit committees of companies that, at the time the person held such
membership, were required to file reports pursuant to section 13(a) or
15(d) of the Exchange Act;
&sbull; The person's level of familiarity and experience with
the use and analysis of financial statements of public companies; and
&sbull; Whether the person has any other relevant
qualifications or experience that would assist him or her in
understanding and evaluating the registrant's financial statements and
other financial information and to make knowledgeable and thorough
inquiries whether:
&sbull; The financial statements fairly present the financial
condition, results of operations and cash flows of the company in
accordance with generally accepted accounting principles; and
&sbull; The financial statements and other financial
information, taken together, fairly present the financial condition,
results of operations and cash flows of the company.
In the case of a foreign private issuer, the board of directors
also should consider the person's experience with public companies in
the foreign private issuer's home country, generally accepted
accounting principles used by the issuer, and the reconciliation of
financial statements with U.S. generally accepted accounting
principles.
This is not intended to be an exhaustive list of the factors that
the board of directors should consider in assessing whether a person
qualifies as a financial expert. Moreover, the proposed rules do not
specify the number of listed factors that a financial expert should
satisfy; satisfaction of any specific number of factors would be
neither necessary nor sufficient for a person to be considered a
financial expert. Most of these factors require a qualitative
assessment of a potential expert's level of knowledge or experience.
The fact that a person previously has served on an audit committee
would not, by itself, justify the board of directors in
“grandfathering” that person as a financial expert under
our proposed definition. Similarly, the fact that a person has
experience as a public accountant or auditor, or a principal financial
officer, controller or principal accounting officer or experience in a
similar position would not, by itself, justify the board of directors
in deeming the person to be a financial expert. The board of directors
would have to confirm that these persons have the requisite attributes
and the right mix of education and experience.
Some individuals who are particularly knowledgeable and experienced
in accounting and financial issues may have the requisite attributes
and mix of knowledge and experience to qualify as financial experts,
even though they may not have served in one of the specifically
identified positions. The board of directors would have to determine
whether an individual's qualifications, in the aggregate, satisfy the
financial expert definition.
Because of the significant role the audit committee plays in the
filing of a public company's financial statement, including the
preparation and filing of their own report, we would find it hard to
believe that an accountant serving as a financial expert on an audit
committee would not be practicing before the Commission.\51\ Therefore,
any accountant, while suspended or barred from practice under Rule
102(e)&thnsp;\52\ of the Commission's Rules of Practice, generally
would not be eligible to serve as a financial expert.
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\51\&thnsp;See 17 CFR 201.102(f).
\52\&thnsp;See 17 CFR 201.102(e).
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Request for Comment
&sbull; Should we modify the proposed definition of
“financial expert” in any way? If so, how?
&sbull; Should we require a financial expert to have direct
experience preparing or auditing financial statements of reporting
companies? Should experience reviewing or analyzing such financial
statements suffice? If so, why?
&sbull; Should a financial expert have to possess all of the
“attributes” listed in the proposed definition? Should we
broaden the scope of individuals who may qualify as such an expert?
&sbull; Do the five attributes adequately describe the
qualities that a financial expert should have? Should we add any
attributes?
&sbull; Although we do not intend for the list of factors that
a company should consider in assessing a potential financial expert's
qualifications to be exhaustive, should we add any factors to the list?
If so, what other factors should we include? Conversely, should we
delete any proposed factors from the list? If so, which factors should
we delete?
&sbull; Should the proposed rules provide for a different
standard or methodology for assessing a financial expert's
qualifications? If so, describe the preferred standard or methodology.
3. Determination by the Board of Directors of Who Is a Financial Expert
The Sarbanes-Oxley Act does not explicitly state who at the company
should determine whether any of the audit committee members is a
financial expert. Management is responsible for preparing the financial
statements. Therefore, it seems inappropriate for management to assess
the qualifications of audit committee members. Similarly, it does not
seem appropriate for the members of the audit committee, alone, to
assess their own qualifications. We believe that the board of directors
in its entirety, as the most broad-based body within the company, is
best-equipped to make the decision. Therefore, we propose to require
the company to disclose the number and names of the persons that the
board of directors has determined to be the financial expert or experts
serving on the company's audit committee.
Certain foreign private issuers have a two-tier board, with one
tier designated as the management board and the other tier designated
as the supervisory or non-management board. In this circumstance, we
believe that the supervisory or non-management board would be the body
within the company that is best-equipped to make the decision.
Request for Comment
&sbull; Will investors find this information useful? Is there
more useful information on how financial experts are determined?
&sbull; Should our rules require the company to disclose the
persons who are responsible for making the financial expert
determination on behalf of the company? Is the board of directors the
appropriate body to make such determination?
4. Impracticability of a “Bright-Line” Test
We considered, but do not propose, a “bright-line” test
for making the financial expert determination that
[[Page 66213]]
eliminates all elements of subjectivity. We do not believe that such a
test would best further the purposes of the statute. Our proposed
“financial expert” definition requires a qualifying
individual to possess all of the specified attributes, and in that
respect, does provide somewhat of a “bright-line” by
setting forth several fairly specific and objective standards to limit
the pool of potential financial expert candidates. The
“factors” also provide guidance to assist the board of
directors in making the financial expert determination. Clearly,
certain factors such as level of education and years spent in a
financial position are important indicia of whether an individual has
such knowledge and experience.
However, we are not convinced that any bright-line rule or fixed
formula that requires a financial expert to have specific academic
credentials or a specific number of years of service in a financial or
accounting position can ensure that an individual has the level of
understanding and experience required by the statute. As the Blue
Ribbon Committee stated regarding corporate governance and audit
committees, “one size doesn't fit all.”&thnsp;\53\ Indeed,
the more complicated the business, the greater the need for a higher
threshold of financial expertise. Therefore, we believe that a bright-
line test would be inappropriate for such determinations.
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\53\&thnsp;See Report and Recommendations of the Blue Ribbon
Committee on Improving the Effectiveness of Corporate Audit
Committees, at 7 (1999).
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Request for Comment
&sbull; Should we create a bright-line test for the definition
of “financial expert'? If so, what should the test be?
5. Location of Disclosure
The Sarbanes-Oxley Act expressly states that companies must include
the financial expert disclosure in their periodic reports required
pursuant to section 13(a) or 15(d) of the Exchange Act. We propose to
require companies to include the new disclosure in their annual reports
on Forms 10–K&thnsp;\54\ and 10–KSB.\55\ We do not propose
to require companies to also include this disclosure in their quarterly
reports because we think that annual disclosure would adequately
fulfill investors' informational needs. In this regard, we note that
our pending Form 8–K proposals would require a company to
disclose the arrival or departure of a director.\56\ This information
would be included in part III of those forms. Consequently, the company
could incorporate this information by reference from its definitive
proxy or information statement that involves an election of directors,
if the company voluntarily chooses to include this information in its
proxy or information statement and then files such statement with the
Commission no later than 120 days after the end of the fiscal year
covered by the Form 10–K or 10–KSB.\57\ We also propose to
require this disclosure in annual reports filed by a foreign private
issuer on Form 20–F&thnsp;\58\ and by a Canadian issuer on Form
40–F.\59\
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\54\&thnsp;Referenced in 17 CFR 249.310.
\55\&thnsp;Referenced in 17 CFR 249.310b.
\56\&thnsp;Therefore if, for example, a director who is the
audit committee financial expert resigned or was removed from the
board one month after the company filed its annual report, the
company would have to disclose this event on a Form 8–K filed
within two business days after the director's departure. See Release
No. 33–8106 (June 17, 2002) [67 FR 42914]. The proposals in
that release have not yet been adopted. The proposals do not require
disclosure of whether the departing director is a financial expert.
We are seeking comment on whether we should require such disclosure.
\57\&thnsp;See General Instruction E(3) to Form 10–KSB [17
CFR 249.310b] and General Instruction G(3) to Form 10–K [17
CFR 249.310].
\58\&thnsp;Referenced in 17 CFR 249.220f.
\59\&thnsp;Referenced in 17 CFR 249.240f.
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Request for Comment
&sbull; Should we also require the proposed financial expert
disclosure to appear in the company's proxy or information statement?
Is this information relevant to a security holder's decision to vote
for a particular director or to elect, approve or ratify the choice of
an independent public accountant?
&sbull; Should we require the company to also disclose this
information in its quarterly reports?
&sbull; Should we also require such disclosure in registration
statements filed under the Securities Act?
&sbull; Should the company have to disclose specifically the
arrival or departure of a financial expert promptly after the
occurrence of the event? If so, should we modify our Form 8–K
proposed item regarding the arrival and departure of a director to also
require a company to disclose whether the departing director was, or
arriving director will be, a financial expert serving on the company's
audit committee? Should a company make appropriate disclosures if: a
financial expert leaves the audit committee, but remains on the board
of directors; or an existing director joins the audit committee as a
financial expert? Should a company only have to file a Form 8–K
if it previously disclosed in its annual report that it had a financial
expert and now has none?
&sbull; A company currently may not have an audit committee
member who qualifies as a financial expert under the proposed
definition but may intend to seek one. In such a case, the proposed
rules would require a company to disclose that it does not have a
financial expert on its audit committee. However, the company could
explain that it is searching for a qualified individual to serve on its
audit committee. Should we provide companies with a transition period
to find such a person? If so, what would be an appropriate transition
period?
6. Registered Investment Companies
We are proposing to implement section 407 of the Sarbanes-Oxley Act
with respect to registered management investment companies by adding
disclosure requirements similar to those in proposed Item 309 of
Regulation S–K to proposed Form N–CSR.\60\ Proposed Item 4
of Form N–CSR would require a registered management investment
company to disclose annually: (i) The number and names of persons that
the board of directors has determined to be the financial experts
serving on the investment company's audit committee; (ii) whether the
financial expert or experts are independent, and if not, an explanation
of why they are not; and (iii) if the investment company does not have
a financial expert serving on its audit committee, the fact that there
is no financial expert and an explanation of why it has no financial
expert.\61\ In addition, the investment company would be required to
disclose the basis for a determination by its board of directors that a
person is a financial
[[Page 66214]]
expert if, in lieu of having experience as a public accountant,
auditor, principal financial officer, principal accounting officer, or
controller, or experience in a position involving the performance of
similar functions, the person has experience in a position that
results, in the judgment of the board, in the person having similar
experience and expertise.\62\ We are proposing the same definition of
“financial expert” for investment companies as for
operating companies, except that we are not including the factor
relevant to foreign private issuers.\63\
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\60\&thnsp;Referenced in 17 CFR 249.331 and 274.128. A
management investment company is an investment company other than a
unit investment trust or face-amount certificate company. See
section 4 of the Investment Company Act [15 U.S.C. 80a–4]. A
unit investment trust (“UIT”) is “an investment
company which (A) is organized under a trust indenture, contract of
custodianship or agency, or similar instrument, (B) does not have a
board of directors, and (C) issues only redeemable securities, each
of which represents an undivided interest in a unit of specified
securities; but does not include a voting trust.” Section 4(2)
of the Investment Company Act [15 U.S.C. 80a–4(2)]. A face-
amount certificate company is an investment company that engages or
proposes to engage in the business of issuing certain face-amount
certificates. Section 4(1) of the Investment Company Act [15 U.S.C.
80a–4(1)].
\61\&thnsp;The proposed amendments would add similar disclosure
requirements applicable to small business investment companies
(“SBICs”) to Item 102P3 of Form N–SAR. Proposed
Instruction (b) to Item 102P3 of Form N–SAR (referenced in 17
CFR 249.330 and 274.101). SBICs are investment companies that are
licensed as SBICs under the Small Business Investment Act of 1958.
We are proposing to add financial expert disclosure requirements for
SBICs to Form N–SAR because SBICs would not be required to
file reports on proposed Form N–CSR.
\62\&thnsp;Proposed Instruction 3 to Item 4 of proposed Form
N–CSR; proposed Instruction (b)(3) to Item 102P3 of Form
N–SAR.
\63\&thnsp;Proposed Instructions 2 and 4 to Item 4 of proposed
Form N–CSR.
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A financial expert would be considered to be
“independent” if he or she: (i) meets the criteria set
forth in section 10A(m)(3)(B)(i) of the Exchange Act; and (ii) is not
an “interested person” of the investment company as defined
in section 2(a)(19) of the Investment Company Act of 1940.\64\ We have
substituted the section 2(a)(19) test for the criteria set forth in
section 10A(m)(3)(B)(ii) of the Exchange Act, which would apply to
operating companies and require that the audit committee member not be
an affiliated person of the issuer or any subsidiary in order to be
considered “independent.” The section 2(a)(19) test is more
appropriate for registered investment companies because it is tailored
to capture the broad range of affiliations with investment advisers,
principal underwriters, and others that are relevant to
“independence” in the case of investment companies.
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\64\&thnsp;Proposed Item 4 of proposed Form N–CSR.
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The proposed disclosure requirements would apply to all registered
management investment companies, regardless of whether they are
required to file reports under section 13(a) or 15(d) of the Exchange
Act. They would not apply to unit investment trusts, which are
unmanaged investment companies that hold specified securities and,
unlike managed investment companies, are not required to provide
shareholder reports containing audited financial statements.
Request for Comment
&sbull; Should the definition of “financial
expert” be modified for investment companies? Are the factors
that are relevant in determining whether someone is a “financial
expert” different for investment companies?
&sbull; What definition of “independence” should
the disclosure requirements apply with respect to financial experts?
Should the definition incorporate the criteria set forth in section
10A(m)(3)(B)(i) of the Exchange Act and section 2(a)(19) of the
Investment Company Act, as proposed, or a different test, for example,
the test used for operating companies?
&sbull; Should disclosure with respect to financial experts on
an investment company's audit committee be required annually, as
proposed? Should this disclosure be required on each report on Form
N–CSR or N–SAR, i.e., semi-annually?
&sbull; For investment companies that would be required to
file reports on proposed Form N–CSR, should the financial experts
disclosure be required on Form N–CSR or Form N–SAR? Should
small business investment companies, which otherwise would not be
required to file proposed Form N–CSR, be required to use Form
N–CSR for this purpose?
B. Proposed Code of Ethics Disclosure
1. Proposed Rules Compared to Section 406 of the Sarbanes-Oxley Act
Section 406(a) of the Sarbanes-Oxley Act directs the Commission to
issue rules requiring a company that is subject to the reporting
requirements of section 13(a) or 15(d) of the Exchange Act to disclose
whether or not the company has adopted a code of ethics for its senior
financial officers that applies to the company's principal financial
officer and controller or principal accounting officer, or persons
performing similar functions. The Sarbanes-Oxley Act states that the
rules also must require companies that have not adopted such a code of
ethics to explain why they have not done so.
The Act defines the term “code of ethics,” as used in
section 406, to mean such standards as are reasonably necessary to
promote:
&sbull; Honest and ethical conduct, including the ethical
handling of actual or apparent conflicts of interest between personal
and professional relationships;
&sbull; Full, fair, accurate, timely and understandable
disclosure in the periodic reports required to be filed by the issuer;
and
&sbull; Compliance with applicable governmental rules and
regulations.
Section 406(b) of the Sarbanes-Oxley Act further directs the
Commission to require a company subject to the Exchange Act reporting
requirements to immediately disclose on Form 8–K, or by Internet
or other electronic means of dissemination, any change in, or waiver
of, a provision of its code of ethics for its senior financial
officers.
Although section 406 of the Sarbanes-Oxley Act focuses on whether
or not a company has adopted a code of ethics applicable to its senior
financial officers, we believe that it is appropriate to propose rules
that also apply to a company's principal executive officer. Investors
not only have an interest in knowing whether a public company holds its
senior financial officers to certain ethical standards, but also
whether a public company holds its principal executive officer to
ethical standards as well. Therefore, we believe that it is consistent
with the purposes of the Sarbanes-Oxley Act to extend the scope of
section 406 to also include a company's principal executive officer.
Specifically, we propose to require a company to disclose whether it
has adopted a written code of ethics that applies to its principal
executive officer, principal financial officer, principal accounting
officer or controller, or persons performing similar functions. We also
propose to broaden the definition of the term “code of
ethics” used in section 406 of the Sarbanes-Oxley Act to include
three additional factors described in more detail below.
2. Description of the Proposed Code of Ethics Disclosure Requirements
We propose to add new Item 406 to Regulations S–B and
S–K, new Item 15(c) to Form 20–F and new Instruction B.(9)
to Form 40–F to require a company subject to the Exchange Act
reporting requirements to disclose:
&sbull; Whether the company has adopted a written code of
ethics that applies to the company's principal executive officer,
principal financial officer, principal accounting officer or
controller, or persons performing similar functions;&thnsp;\65\ and
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\65\&thnsp;We expect that many companies already have a code of
ethics that applies to these officers, as well as additional
officers, directors and employees. We encourage companies to apply
the code of ethics to as broad a spectrum of personnel and
affiliates as practicable.
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&sbull; If the company has not adopted such a code of ethics,
the reasons it has not done so.
For purposes of this new disclosure item, we would define the term
“code of ethics” to mean a codification of standards that
is reasonably designed to deter wrongdoing and to promote:&thnsp;\66\
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\66\&thnsp;The Sarbanes-Oxley Act section 406(c) definition of
the term “code of ethics” does not include the phrase
“to deter wrongdoing” that we have incorporated into
proposed Item 406 of Regulations S–K and S–B, but we
think that it is appropriate to expand the definition in this
manner. Although codes of ethics typically are designed to promote
high standards of ethical conduct, they also generally seek to
instruct those to whom they apply as to improper or illegal conduct
or activity and to prohibit such conduct or activity.
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(1) Honest and ethical conduct, including the ethical handling of
actual
[[Page 66215]]
or apparent conflicts of interest between personal and professional
relationships;
(2) Avoidance of conflicts of interest, including disclosure to an
appropriate person or persons identified in the code&thnsp;&thnsp;\67\
of any material transaction or relationship that reasonably could be
expected to give rise to such a conflict;
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\67\&thnsp;Under our proposal, although the company would retain
discretion to determine the identity of the appropriate person or
persons, such person should not be involved in the matter giving
rise to the conflict of interest. Furthermore, we believe the person
identified in the code should have sufficient status within the
company to engender respect for the code and the authority to
adequately deal with the persons subject to the code regardless of
their stature in the company.
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(3) Full, fair, accurate, timely, and understandable disclosure in
reports and documents that a company files with, or submits to, the
Commission and in other public communications made by the company;
(4) Compliance with applicable governmental laws, rules and
regulations;&thnsp;\68\
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\68\&thnsp;We propose to add “laws” to this prong of
the proposed definition. The Sarbanes-Oxley Act section 406(c)
definition refers only to compliance with applicable governmental
rules and regulations. This language also is intended to ensure
compliance with other provisions of the Sarbanes-Oxley Act,
including “up-the-ladder” reporting by lawyers,
“whistleblower” protection and the enhanced conflict of
interest provisions.
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(5) The prompt internal reporting to an appropriate person or
persons identified in the code of violations of the code;&thnsp;\69\
and
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\69\&thnsp;The concerns regarding the identification of
appropriate persons for the reporting of potential conflicts of
interest discussed above would similarly apply to the reporting of
violations of the code.
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(6) Accountability for adherence to the code.
The second, fifth and sixth prongs of this proposed definition
supplement the requirements specified by section 406 of the Sarbanes-
Oxley Act. We believe that these items are consistent with the
objectives of that section. A comprehensive code of ethics should set
forth guidelines requiring avoidance of conflicts of interests and
material transactions or relationships involving potential conflicts of
interests without proper approval. Moreover, an effective code of
ethics should describe the company's system for the internal reporting
of code violations.\70\ The code also should state clearly the
consequences for non-adherence to code provisions.
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\70\&thnsp;There are a number of provisions in the Sarbanes-
Oxley Act that require internal reporting of events. We believe that
it is incumbent upon public companies to coordinate these
requirements.
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In addition to providing the required disclosure, a company also
would have to file a copy of its ethics code as an exhibit to its
annual report.\71\ We believe investors would find such disclosure
useful.
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\71\&thnsp;See proposed Item 601(b)(14) of Regulations S–K
and S–B. Section 406 of the Sarbanes-Oxley Act does not state
that our rules must require a company to file a copy of the code of
ethics as an exhibit to its annual report, but we think investors
may be interested in examining the actual code itself, given that
codes are likely to vary significantly from one company to another.
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Request for Comment
&sbull; Should the rules address whether a company has a code
of ethics that applies to its principal executive officer, as proposed,
or should the rules track the language of section 406 of the Sarbanes-
Oxley Act and require a company only to disclose whether it has a code
of ethics that applies to its senior financial officers?
&sbull; Should we expand the definition of “code of
ethics,” as proposed, or should the definition adhere to the
language in section 406(c) of the Sarbanes-Oxley Act? Are there other
ethical principles that should be included in the definition?
&sbull; Should the rules cover a broader group of officers? If
so, which group of officers should they cover? Should the general
counsel be covered? Should all executive officers be
covered?&thnsp;\72\
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\72\&thnsp;Exchange Act Rule 3b–7 [17 CFR 240.3b–7]
defines the term “executive officer” as a registrant's
president, any vice president of the registrant in charge of a
principal business unit, division or function (such as sales,
administration or finance), any other officer who performs a policy-
making function or any other person who performs similar policy-
making functions for the registrant. Executive officers of
subsidiaries may be deemed executive officers of the registrant if
they perform such policy-making functions for the registrant.
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&sbull; Should the proposed rules require a company to
disclose whether it has a code of ethics that applies to its directors?
Do most companies have a code of ethics that applies to the board of
directors? Does the same code of ethics generally apply to the
company's executive officers and its directors?
&sbull; Should we require the company to describe its
procedures to ensure compliance with the code of ethics?
&sbull; Should we require the company to describe its
procedures for granting a waiver from a provision of its code of
ethics?
&sbull; Should we require the company to disclose the date of
adoption of its code of ethics and the date of the most recent update
or the company's frequency of review of the code?
&sbull; Should the company have to file the code of ethics as
an exhibit to its annual report as proposed? If not, should we also
require the company to describe the principal topics that the code
addresses?
&sbull; Should we require disclosure regarding the existence
of a code of ethics in our other reports and registration statements,
including our Securities Act and Exchange Act registration statements?
3. Content of the Code of Ethics
The proposed rules do not specify every detail that the company
must address in its code of ethics, or prescribe any specific language
that the code of ethics must include. They further do not specify the
procedures that the company should develop, or the types of sanctions
that the company should impose, to ensure compliance with its code of
ethics. We believe that ethics codes do, and should, vary from company
to company and that decisions as to the specific provisions of the
code, compliance procedures and disciplinary measures for ethical
breaches are best left to the company. In addition, such an approach is
consistent with our disclosure-based regulatory scheme.
Many companies already maintain codes of ethics or conduct.\73\
These codes often contain specific policies and restrictions
addressing, among other things, such issues as insider trading and
conflicts of interest. The proposed rules would not require a company
to adopt a code of ethics if it has not already done so, or to amend
its existing code of ethics, but they would require a company that does
not have a code of ethics that meets the definition in the rule for the
specified officers to explain why it does not have such a code. A pre-
existing ethics code may satisfy the requirements of proposed Item 406,
but a company should review its code upon our adoption of final rules
to determine whether the code meets all of the standards included in
the rules' definition of a “code of ethics.” If a company
has a code, but it does not satisfy all parts of the definition, the
company would not be able to affirm that it has the type of code
contemplated by the rules.
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\73\&thnsp;On August 16, 2002, NYSE submitted proposed new
listing standards that would, among other things, require all NYSE
listed companies to adopt a code of business conduct and ethics
consistent with the principles enumerated in the listing standards.
See File No. SR–NYSE–2002–33. The NASD has
indicated that it intends to propose new listing standards that
would require a code of conduct for NASDAQ listed companies.
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4. Types of Companies That Would Be Subject to the Proposed Code of
Ethics Disclosure Requirements and Location of the Disclosure
All companies that file Form 10–K or 10–KSB reports
would be subject to the proposed disclosure requirement.\74\ We
[[Page 66216]]
also propose to require this disclosure in annual reports filed by a
foreign private issuer on Form 20–F and by a Canadian issuer on
Form 40–F.
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\74\&thnsp;This disclosure would be required by Item 10 of Form
10–K and Item 9 of Form 10–KSB.
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Request for Comment
&sbull; Should we require a company to also provide the
proposed code of ethics disclosure in its quarterly reports? Should
such disclosure be made in a company's proxy and information
statements? Should it be disclosed in Securities Act registration
statements?
&sbull; Should the requirement apply to foreign private
issuers, as proposed? If not, why?
5. Proposed Form 8–K or Internet Disclosure Regarding Changes to,
or Waivers From, the Code of Ethics
Section 406(b) of the Sarbanes-Oxley Act directs us to require
“immediate disclosure” by a company of any change to, or
waiver from, the company's code of ethics for its senior financial
officers.\75\ As discussed above, we propose to require the basic
ethics code disclosure with respect to a company's principal executive
officer as well as to its senior financial officers. We therefore also
propose to require current disclosure regarding changes to, or the
company's grant of a waiver from, a provision of the code of ethics
that applies to these same persons.
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\75\&thnsp;Under the proposed rules this would also include an
implicit waiver due to inaction on the part of the company with
respect to a reported or known violation of a code provision.
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On June 17, 2002, we proposed amendments to Form 8–K that
would expand significantly the number of disclosure items triggering a
Form 8–K filing requirement and accelerate the Form 8–K
filing deadline.\76\ In those proposals, we stated that we were
reviewing possible changes by self-regulatory organizations to their
corporate governance provisions, including changes that would require a
company to promptly disclose any revision that it makes to its code of
ethics, or ethics waiver that it grants.
---------------------------------------------------------------------------
\76\&thnsp;See Release No. 33–8106 (June 17, 2002) [67 FR
42914].
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In light of the directive in section 406(b), we propose to add an
item to the list of Form 8–K triggering events to require
disclosure of the following:
&sbull; A change to a company's code of ethics that applies to
the specified officers; or
&sbull; A grant of a waiver of an ethics code provision to a
specified officer.\77\
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\77\&thnsp;See proposed Item 5.05 to Form 8–K. In Release
No. 33–8106, we proposed to reorganize and renumber the Form
8–K items as part of our Form 8–K proposals. The
proposed Item 5.05 designation is consistent with the renumbering
scheme proposed in that release.
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If choosing to provide the required disclosure on Form 8–K,
the company would have to file the report within two business days
after it made the change or granted the waiver.\78\ As an alternative
to reporting this information on Form 8–K, section 406(b) of the
Sarbanes-Oxley Act contemplates a company's use of the Internet as a
method of disseminating this disclosure.\79\ Many companies maintain
websites to provide information about themselves to the public. A
company's website is often an obvious place for investors to find
information about a company.\80\ We therefore propose to allow a
company to use its own Internet website, if it has a website, as an
alternative means of disseminating the proposed required disclosure
about changes in, or waivers from, its code of ethics.\81\ Under the
proposed rules, a company would be able to take advantage of the
Internet dissemination option only if it had disclosed in its most
recently filed annual report on Form 10–K or
10–KSB:&thnsp;\82\
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\78\&thnsp;A two business day filing period is consistent with
the accelerated filing deadline that we proposed in Release No.
33–8106.
\79\&thnsp;Section 406(b) of the Sarbanes-Oxley Act states that
our rules should require a company to report this disclosure on Form
8–K or by “dissemination by the Internet or by other
electronic means.” Our proposed rules would permit optional
dissemination of the required disclosure through the company's
website; it is not clear whether there are “other electronic
means” that would result in widespread dissemination of the
disclosure that would be accessible by a company's investors and
potential investors. This release seeks comment on that issue.
\80\&thnsp;We are allowing website disclosure in these limited
circumstances consistent with the terms of section 406 of the
Sarbanes-Oxley Act. The present proposal does not indicate that the
Commission deems website postings as sufficient to broadly and
simultaneously disseminate information to the public in other
contexts.
\81\&thnsp;A company choosing to post proposed disclosure about
a change to its code of ethics on its website also would have to
post a copy of the amended provision on its website.
\82\&thnsp;See proposed Item 406(b) of Regulations S–K and
S–B. Because investors may not expect these disclosures to be
made on the company's website in lieu of a Form 8–K filing, we
are proposing to require a company to provide investors with advance
notice that it may choose to use this option. Otherwise, investors
may be confused regarding the location of this disclosure.
---------------------------------------------------------------------------
&sbull; That it intends to disclose these events on its
Internet website, and
&sbull; Its Internet website address.
If a company elects to disclose this information on its website, it
would have to do so within the same two-business day time period that
we propose to require for Form 8–K filings. In addition, we
propose that a company electing to provide disclosure in this manner
would have to make the disclosure available on its website for a period
of at least 12 months after it initially posts the disclosure. Although
the proposed rules would permit a company to remove information from
its website after the 12-month posting period, we propose to require
the company to retain this disclosure for a period of not less than
five years and to make it available to the Commission or its staff upon
request.\83\ We propose a 12-month period because we believe that it
would be inappropriate to allow a company to comply with this provision
by only briefly posting the disclosure on its website. Reports on Form
8–K are available to the public indefinitely after filing with
the Commission.
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\83\&thnsp;Proposed Item 406 of Regulations S–B and
S–K.
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Request for Comment
&sbull; Are there any privacy concerns that we should consider
that would warrant narrowing the disclosure requirements regarding a
grant of a waiver from the code?
&sbull; Is a “waiver” a sufficiently distinct and
formal event that the obligation to disclose will not present any
difficulties of interpretation? Should we modify the requirement to
ensure that “de facto, post hoc” waivers of codes'granted
or acceded to after the occurrence of the “violation” are
reported?
&sbull; Should companies that use the Internet for these
disclosures also be required to have technology that allows investors
to be notified by e-mail when new information is posted to the website?
&sbull; Should we require the filing of a Form 8–K
regardless of whether a company provides the proposed disclosure on its
website? Do investors need access to this information for longer than
12 months? How can we permit Internet disclosure and maintain a lasting
public record of the information?
&sbull; Should we specify where and how this disclosure should
appear on a company's website if the company opts for the website
method of dissemination?
&sbull; Are there other means of electronic dissemination that
our proposed rules should permit?
&sbull; Should we require a company choosing to disclose
information about ethics code changes or waivers through its Internet
website to provide advance notice in the company's annual report of its
intent to satisfy the disclosure requirements in this manner, as
proposed?
&sbull; Should we require all Exchange Act reporting companies
to disclose their website addresses? If so, should we
[[Page 66217]]
specify the location of this disclosure? For example, should it have to
appear on the front cover of all periodic and current reports, along
with the company's street address? Should a company have to disclose
its website address in, or on the front cover of, all of its Exchange
reports? Proxy and information statements? Exchange Act registration
statements? Securities Act registration statements?
Foreign Private Issuers
Foreign private issuers are not required to file current reports on
Form 8–K.\84\ Instead, they are required to file under the cover
of Form 6–K&thnsp;\85\ copies of all information that the foreign
private issuer: makes, or is required to make, public under the laws of
its jurisdiction of incorporation; files, or is required to file, under
the rules of any stock exchange; or otherwise distributes to its
security holders.\86\ We do not propose to change these reporting
requirements. We are proposing changes to Form 20–F and
40–F that would require a foreign private issuer to disclose any
change to its code of ethics made during the foreign private issuer's
past fiscal year that applies to the foreign private issuer's senior
officers. The foreign private issuer additionally would have to file
the change as an exhibit to Form 20–F or 40–F. Under the
proposals, a foreign private issuer also would have to disclose any
grant of a waiver from the code by the company to one of these
officers, that occurred during the foreign private issuer's last fiscal
year. A foreign private issuer could also make the disclosure under
cover of a Form 6–K or on its Internet website. We plan to
strongly encourage foreign private issuers to make these disclosures
promptly.
---------------------------------------------------------------------------
\84\&thnsp;See Exchange Act Rules 13a–11 and 15d–11
[17 CFR 240.13a–11 and 15d–11].
\85\&thnsp;Referenced in 17 CFR 249.306.
\86\&thnsp;See Exchange Act Rule 13a–16 [17 CFR
240.13a–16].
---------------------------------------------------------------------------
Request for Comment
&sbull; Should we require foreign private issuers to file
disclosure about ethics code changes and waivers within two days under
cover of Form 6–K? Should we otherwise require a foreign private
issuer to promptly disclose ethics code changes and waivers?
6. Registered Investment Companies
We are proposing to amend Forms N–SAR and N–CSR to
require a registered investment company to:
&sbull; Disclose annually whether each of the investment
company, its investment adviser, and its principal underwriter has
adopted a written code of ethics that applies to the principal
executive officer, principal financial officer, principal accounting
officer or controller, or persons performing similar functions of,
respectively, the investment company, its investment adviser, and its
principal underwriter;\87\
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\87\&thnsp;See proposed Instructions (a)(1) and (a)(7) to Item
102P3 of Form N–SAR; proposed Item 3(a) and proposed
instruction to Item 3(a) of proposed Form N–CSR. In the case
of a UIT, the code of ethics disclosure requirements would apply
with respect to the UIT's sponsor, depositor, trustee, and principal
underwriter. Proposed Item 133(a) of Form N–SAR.
---------------------------------------------------------------------------
&sbull; If the investment company, its investment adviser, or
its principal underwriter has not adopted a code of ethics, explain why
it has not done so;\88\
---------------------------------------------------------------------------
\88\&thnsp;Proposed Item 133(a) and Instruction (a)(1) to Item
102P3 of Form N–SAR; proposed Item 3(a) of Form N–CSR.
---------------------------------------------------------------------------
&sbull; If the investment company, its investment adviser, or
its principal underwriter has, during the period covered by the report,
amended or granted a waiver from any code of ethics applicable to the
investment company's, investment adviser's, or principal underwriter's
principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar
functions, provide a brief description of the amendment or waiver in
the investment company's report on proposed Form N–CSR or Form
N–SAR, as applicable. In the alternative, the investment company
may disclose this information on its Internet website within two
business days after the occurrence of the amendment or waiver, if the
investment company has disclosed in its most recently filed report on
Form N–SAR or N–CSR its intention to provide disclosure in
this manner and its Internet address, it makes the information
available on its website for a 12-month period, and it retains the
information for a period of not less than six years following the end
of the fiscal year in which the amendment or waiver
occurred;&thnsp;\89\ and
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\89\&thnsp;Proposed Item 133(b) and (c), proposed Instructions
(a)(2) and (a)(3) to Item 102P3 and proposed Instruction (c) to Item
133 of Form N–SAR; proposed Item 3(b) and 3(c) and proposed
Instruction 3 to Item 3 of proposed Form N–CSR.
---------------------------------------------------------------------------
&sbull; Include any written code of ethics and amendment to
that code of ethics as an exhibit to the investment company's reports
on Form N–CSR or N–SAR.\90\
---------------------------------------------------------------------------
\90\&thnsp;Item 134(b) and proposed Instruction (a)(4) to Item
102P3 of Form N–SAR; proposed Item 6(b) of proposed Form
N–CSR.
The proposed disclosure requirements would apply to all registered
investment companies, regardless of whether they are required to file
reports under section 13(a) or 15(d) of the Exchange Act. Management
investment companies generally would provide the required disclosure on
proposed Form N–CSR, and small business investment companies and
unit investment trusts would provide the required disclosure on Form
N–SAR.\91\ The proposed amendments would apply the same
definition of a code of ethics that we are proposing for operating
companies.\92\
---------------------------------------------------------------------------
\91\&thnsp;See proposed Item 3 of proposed Form N–CSR
(management investment companies, other than SBICs); proposed
Instruction (a) to Item 102P3 of Form N–SAR (SBICs); proposed
Items 133 and 134(b) of Form N–SAR (UITs).
\92\&thnsp;Proposed Instruction (a)(6) to Item 102P3 and
proposed Instruction (b) to Item 133 of Form N–SAR; proposed
Instruction 2 to Item 3 of proposed Form N–CSR. See Section
II.B.2. above, “Description of the Proposed Code of Ethics
Disclosure Requirements.”
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We recognize that Investment Company Act Rule 17j–1 currently
requires investment companies, and their investment advisers and
principal underwriters, to adopt codes of ethics designed to prevent
fraud resulting from personal trading in securities by portfolio
managers and other employees.\93\ The amendments we are proposing today
would address a broader range of conduct, including disclosure provided
in filings with the Commission; compliance with governmental laws,
rules and regulations; and ethical conduct generally, including the
handling of actual or apparent conflicts of interest. As a result, we
believe that the proposals should apply with equal force to investment
companies and operating companies. However, to the extent that an
investment company, or its investment adviser or principal underwriter,
is considering implementing new or changed code of ethics provisions as
a result of today's proposals, it may wish to incorporate these
provisions, together with its existing code of ethics under Rule
17j–1, into a single comprehensive code of ethics.\94\
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\93\&thnsp;17 CFR 270.17j–1.
\94\&thnsp;Proposed General Instruction D to Form N–CSR
would permit a registered management investment company to
incorporate its code of ethics by reference from another document,
such as the fund's registration statement. See Item 23(p) of Form
N–1A; Item 24.2.r of Form N–2; Item 28(b)(17) of Form
N–3 (requiring codes of ethics required by Rule 17j–1 to
be filed as exhibits to registration statements).
---------------------------------------------------------------------------
The proposed disclosure requirements would generally cover the same
entities covered by Rule 17j–1 (investment companies, investment
advisers, principal underwriters) because these are the entities with
respect to which conflicts of interest and other ethical issues are
most likely to arise. Like Rule 17j–1, the proposed amendments
would cover the code of ethics of an
[[Page 66218]]
investment company's principal underwriter only if: (i) The principal
underwriter is an affiliated person of the investment company or the
investment company's investment adviser; or (ii) an officer, director,
or general partner of the principal underwriter serves as an officer,
director, or general partner of the investment company or of its
investment adviser.\95\ Unit investment trusts do not have a corporate-
type management structure, but rather are created by a sponsor or
depositor that accumulates a portfolio of securities and deposits them
with a trustee under the terms of a trust indenture. Therefore, a unit
investment trust would not be required to disclose whether it has a
code of ethics because it has no officers. Rather, for unit investment
trusts, we are proposing to require disclosure with respect to codes of
ethics of the trust's sponsor, depositor, trustee or principal
underwriter.\96\ For unit investment trusts, the proposed amendments
would cover the code of ethics of a principal underwriter only if: (i)
The principal underwriter is an affiliated person of the trust or the
trust's sponsor, depositor, or trustee; or (ii) an officer, director,
or general partner of the principal underwriter serves as an officer,
director, or general partner of the trust's sponsor, depositor, or
trustee.\97\
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\95\&thnsp;Proposed Instruction 1 to Item 3 of proposed Form
N–CSR; proposed Instruction (a)(5) to Item 102P3 of Form
N–SAR. See also Investment Company Act Rule 17j–1(c)(3)
[17 CFR 270.17j-1(c)(3)].
\96\&thnsp;Proposed Items 133 and 134(b) of Form N–SAR.
\97\&thnsp;Proposed Instruction (a) to Item 133 of Form
N–SAR.
---------------------------------------------------------------------------
Request for Comment
&sbull; Is the proposed definition of a code of ethics
appropriate? Are there any modifications that should be made to this
definition in the case of investment companies?
&sbull; Do the proposed code of ethics disclosure requirements
cover the appropriate entities, in addition to the registered
investment company itself? Should any entities be removed, or should
other entities (e.g., the administrator) be added?
&sbull; Do the code of ethics disclosure requirements cover
the appropriate individuals at those entities? Should any of these
individuals be removed, or should other individuals be added?
&sbull; Should we require registered investment companies,
like domestic operating companies, to use Form 8–K to disclose
amendments to, or waivers of, a code of ethics within two business
days? Or is our proposed approach of requiring periodic reporting of
this information on Form N–CSR or Form N–SAR appropriate?
Should we propose a separate form for prompt reporting of this
information? If we require periodic reporting of amendments and waivers
on Forms N–CSR and N–SAR, is the proposed alternative
option for disclosure of amendments and waivers on the investment
company's Internet website within two business days necessary or
appropriate?
&sbull; For what period of time should we require an
investment company to retain information about amendments to, or
waivers from, codes of ethics, if it elects to post this information on
its website? Should the retention period be not less than six years
from the end of the fiscal year in which the amendment or waiver
occurred, which would be consistent with the standard retention period
for investment company records, or should it be some other period?\98\
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\98\&thnsp;See Investment Company Act Rule 31a–2 [17 CFR
270.31a–2] (requiring retention by registered investment
companies of various types of records for not less than six years).
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C. Management's Internal Controls and Procedures for Financial
Reporting
1. Management's Internal Control Report
Section 404 of the Sarbanes-Oxley Act directs the Commission to
prescribe rules that would require each annual report that a company,
other than a registered investment company,\99\ files pursuant to
Section 13(a) or 15(d) of the Exchange Act to contain an internal
control report: (1) Stating management's responsibilities for
establishing and maintaining adequate internal control structure and
procedures for financial reporting; and (2) containing an assessment,
as of the end of the company's most recent fiscal year, of the
effectiveness of the company's internal controls and procedures for
financial reporting.\100\
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\99\&thnsp;Section 404 of the Sarbanes-Oxley Act, and any rules
of the Commission under section 404, do not apply to any registered
investment company. Section 405 of the Sarbanes-Oxley Act. See
section II.C.4 below “Registered Investment Companies.”
\100\&thnsp;Section 404 also requires every registered public
accounting firm that prepares or issues an audit report for a
company to attest to, and report on, the assessment made by the
management of a company.
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Twice in the past, the Commission has proposed an internal control
report requirement. First, in 1979, following enactment of the Foreign
Corrupt Practices Act (“FCPA”),\101\ we proposed rules that
would have required a company to annually disclose certain information
about its internal accounting controls.\102\ The proposed rules would
have required a company's management to state its opinion as to whether
the company's systems of internal accounting control provided
reasonable assurance that:
---------------------------------------------------------------------------
\101\&thnsp;Title I of Pub. L. 95–213 (1977). Partially
codified in 15 U.S.C. 78m(b)(2), these provisions require issuers,
with securities registered under section 12 of the Exchange Act, to
make and keep books, records, and accounts, which, in reasonable
detail, accurately and fairly reflect the transactions and
dispositions of the assets of the issuer; and to devise and maintain
a system of internal accounting control sufficient to provide
reasonable assurances that: (i) transactions are executed in
accordance with management's general or specific authorization; (ii)
transactions are recorded as necessary (a) to permit preparation of
financial statements in conformity with generally accepted
accounting principles or any other criteria applicable to such
statements, and (b) to maintain accountability for assets; (iii)
access to assets is permitted only in accordance with management's
general or specific authorization; and (iv) the recorded
accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to
any differences.
\102\&thnsp;Release No. 34–15772 (April 30, 1979) [44 FR
26702].
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&sbull; Transactions were executed in accordance with
management's general and specific authorization;
&sbull; Transactions were recorded as necessary: (a) To permit
preparation of financial statements in conformity with generally
accepted accounting principles (or other applicable criteria); and (b)
to maintain accountability for assets;
&sbull; Access to assets was permitted in accordance with
management's general or specific authorization; and
&sbull; The recorded accountability for assets was compared
with the existing assets at reasonable intervals and appropriate action
was taken with respect to any differences.
The proposed rules also would have required an independent public
accountant to examine and report on management's statement.
Commenters criticized the 1979 proposal for the scope and content
of the proposed management statement, and its close correlation to the
FCPA requirements. Many commenters viewed the proposal as requiring a
report on compliance with the law. Others pointed to the significant
voluntary and private-sector initiatives that had been undertaken in
this area and urged us not to preempt such efforts by promulgating
formal legal requirements. While we did not agree with all of the
commenters' concerns, the Commission at that time decided not to
proceed with the rulemaking to allow existing voluntary and private-
sector initiatives for public reporting on internal accounting control
to continue to develop. In 1980, the Commission formally withdrew the
proposal.\103\
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\103\&thnsp;Release No. 34–16877 (June 6, 1980) [45 FR
40134].
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[[Page 66219]]
Following the recommendations of the Treadway Commission, the
Commission again proposed rules in 1988 that would have required
companies to include in their annual reports a report of management's
responsibilities with respect to financial reporting, including its
responsibilities for the company's internal control system, and an
assessment of the effectiveness of that system.\104\ Our 1988 proposal
differed from the 1979 proposal in several respects. Under the 1988
proposal, management's report would have been signed on behalf of the
company's principal executive, financial, and accounting officers, and
would have contained:
---------------------------------------------------------------------------
\104\&thnsp;Release No. 34–25925 (July 19, 1988) [53 FR
28009].
---------------------------------------------------------------------------
&sbull; A description of management's responsibilities for the
preparation of the company's financial statements and other financial
information included in a document containing the financial statements;
&sbull; A description of management's responsibilities for
establishing and maintaining a system of internal control directly
related to, and designed to provide reasonable assurance as to the
integrity and reliability of, financial reporting;
&sbull; An assessment of the effectiveness of the company's
system of internal control that encompassed material matters; and
&sbull; A statement of how management responded to any
significant recommendations concerning its system of internal controls
made by its internal auditors and its independent accountants.
Our 1988 proposal attempted to avoid a direct correlation with the
FCPA by including a materiality threshold and focusing on the company's
entire system of internal controls, rather than just its internal
accounting controls. We received more than 180 comment letters in
response to the 1988 proposal, with a majority of commenters supporting
it. Many commenters, however, expressed concern over being required to
disclose management's response to significant auditor recommendations
on the management report. Furthermore, several commenters noted that
private sector organizations were working to develop standards for
reporting on the effectiveness of a company's internal controls.\105\
The Commission did not act on the proposals.
---------------------------------------------------------------------------
\105\&thnsp;Committee of Sponsoring Organizations of the
Treadway Commission, Internal Control—Integrated Framework,
(August 1992) (the “COSO Report”).
---------------------------------------------------------------------------
In light of the mandates of the Sarbanes-Oxley Act, we again are
proposing to require companies to include a report on their internal
controls and procedures for financial reporting in their annual
reports.
a. Proposed Disclosure
We propose to amend Item 307 of Regulations S–K and
S–B, as well as Forms 20–F and 40–F, to require a
company's annual report to include an internal control report of
management that includes:
&sbull; A statement of management's responsibilities for
establishing and maintaining adequate internal controls and procedures
for financial reporting;
&sbull; Conclusions about the effectiveness of the company's
internal controls and procedures for financial reporting based on
management's evaluation of those controls and procedures in accordance
with Exchange Act Rule 13a–15 or 15d–15, as of the end of
the company's most recent fiscal year;&thnsp;\106\ and
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\106\&thnsp;A proposed instruction to Item 307 of Regulations
S–K and S–B, Item 15(a) of Form 20–F and
Instruction B.(7) of Form 40–F states that if the conclusions
of the company's principal executive and financial officers are
reflected in management's conclusions disclosed in the internal
control report, the company does not have to include any separate
disclosure required by Item 307(a) (or relevant provision in the
foreign forms) regarding the conclusions of those officers about the
effectiveness of the company's internal controls and procedures for
financial reporting in its report for its fourth fiscal quarter.
Another proposed instruction to those provisions states that the
company is encouraged, but not required, to include the disclosure
required by Item 307(b) (or relevant provision in the foreign forms)
for the company's fourth fiscal quarter in the annual internal
control report, rather than disclose this information separately.
---------------------------------------------------------------------------
&sbull; A statement that the registered public accounting firm
that prepared or issued the company's audit report relating to the
financial statements included in the company's annual report has
attested to, and reported on, management's evaluation of the company's
internal controls and procedures for financial reporting.
The proposed amendments do not specify the exact content of the
proposed management report, as this likely would result in boilerplate
responses of little value. We believe that management should tailor the
report to the company's circumstances.
b. Internal Controls and Procedures for Financial Reporting
A key aspect of management's responsibility for the preparation of
financial information is its responsibility to establish and maintain
an internal control system.\107\ On August 29, 2002, we issued a
release adopting new Exchange Act Rules 13a–14 and 15d–14
to implement section 302 of the Sarbanes-Oxley Act. In that release we
stated that the term “internal controls”&thnsp;\108\ as
used in section 302 of the Sarbanes-Oxley Act is a pre-existing concept
that pertains to a company's financial reporting and control of its
assets.\109\ However, because there are a variety of different
definitions of the term “internal controls” and its meaning
has changed over time, there continues to be confusion regarding the
meaning and scope of the term.
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\107\&thnsp;See American Institute of Certified Public
Accountants (AICPA), Codification of Statements on Auditing
Standards (AU) 319.53, “Internal Control in a Financial
Statement Audit.”
\108\&thnsp;In this release we use the term “internal
controls” and “internal control structure”
synonymously.
\109\&thnsp;See Release No. 33–8124 (August 29, 2002) [67
FR 57276].
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One of the first attempts to define internal controls was reflected
in 1958 in the Statement on Auditing Procedure No. 29, in which the
Committee on Auditing Procedure of the AICPA subdivided the definition
of internal control into the following two components:
“administrative control” and “accounting
control.”&thnsp;\110\ This statement explained that the term
“accounting control” related directly to the safeguarding
of assets and the reliability of financial records. Examples included
systems of transaction authorization and approval, physical controls
over assets, and the plan of organization for separating duties
concerned with record-keeping from duties concerned with operations or
asset custody. “Administrative control” was defined as
mainly concerning operational efficiency or adherence to managerial
policies. Examples included statistical analyses, performance reports,
training programs, and quality-control procedures.
---------------------------------------------------------------------------
\110\&thnsp;See Committee on Auditing Procedure, AICPA,
Statement on Auditing Procedure No. 29, “Scope of the
Independent Auditor's Review of Internal Control” (1958).
---------------------------------------------------------------------------
In 1972, the Statement on Auditing Procedure No. 54 redefined the
administrative control and accounting control concepts.\111\ SAP No. 54
defined administrative control as the plan of organization, procedures,
and records concerned with the decision processes leading to
management's authorization of transactions. Accounting control was
defined as a plan of organization and the procedures and records that
are concerned with the safeguarding of assets and the reliability of
financial records and consequently are designed to provide reasonable
assurance that:
---------------------------------------------------------------------------
\111\&thnsp;See Committee on Auditing Procedure, AICPA,
Statement on Auditing Procedure No. 54. The FCPA codified the
accounting control provisions of SAP No. 54, see note 58.
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[[Page 66220]]
&sbull; Transactions are executed in accordance with
management's general or specific authorization;
&sbull; Transactions are recorded as necessary (1) to permit
preparation of financial statements in conformity with generally
accepted accounting principles; and (2) to maintain accountability for
assets;
&sbull; Access to assets is permitted only by management's
authorization; and
&sbull; The recorded accountability for assets is compared
with the existing assets at reasonable intervals and appropriate action
is taken with respect to any differences.
In 1992, the Committee of Sponsoring Organizations of the Treadway
Commission (“COSO”) undertook an extensive study of
internal control. COSO defined internal control as “a process,
effected by an entity's board of directors, management and other
personnel, designed to provide reasonable assurance regarding the
achievement of objectives' in three categories—effectiveness and
efficiency of operations, reliability of financial reporting, and
compliance with applicable laws and regulations. COSO further stated
that internal control over each of these objectives consisted of the
control environment, risk assessment, control activities, information
and communication, and monitoring. In 1995, the AICPA's Auditing
Standards Board in Statement on Auditing Standards No. 78 codified this
definition of internal controls.\112\
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\112\&thnsp;Auditing Standards Board, AICPA, Statement on
Auditing Standards No. 78, “Consideration of Internal Control
in a Financial Statement Audit: An Amendment to SAS No. 55”
(1995).
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We believe that the purpose of internal controls and procedures for
financial reporting is to ensure that companies have processes designed
to provide reasonable assurance that:
&sbull; The company's transactions are properly authorized;
&sbull; The company's assets are safeguarded against
unauthorized or improper use; and
&sbull; The company's transactions are properly recorded and
reported to permit the preparation of the registrant's financial
statements in conformity with generally accepted accounting principles.
We believe that these objectives are embodied in the definition of the
term “internal controls” as the term is defined in AICPA's
Codification of Statements on Auditing Standards (AU) section 319 and
is consistent with section 103 of the Sarbanes-Oxley Act.\113\
Accordingly, we propose to refer to AU section 319 to define currently
internal controls and procedures for financial reporting, pending
action by the Public Company Accounting Oversight Board.\114\ The
proposed definition would state that the term “internal controls
and procedures for financial reporting” means controls that
pertain to the preparation of financial statements for external
purposes that are fairly presented in conformity with generally
accepted accounting principles as addressed by the Codification of
Statements on Auditing Standards 319 or any superseding definition or
other literature that is issued or adopted by the Public Company
Accounting Oversight Board.
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\113\&thnsp;Among other things, section 103 of the Act [Pub. L.
107–204 103] directs the Public Company Accounting Oversight
Board to adopt auditing standards that would require all registered
public accounting firms to present in each audit report or in a
separate report: (1) The scope of the auditor's testing of the
internal control structure and procedures of the issuer; (2) the
findings of the auditor from such testing; (3) the auditor's
evaluation of whether such internal control structure and procedures
include maintenance of records that in reasonable detail accurately
and fairly reflect the transactions and dispositions of the assets
of the issuer, provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements
in accordance with generally accepted accounting principles, and
that receipts and expenditures of the issuer are being made only in
accordance with authorizations of management and directors of the
issuer; and (4) a description, at a minimum, of material weaknesses
in such internal controls, and of any material noncompliance found
on the basis of such testing.
\114\&thnsp;We believe that this definition integrates the
various concepts of internal control into a unified concept that is
widely understood by the accounting profession and issuers.
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Request for Comment
&sbull; Should we propose a definition of internal controls
and procedures for financial reporting? If so, is the proposed
definition appropriate?
&sbull; Should we define the term using AICPA's Codification
of Statements on Auditing Standards Section 319 definition? If not, are
there any other definitions we should use?
&sbull; Should we propose specific disclosure criteria and
standards for the management report? If so, what disclosure criteria
and standards should we consider?
2. Attestation to, and Report on, Management's Internal Control Report
by the Company's Auditor
Section 404(b) of the Sarbanes-Oxley Act requires every registered
public accounting firm that prepares or issues an audit report for an
issuer other than a registered investment company&thnsp;\115\ to attest
to, and report on, management's assessment of the issuer's internal
controls and procedures for financial reporting. The attestation and
report required by section 404(b) must be made in accordance with
standards for attestation engagements “issued or adopted”
by the Public Company Accounting Oversight Board (the
“PCAOB”).
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\115\&thnsp;See section 405 of the Sarbanes-Oxley Act, which
states that rules under section 404 of the Act shall not apply to
registered investment companies.
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We are proposing amendments to Regulation S–X to reference
the attestation report that will be prepared by registered public
accounting firms and to require a company to file the attestation in
annual reports on Forms 10–K, 10–KSB, 20–F and
40–F.\116\ Section 404(b) of the Sarbanes-Oxley Act does not
require filing of the attestation report, but we believe that it is
essential in satisfying the purposes of this provision of the Sarbanes-
Oxley Act to require a company to file both the internal control report
and auditor's attestation report in its annual report.
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\116\&thnsp;See proposed Items 210.1–02(b) and
210.2–02(d) of Regulation S–X.
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Request for Comment
&sbull; If we adopt the proposed amendments before the PCAOB
is operational, should we delay effectiveness of the rules until such
time as attestation engagements standards are issued or adopted by the
PCAOB?
&sbull; Should the company have to file the attestation report
as part of the annual report? If so, should the report have to appear
in a particular part of the annual report? Where?
3. Quarterly Evaluation of Internal Controls and Procedures for
Financial Reporting
On August 29, 2002, we adopted new Exchange Act Rules 13a–14
and 15d–14 to implement section 302 of the Sarbanes-Oxley Act.
These rules require the principal executive and financial officers of
reporting companies to certify the information in their companies'
quarterly and annual reports. Specifically, new Rules 13a–14 and
15d–14 require each of these officers to disclose that:
&sbull; He or she has reviewed the report;
&sbull; Based on his or her 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 with respect to the period covered by the report;
&sbull; Based on his or her knowledge, the financial
statements, and other financial information included in the report,
fairly present in all material respects the
[[Page 66221]]
financial condition, results of operations and cash flows of the issuer
as of, and for, the periods presented in the report;
&sbull; He or she and the other certifying officers:
(1) Are responsible for establishing and maintaining
“disclosure controls and procedures” (a newly-defined term
reflecting the concept of controls and procedures related to disclosure
embodied in section 302(a)(4) of the Sarbanes-Oxley Act) for the
issuer;
(2) Have designed such disclosure controls and procedures to ensure
that material information is made known to them, particularly during
the period in which the periodic report is being prepared;
(3) Have evaluated the effectiveness of the issuer's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of the report; and
(4) Have presented in the report their conclusions about the
effectiveness of the disclosure controls and procedures based on the
required evaluation as of that date;
&sbull; He or she and the other certifying officers have
disclosed to the issuer's auditors and to the audit committee of the
board of directors (or persons fulfilling the equivalent function):
(1) All significant deficiencies and material weaknesses in the
design or operation of internal controls (a pre-existing term relating
to internal controls regarding financial reporting) 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
(2) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the issuer's internal
controls; and
&sbull; He or she and the other certifying 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.
For purposes of the Exchange Act Rules 13a–14 and
15d–14, “disclosure controls and procedures” are
defined as controls and other procedures of an issuer that are designed
to ensure that information required to be disclosed by the issuer in
the reports filed or submitted by it under the Exchange Act&thnsp;\117\
is recorded, processed, summarized and reported, within the time
periods specified in the Commission's rules and forms.\118\
“Disclosure controls and procedures” include, without
limitation, controls and procedures designed to ensure that information
required to be disclosed by an issuer in its Exchange Act reports is
accumulated and communicated to the issuer's management, including its
principal executive and financial officers, as appropriate to allow
timely decisions regarding required disclosure.
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\117\&thnsp;These reports include quarterly reports on Form
10–Q or 10–QSB, annual reports on Form 10–K,
10–KSB, 20–F or 40–F, current reports, definitive
proxy materials filed under section 14(a) of the Exchange Act [15
U.S.C. 78n(a)], definitive information statements filed under
section 14(c) of the Exchange Act [15 U.S.C. 78n(c)] and amendments
to any of these reports or documents.
\118\&thnsp;See Exchange Act Rules 13a–14(c) and
15d–14(c).
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We also adopted new Item 307 of Regulations S–K and
S–B&thnsp;\119\ to require disclosure in the company's annual and
quarterly reports about the principal officers' evaluation of the
company's disclosure controls and procedures and whether or not there
have been significant changes to the company's internal
controls—disclosure that the principal officers must certify that
they have made.
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\119\&thnsp;In addition, we adopted corresponding amendments to
Forms 20–F and 40–F for private foreign issuers. See 17
CFR 249.220f and 17 CFR 249.240f.
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Regarding internal controls and procedures for financial reporting,
our recently adopted rules require the company's principal executive
and financial officers to disclose “any significant changes in
the company's internal controls or in other factors that could
significantly affect these controls subsequent to the date of their
evaluation, including any corrective actions with respect to
significant deficiencies and material weaknesses.” Despite the
reference to an evaluation in this disclosure requirement, our rules
currently do not require the company's principal executive and
financial officers, or the company itself, to conduct periodic
evaluations of the company's internal controls. New Exchange Act Rules
13a–15 and 15d–15 do, however, require a company to conduct
a quarterly evaluation of the company's disclosure controls and
procedures.
As explained above, section 404 of the Sarbanes-Oxley Act directs
us to propose and adopt rules that would require management to annually
assess the company's internal control structure and procedures for
financial reporting. Section 404 contemplates only an annual evaluation
of the company's internal controls. A company's officers already must
certify to significant changes to internal controls as required by
section 302 of the Sarbanes-Oxley Act.
To provide a basis for this quarterly disclosure about changes to
the company's internal controls and procedures for financial reporting,
and to create symmetry between our requirements for periodic
evaluations of both the company's disclosure controls and procedures
and its internal controls and procedures for financial reporting, we
propose to require the company's management to evaluate the
effectiveness of the design and operation of the company's internal
controls and procedures for financial reporting, as well as its
disclosure controls and procedures, with respect to each annual and
quarterly report that it is required to file under the Exchange
Act.\120\ In addition, we propose to modify the requirement in Exchange
Act Rules 13a–15 and 15d–15 that the evaluation be
conducted within the 90-day period prior to the filing date of the
quarterly or annual report, to require that the evaluation be made as
of the end of the period covered by the report.\121\ We are also
proposing conforming changes&thnsp;\122\ to Exchange Act Rules
13a–14, 13a–15, 15d–14 and 15d–15 and the form
of certification in Forms
[[Page 66222]]
10–Q, 10–QSB, 10–K, 10–KSB, 20–F and
40–F.
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\120\&thnsp;Rules 13a–15(b) and 15d–15(b). As
originally adopted, Rules 13a–15 and 15d–15 required the
company to carry out this evaluation under the supervision of, and
with the participation of the company's management, including the
company's principal executive and financial officers. To better
reconcile this requirement with the proposed rules under section 404
of the Sarbanes-Oxley Act, we propose to revise these rules to state
more directly that company's management, rather than the company
itself, must undertake the required evaluations with the
participation of the principal executive and financial officers.
\121\&thnsp;Rules 13a–15(b) and 15d–15(b).
\122\&thnsp;We have also made several clarifying amendments. In
particular, the current certification would require management to
disclose significant deficiencies to the auditors and audit
committee, and identify material weaknesses to the auditors. The
accounting literature states that a “reportable
condition” is one that represents significant deficiencies in
the design or operation of internal control. AICPA Codification of
Statements on Auditing Standards, section 325. A material weakness
is a reportable condition of a magnitude discussed in the
literature. Id. Therefore, material weaknesses are a subset of
significant deficiencies. To clarify, and amplify, that significant
weaknesses, including material weaknesses must be disclosed to the
auditor and audit committee, we have proposed clarifying language.
We have also added language to clarify that the certifying officers
need not personally design the company's controls and procedures,
and may have such controls and procedures designed under their
supervision. In so doing, we recognize that the certifying officers
may not have appropriate expertise to do so, and in such case should
obtain assistance from third parties. We have also clarified that
the reports conclusions must be based on the certifying officers'
evaluation as of the end of the period covered by the report.
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Request for Comment
&sbull; Should we propose changes to Exchange Act Rules
13a–14, 13a–15, 15d–14 and 15d–15 to require
periodic evaluations of both the company's disclosure controls and
procedures and its internal controls and procedures for financial
reporting?
4. Federal Deposit Insurance Act Internal Control Reports
In 1993, the Federal Deposit Insurance Corporation (FDIC) adopted
rules implementing section 36 of the Federal Deposit Insurance
Act&thnsp;\123\ that requires, among other things, an insured
depository institution with total assets of $500 million or more to
prepare an annual management report that contains:
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\123\&thnsp;12 U.S.C. 1831m.
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&sbull; A statement of management's responsibilities for
preparing the institution's annual financial statements, for
establishing and maintaining an adequate internal control structure and
procedures for financial reporting, and for complying with designated
laws and regulations relating to safety and soundness;\124\ and
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\124\&thnsp;The designated laws and regulations are federal laws
and regulations concerning loans to insiders and federal and state
laws and regulations concerning dividend restrictions. See 12 CFR
part 363, appendix A, guideline 12.
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&sbull; Management's assessment of the effectiveness of the
institution's internal control structure and procedures for financial
reporting as of the end of the fiscal year and the institution's
compliance with the designated laws and regulations during the fiscal
year.\125\
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\125\&thnsp;See 12 CFR 363.2, adopted in 58 FR 31332.
The FDIC's rules additionally require the institution's independent
public accountant to examine, and attest to, management's assertions
concerning the effectiveness of the institution's internal controls
over financial reporting.\126\
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\126\&thnsp;12 CFR 363.3.
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Furthermore, the FDIC's rules permit an insured depository
institution that is the subsidiary of a holding company to satisfy its
internal control report requirement with an internal control report of
the consolidated holding company's management if:
&sbull; Services and functions comparable to those required of
the subsidiary by section 36 of the Federal Deposit Insurance Act are
provided at the holding company level; and
&sbull; The subsidiary has, as of the beginning of its fiscal
year, total assets of less than $5 billion, or total assets of $5
billion or more and a composite rating of 1 or 2 under the Uniform
Financial Institutions Rating System.\127\
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\127\&thnsp;This rating is more commonly known as the CAMELS
rating, which addresses Capital adequacy, Asset quality, Management,
Earnings, Liquidity, and Sensitivity to market risk. See 12 CFR
363.1(b)(2).
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Bank and thrift holding companies that are required to file reports
under section 13(a) or 15(d) of the Exchange Act would be subject to
the internal control reporting requirements that we are proposing
today. Although our proposed amendments are similar to the FDIC's
internal control report requirements, our proposed rules differ in a
few respects.\128\
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\128\&thnsp;Most notably, proposed Item 307(b) and (c) of
Regulations S–K and S–B would not require a statement of
compliance with laws and regulations as is required by FDIC Rule
363.2 [12 CFR 363.2].
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We are coordinating with the FDIC and other federal banking
regulators to eliminate, to the extent possible, any unnecessary
duplication between our proposed internal control report and the FDIC's
internal control report requirements. We expect to provide further
guidance on this subject in our release adopting final rules under
section 404 of the Sarbanes-Oxley Act.
5. Registered Investment Companies
Section 404 of the Sarbanes-Oxley Act does not apply to registered
investment companies, and we are not proposing to extend any of the
requirements that would implement section 404 to registered investment
companies.\129\ We are, however, proposing to make the following
technical changes to our rules and forms implementing section 302 of
the Sarbanes-Oxley Act for registered investment companies in order to
conform to the rule changes that we are proposing for operating
companies and for other reasons.
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\129\&thnsp;See section 405 of the Sarbanes-Oxley Act
(“Nothing in section 401, 402, or 404, the amendments made by
those sections, or the rules of the Commission under those sections
shall apply to any investment company registered under section 8 of
the Investment Company Act of 1940 (15 U.S.C. 80a–8).”).
The provisions that would not extend to registered investment
companies include proposed amendments to Item 307(a) of Regulation
S–K, Exchange Act rules 13a–14(b)(4)(iii) and (iv),
13a–15(b), 15a–14(b)(4)(iii) and (iv), and
15d–15(b) (disclosure of effectiveness of internal controls
and procedures for financial reporting); proposed Item 307(c) of
Regulation S–K (management report on internal controls); and
proposed Item 210.2–02(d) of Regulation S–X (attestation
to, and report on, management's internal control report).
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&sbull; Exchange Act Rules 13a–15(c) and
15d–15(c), Paragraph (b)(4)(iii) of Investment Company Act Rule
30a–2, and proposed Investment Company Act Rule 30a–3(b).
The proposed amendments would specify that an investment company's
management must evaluate the effectiveness of its disclosure controls
and procedures, with the participation of the principal executive and
financial officers, as of the end of the period covered by each report
filed on Form N–SAR or Form N–CSR.
&sbull; Paragraph (d) of Investment Company Act Rule
30a–2. The proposed amendments would include the same definition
of “internal controls and procedures for financial
reporting” that we are proposing in Exchange Act Rules
13a–14(d) and 15d–14(d).
&sbull; Instruction (a)(i) to Item 77Q3 of Form N–SAR
and Item 5(a) of proposed Form N–CSR. The proposed amendments
would require the disclosure about the evaluation of the investment
company's disclosure controls and procedures by the investment
company's management to be as of the end of the period covered by the
report being filed.
&sbull; Paragraph (b)(4)(vi) of Investment Company Act Rule
30a–2, Instruction (a)(ii) of Item 77Q3 of Form N–SAR, and
Item 5(b) of proposed Form N–CSR. The proposed amendments would
require disclosure of any significant changes to the registrant's
internal controls and procedures for financial reporting made during
the period covered by the report.
&sbull; Item 6(a) of proposed Form N–CSR; paragraphs 1,
2, and 3 of the certification in instruction (a)(iii) to Item 77Q3 of
Form N–SAR; and paragraphs 1, 2, and 3 of the certification
section of proposed Form N–CSR. The proposed amendments would
expressly require the shareholder reports to be filed as an exhibit to
proposed Form N–CSR rather than as an Item response,\130\ and
would also revise the form of certification in Forms N–SAR and
N–CSR to make clear that the report being certified includes any
exhibits.
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\130\&thnsp;The proposed amendments would delete Item 1 of
proposed Form N–CSR.
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&sbull; Paragraph (b)(4) of Investment Company Act Rule
30a–2, paragraph 4 of the certification in Instruction (a)(iii)
to item 77Q3 of Form N–SAR, and paragraph 4 of the certification
section of proposed Form N–CSR. The proposed amendments would
require the signing officers to state that they are responsible for
establishing and maintaining internal controls and procedures for
financial reporting, and that they have disclosed to the investment
company's auditors and audit committee all significant deficiencies in
the design and operation of internal controls and procedures for
financial reporting which could adversely affect the investment
company's ability to record, process, summarize and report financial
information required to be disclosed in the reports that it files or
submits under
[[Page 66223]]
both the Securities Exchange Act and the Investment Company Act.
&sbull; Exchange Act Rule 12b–25(a) and (b)(2)(ii) and
Form 12b–25.\131\ The proposed amendments would require an
investment company to file a Form 12b–25 if it will not be able
to file a report on proposed Form N–CSR in a timely manner.
Filing of a Form 12b–25 would provide the investment company with
an automatic extension of time to file proposed Form N–CSR of up
to 15 calendar days following the prescribed due date.
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\131\&thnsp;Referenced in 17 CFR 249.322.
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&sbull; General Instruction E of proposed Form N–CSR. A
proposed technical amendment would clarify that terms used in Form
N–CSR have meanings as defined in the Investment Company Act of
1940 and the rules and regulations thereunder.
Request for Comment
&sbull; Should any rules regarding internal controls and
procedures for financial reporting be applied to registered investment
companies? If so, which specific rules and procedures should apply?
&sbull; When we adopted the certification rules implementing
section 302 of the Sarbanes-Oxley Act, we stated that a single
evaluation of the effectiveness of the disclosure controls and
procedures for a series fund or family of investment companies could be
used in multiple certifications for the funds in the series or family,
as long as the evaluation had been performed within 90 days of the date
of the certified report.\132\ What is the effect of today's proposed
changes requiring that the evaluation be as of the end of the period
covered by the report on the ability to use a single evaluation for a
series fund or family of investment companies where the funds have
different fiscal years? Should we adopt the approach of today's
proposal, retain the approach that we previously adopted, or adopt a
different approach?
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\132\&thnsp;See Release No. 33–8124 (Aug. 28, 2002) [67 FR
57276, 57282 n. 86].
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6. Transition Period for Compliance With Rules Regarding Evaluations
of, and Reports and Attestations on, Internal Controls and Procedures
for Financial Reporting
The annual internal controls report by management, as well as the
related attestation and report on management's evaluation by auditors
are proposed new requirements. Although we believe that management and
auditors currently review such controls and procedures in conjunction
with a company's annual audit, we understand that in many cases such
reviews may not be as thorough or as detailed as the proposed rules
would require. We expect that companies and their auditors will require
substantial time to develop processes under relevant standards and to
train appropriate personnel to ensure compliance with these
requirements imposed by the Sarbanes-Oxley Act. Similarly, companies
and accounting firms likely will need additional time to actually
perform these activities.
The Sarbanes-Oxley Act does not impose a deadline for compliance
with section 404. Rather, the wording of this section contemplates
action by both the PCAOB as well as registered public accounting firms.
Specifically, the statute requires that auditor attestations conform
with standards for attestation engagements adopted by the PCAOB. We
therefore believe that Congress did not intend for the provisions of
this section to take effect until the PCAOB has established the
relevant attestation standards.\133\ Accordingly, we propose to delay
the effectiveness of our rules under section 404 to enable the PCAOB to
act and other relevant parties to prepare for compliance.
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\133\&thnsp;Such standards would be subject to approval by the
Commission.
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Specifically, we propose that the rules under section 404, if
adopted, would apply to companies whose fiscal years end on or after
September 15, 2003. This should provide the PCAOB sufficient time to
adopt standards for attestation engagements, as well as for companies
and auditors to prepare for the expected increase in workload.
We would not require companies to provide such reports or
attestations before the proposed date of effectiveness. However, to the
extent that a company desires to provide voluntarily an annual report
on the effectiveness of its internal controls and procedures for
financial reporting, we believe that existing accounting literature
should be followed. Similarly, although we do not require attestations
by auditors before the proposed rules become effective, we believe that
to the extent such attestations are made, accountants would perform
such attestations in conformity with existing accounting literature
regarding attestation engagements, including section 501 of the AICPA's
Statement on Standards for Attestation Engagements.
Similarly, we believe that the effectiveness of changes to
certifications by management in a company's annual and quarterly
reports also should be delayed until the company has had the
opportunity to perform the comprehensive evaluation of internal
controls and procedures for financial reporting contemplated by section
404. Therefore, we propose that management need not provide the
proposed amended certifications until the first annual report in which
the company includes the internal control report required under section
404. Accordingly, until a company is required to provide such report,
it need only provide certifications as adopted on August 29, 2002.\134\
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\134\&thnsp;See Release No. 33–8124 (August 29, 2002) [67
FR 57276].
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Request for Comment
&sbull; What transition period do companies and registered
public accounting firms need to prepare to perform these undertakings?
Is the compliance date we propose adequate? If not, what date should we
adopt?
D. Asset-Backed Securities Issuers
In the release adopting the certification requirements,\135\ we
noted that issuers of asset-backed securities have a reporting
obligation under either sections 13(a) or 15(d) of the Exchange Act, at
least for a period of time. Because of the nature of asset-backed
issuers, the staff of the Division of Corporation Finance has granted
requests allowing asset-backed issuers to file modified reports under
the Exchange Act.\136\ The modified reporting structure for asset-
backed issuers allows issuers or depositors to file modified annual
reports on Form 10–K and to file reports on Form 8–K tied
to payments on the underlying assets in the trust. These reports
include a copy of the servicing or distribution report required by the
issuer's governing documents and information on the performance of the
assets, payments on the asset-backed securities and any other material
developments that affect the issuer. Because the information included
in these reports for asset-backed issuers differs significantly from
that provided by other issuers, as well as the structure of asset-
backed issuers we are proposing to exclude them from the disclosure
requirements under proposed Items 307, 309 and 406 of Regulation
S–K and S–B.
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\135\&thnsp;Id.
\136\&thnsp;See, for example, Release No. 34–16520
(January 23, 1980) (order granting application pursuant to section
12(h) of the Exchange Act [15 U.S.C. 78l(h)] of Home Savings and
Loan Association); Release No. 34–14446 (February 6, 1978)
(order granting application pursuant to section 12(h) of Bank of
America National Trust and Savings Association); Bay View
Securitization Corporation (January 15, 1998); and Key Bank USA,
National Association (May 9, 1997).
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[[Page 66224]]
E. General Request for Comment
We request and encourage any interested person to submit comments
regarding:
(1) The proposed changes that are the subject of this release,
(2) Additional or different changes, or
(3) Other matters that may have an effect on the proposals
contained in this release.
We request comment from the point of view of registrants, investors and
other users of information about the proposals. With regard to any
comments, we note that such comments are of greatest assistance to our
rulemaking initiative if accompanied by supporting data and analysis of
the issues addressed in those comments.
III. Paperwork Reduction Act
Form 10–K, Form 10–KSB, Form 20–F, Form
40–F, Form 10–Q, Form 10–QSB, Form 8–K, and
Form 12b–25 under the Exchange Act, Regulation S–K,
Regulation S–B, and Forms N–SAR and N–CSR under the
Exchange Act and the Investment Company Act contain “collection
of information” requirements within the meaning of the Paperwork
Reduction Act of 1995.\137\ We are submitting a request for approval of
the proposed revisions to these requirements to the Office of
Management and Budget (“OMB”) for review in accordance with
44 U.S.C. 3507(d) and 5 CFR 1320.11. An agency may not conduct or
sponsor, and a person is not required to respond to, a collection of
information unless it displays a currently valid control number.
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\137\&thnsp;44 U.S.C. 3501 et seq.
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Periodic Reporting Requirements
Form 10–K (OMB Control No. 3235–0063) prescribes
information that a registrant must disclose annually to the market
about its business. Form 10–KSB (OMB Control No. 3235–0420)
prescribes information that a registrant that is a “small
business issuer” as defined under our rules must disclose
annually to the market about its business. Form 20–F (OMB Control
No. 3235–0288) prescribes information that a registrant that is a
foreign private issuer must disclose annually to the market about its
business. Form 40–F (OMB Control No. 3235–0381) prescribes
information that a registrant that is eligible to use that form must
disclose annually to the market about its business.
Form 10–Q (OMB Control No. 3235–0070) prescribes
information that a registrant must disclose quarterly to the market
about its business. Form 10–QSB (OMB Control No. 3235–0416)
prescribes information that a registrant that is a “small
business issuer” as defined under our rules must disclose
quarterly to the market about its business.
We are proposing to add several disclosure requirements to these
forms relating to: (1) Whether a financial expert serves on a company's
audit committee; (2) the existence of a company code of ethics for
specified officers, and (3) management's assessment of the
effectiveness of a company's internal controls and procedures for
financial reporting. These proposals would increase the amount of
information that a registrant must compile and disclose in these forms.
With respect to the first two items, the information in these required
disclosures should be readily available to the management of a
registrant. Therefore, we expect the burden to compile and report this
information to be minimal. The third item requires management to
evaluate the effectiveness of the company's internal controls and
procedures for financial reporting. We expect that performing these
acts will impose a substantially greater burden than the other two
disclosure requirements.
Financial Expert. This proposed disclosure requirement would
increase the disclosure burden by requiring a registrant to report the
number and names of persons that the board of directors has determined
to be financial experts on its audit committee as well as whether the
expert is independent, and if not, an explanation of why they are not.
It would not require a registrant to have a financial expert on its
audit committee. Item 401 of Regulations S–K and S–B
already requires registrants to ascertain and disclose the business
experience of all of its directors. The inquiry that registrants should
make to satisfy this disclosure requirement should assist the
registrant in determining whether a particular director is a financial
expert under the rules. If the registrant does not have a financial
expert, the rule only requires that the registrant explain why it does
not have such a person on its audit committee. Therefore, we believe
the added burden of the proposed rule would be minimal. For purposes of
the PRA, we estimate that the proposed disclosure requirements
regarding financial experts will result in a minimal incremental
increase of 0.5 burden hours per issuer in connection with preparing
each annual report.
Code of Ethics. The proposed rule would require a registrant to
disclose whether it has adopted a written code of ethics for its
principal executive officer, principal financial officer, principal
accounting officer or controller, or persons serving similar functions.
If it has not, it must explain why. The proposed rule would not require
any company to adopt such a code of ethics. Management should be
readily able to determine whether or not its company has adopted a code
of ethics. In certain cases, the required disclosure would require
minimal analysis regarding why the company does not have a code. In
addition, in the first year, registrants must file a copy of the code
with the Commission. In the case of large manuals that must be filed,
we expect a small added cost to file such a document on EDGAR. In
addition, we estimate that the disclosure requirements regarding codes
of ethics will also cause a minimal increase of 0.5 burden hours per
issuer in connection with each annual report.
Management Assessment of Internal Controls and Procedures for
Financial Reporting. The proposed rules would require management to
assess its internal controls and procedures for financial reporting
every quarter. In addition, registrants must provide an internal
control report in its annual report as well as obtain an attestation on
that evaluation from the independent accountant that audited its
financial statements. The performance of, and report on, the assessment
will impose costs on registrants. This requirement would not apply to
registered investment companies.
Although we expect such evaluation to impose a burden on companies,
they are already required to evaluate on a quarterly basis the
company's disclosure controls and procedures. We believe that a
significant portion of internal controls and procedures for financial
reporting are included in disclosure controls and procedures. We
already received OMB approval for the added burden of evaluating
disclosure controls and procedures. Therefore, for purposes of this
release, we need only consider the added incremental burden imposed on
companies by the evaluation of that portion of internal controls and
procedures for financial reporting that is not subsumed by the
disclosure controls and procedures evaluation. In that submission, we
estimated that the evaluation of disclosure controls and procedures
would add a burden on each issuer of 5 hours per quarterly and annual
report. We estimate that the proposed rules would impose and additional
5 burden hours per issuer in connection with each quarterly and annual
report. We do not have any data to support this estimate. However,
[[Page 66225]]
because much of the burden is subsumed in the previous estimate, we
believe an estimate of 5 burden hours per quarter is conservative. In
addition, in conjunction with annual reports, a company must provide an
internal control report. Although the burden of the evaluation has
already been considered, the company must compile its conclusions into
a publicly disclosed report. We expect that preparation of this report
would add an additional 5 hours in conjunction with the annual report.
For PRA purposes, we do not need to consider the added burden to
the company of obtaining an attestation on that internal control report
by the company's auditor. The Sarbanes-Oxley Act currently requires
companies to obtain such an attestation. Our proposed rules do not
establish standards for the contents or format of such attestation. In
addition, the proposed rules requiring attestation would not be
effective until the PCAOB has had the opportunity to establish such
standards. The proposed rules would establish no requirements beyond
those required by the Sarbanes-Oxley Act except the requirement that
the attestation be filed. We do consider the incremental increase in
burden caused by this proposed requirement. We estimate that the costs
of filing such an attestation report would be minimal. Similar to our
estimates regarding disclosure of readily known information, such as
the existence of a code of ethics, we estimate that such filing would
create an added burden of 0.5 hours.
The burden hours for complying with these proposed requirements are
set forth below in the following table. Estimates regarding burden
within the company, for third party services, and for professional
costs were obtained by contacting a number of law firms and other
persons regularly involved in completing the forms.
--------------------------------------------------------------------------------------------------------------------------------------------------------
$300
Annual Total hours/ Total 75% 25% professional
responses form burden&thnsp;\1\ company&thnsp;\2\ professional cost
--------------------------------------------------------------------------------------------------------------------------------------------------------
10–K........................................ 9,384 11.5 107,916 80,937 26,979 8,093,700
10–KSB...................................... 3,789 11.5 43,574 32,680.5 10,893.5 3,268,050
20–F........................................ 1,096 11.5 12,604 3,151 9,453 2,835,900
40–F........................................ 127 11.5 1,461 365.25 1,095.75 328,725
10–Q........................................ 26,746 5 133,730 100,297.5 33,432.5 10,029,750
10–QSB...................................... 11,608 5 58,040 43,530 14,510 4,353,000
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\&thnsp;Annual Responses × Total Hours per Form.
\2\&thnsp;The staff estimated the average number of hours each entity spends completing the form, and the average hourly rate for outside securities
counsel, by contacting a number of law firms and other persons regularly involved in completing the forms. For Forms 20–F and 40–F, we
estimate that 25% of the burden is imposed on the company and 75% of the burden is attributed to costs of third parties.
Our current OMB inventories and requested burden estimates are
presented in the following table.
--------------------------------------------------------------------------------------------------------------------------------------------------------
Current hour Expected hour Total expected Current cost Expected cost Total expected
burden increase burden burden increase cost
--------------------------------------------------------------------------------------------------------------------------------------------------------
10–K.............................................. 12,337,614 80,937 12,418,551 1,233,761 8,093,700 1,241,854,700
10–KSB............................................ 3,435,676 32,680.5 3,468,356.5 343,568,000 3,268,050 346,836,050
20–F.............................................. 583,248 3,151 586,399 524,496,000 2,835,900 527,331,900
40–F.............................................. 175 365.25 440.25 440.5138,500 328,725 467,225
10–Q.............................................. 3,109,223 100,297.5 3,209,520.5 310,922,000 10,029,750 320,951,750
10–QSB............................................ 1,279,782 43,530 1,323.312 127,978,000 4,353,000 132,331,000
--------------------------------------------------------------------------------------------------------------------------------------------------------
Form 8–K
Form 8–K (OMB Control No. 3235–0060) prescribes
information about significant events that a registrant must disclose on
a current basis. Form 8–K also may be used, at a registrant's
option, to report any events that the registrant deems to be of
importance to shareholders. Companies also may use the form to disclose
the nonpublic information required to be disclosed by Regulation
FD.\138\ We are proposing to require disclosure in the Form 8–K
of any change in, or waiver of any provision of, a company code of
ethics for senior executive officers. Alternatively, companies may
disclose the required information on their websites.
---------------------------------------------------------------------------
\138\&thnsp;17 CFR 243.100–103.
---------------------------------------------------------------------------
We currently estimate that Form 8–K results in a total annual
compliance burden of 627,300 hours and an annual cost of $81,377,000.
We estimate the number of Form 8–K filers to be 13,200, based on
the actual number of Form 10–K and 10–KSB filers during the
2001 fiscal year. For purposes of this analysis, we estimate that the
number of reports on Form 8–K filed is 276,800.\139\ We estimate
that each entity spends, on average, approximately 5 hours completing
the form. We note that a company need not file a Form 8–K to
report these events if it discloses the information on its Internet
website. If a company elects to disclose such information only on its
website, the proposed rules would require the company to keep such
information on its website for 12 months and to keep such disclosure
for five years. We estimate that the cost of disclosing and maintaining
the information on a company's website would be no more than the cost
to file a Form 8–K. Therefore, for a particular reporting event,
whether disclosed on Form 8–K or through a company's website, we
estimate the burden would be 5 hours. We estimate that 75% of the
burden is prepared by the company and that 25% of the burden is
prepared by outside counsel retained by the company at an average cost
of $300 per hour. The staff estimated the average number of hours each
entity spends completing the form, and the average hourly rate for
outside securities counsel, by contacting a number of law firms and
other persons regularly involved in completing the forms.
---------------------------------------------------------------------------
\139\&thnsp;This number assumes adoption of the proposals in
Release No. 33–8090 (April 12, 2002) [67 FR 19914] If adopted,
those proposals would cause companies to file estimated additional
215,500 Form 8–K reports each year.
---------------------------------------------------------------------------
Under the proposals, we estimate that, on average, completing and
filing a Form 8–K if the proposed new disclosure items are
adopted would require the same amount of time currently spent by
entities completing the form—approximately 5 hours. We believe
that changes to a company's code of ethics and waivers from a code
[[Page 66226]]
will be relatively rare events. Therefore, we expect that on average, a
company will file a Form 8–K to report such an event once every
three years, resulting in a total increase of 4,400 filings on Form
8–K per year. The additional filings would result in an added
annual burden of 16,500 hours (4,400 × 5 × .75 = 16,500)
and a total annual burden of 643,800 (627,300 + 16,500). We estimate
that, if the proposals are adopted, the additional filings would result
in an added annual cost of $1,650,000 (4,400 × 5 × .25
× $300 = $1,650,000) and a total annual cost to issuers of
$83,027,000 ($81,377,000 + $1,650,000 = $83,027,000).
Regulation S–K and Regulation S–B
Regulation S–K (OMB Control No. 3235–0071) includes the
requirements that a registrant must provide in filings under both the
Securities Act and the Exchange Act. Regulation S–B (OMB Control
No. 3235–0417) includes the requirements that a small business
issuer must provide in filings under the Securities Act and the
Exchange Act.
The proposed changes to these items would create new items under
Regulation S–K and Regulation S–B. However, the filing
requirements themselves are included in Form 10–K, Form
10–KSB, Form 10–Q, Form 10–QSB, Form 20–F, Form
40–F, and Form 8–K. We have reflected the burden for these
new requirements in the burden estimate for those forms. These items in
Regulation S–K and Regulation S–B do not impose any
separate burden. We assign one burden hour each to Regulations
S–B and S–K for administrative convenience to reflect the
fact that these regulations do not impose any direct burden on
companies.
Investment Company Forms
Form N–SAR (OMB Control No. 3235–0330) under the
Exchange Act and the Investment Company Act is used by registered
investment companies to file periodic reports with the Commission. We
estimate that 4500 investment companies, including 798 unit investment
trusts and 2 small business investment companies, currently file
reports on Form N–SAR. The current estimated total compliance
burden of Form N–SAR is 154,450 hours. Unit investment trusts
would be required to make the proposed disclosure regarding codes of
ethics on Form N–SAR, and small business investment companies
would be required to make the proposed disclosure regarding codes of
ethics and financial experts on Form N–SAR. We estimate that the
proposed disclosure requirements will increase the annual burden of
filing Form N–SAR by 0.5 hours per unit investment trust, and by
1.0 hour per small business investment company. Therefore, the new
estimated total compliance burden of filing Form N–SAR would be
154,851 hours.
We issued a release proposing Form N–CSR on August 30, 2002,
pursuant to section 8(a) of the Investment Company Act [15 U.S.C.
80a–8] and section 13 of the Securities Exchange Act [15 U.S.C.
78m]. Proposed Form N–CSR would be used by registered management
investment companies to file certified shareholder reports with the
Commission. We estimate that 3700 registered management investment
companies would be required to file reports on Form N–CSR, and
the total compliance burden for Form N–CSR would be 111,000
hours, excluding the amendments proposed in this release. We estimate
that the proposed disclosure requirements would increase the annual
burden of filing Form N–CSR by 1.0 hours per management
investment company. Therefore, the new estimated total compliance
burden of filing Form N–CSR would be 114,700 hours.
Form 12b–25 (OMB Control No. 3235–0058) was adopted
pursuant to sections 13, 15, and 23 of the Exchange Act. Form
12b–25 provides notice to the Commission and the marketplace that
a public company will be unable to file a required report in a timely
manner. If certain conditions are met, the company will be granted an
automatic filing extension. The proposed amendments would permit
investment companies to use Form 12b–25 for the purpose of
obtaining extensions with respect to filing Form N–CSR. We
estimate that Form 12b–25 results in a total annual compliance
burden currently of 31,750 hours, and that each entity using Form
12b–25 spends, on average, approximately 2.5 hours completing the
form. Currently, 168 investment companies use Form 12b–25 to
obtain extensions of time for filing Form N–SAR. We estimate that
the same number of investment companies annually would use Form
12b–25 to obtain extensions of filing Form N–CSR, resulting
in a new total compliance burden of 32,170 hours.
Compliance with the revised disclosure requirements would be
mandatory. Responses to the disclosure requirements would not be kept
confidential.
Pursuant to 44 U.S.C. 3506(c)(2)(B), we solicit comments to: (i)
Evaluate whether the proposed collection of information is necessary
for the proper performance of the functions of the agency, including
whether the information will have practical utility; (ii) evaluate the
accuracy of our estimate of the burden of the proposed collection of
information; (iii) determine whether there are ways to enhance the
quality, utility, and clarity of the information to be collected; and
(iv) evaluate whether there are ways to minimize the burden of the
collection of information on those who are to respond, including
through the use of automated collection techniques or other forms of
information technology. In addition, we solicit any comments on this
analysis.
Persons submitting comments on the collection of information
requirements should direct the comments to the Office of Management and
Budget, Attention: Desk Officer for the Securities and Exchange
Commission, Office of Information and Regulatory Affairs, Washington,
DC 20503, and should send a copy to Jonathan G. Katz, Secretary,
Securities and Exchange Commission, 450 Fifth Street, NW., Washington,
DC 20549–0609, with reference to File No. S7–40–02.
Requests for materials submitted to OMB by the Commission with regard
to these collections of information should be in writing, refer to File
No. S7–40–02, and be submitted to the Securities and
Exchange Commission, Records Management, Office of Filings and
Information Services. OMB is required to make a decision concerning the
collection of information between 30 and 60 days after publication of
this release. Consequently, a comment to OMB is assured of having its
full effect if OMB receives it within 30 days of publication.
IV. Costs and Benefits
The Sarbanes-Oxley Act requires us to propose most of the
requirements discussed in this release. These changes will affect all
companies reporting under section 13(a) and 15(d) of the Exchange Act,
including foreign private issuers and small business issuers, and
certain of the proposed changes will affect registered investment
companies. We recognize that any implementation of the Sarbanes-Oxley
Act will likely result in costs as well as benefits and have an effect
on the economy. We are sensitive to the costs and benefits of the
proposed rules, if adopted. We discuss these costs and benefits below.
A. Benefits
One of the main goals of the Sarbanes-Oxley Act is to improve
investor confidence in the financial markets. These proposals are among
many required by the Sarbanes-Oxley Act. They seek to achieve the
Sarbanes-Oxley Act's goals by providing greater
[[Page 66227]]
transparency regarding issues such as the competency of audit committee
members, compliance of senior financial officers with ethics codes of
conduct, and the adequacy of a company's internal controls and
procedures for financial reporting. By increasing transparency
regarding key aspects of corporate activities and conduct, the
proposals are designed to improve the quality of information available
to investors. Greater transparency should assist the market in properly
valuing securities, which leads to more efficient allocation of capital
resources.
In addition to the requirements under the Sarbanes-Oxley Act, we
are proposing additional requirements. First, the proposal regarding
disclosure of whether a company has a financial expert on its audit
committee would require disclosure of the names and number of the
financial experts on an audit committee and whether those persons are
independent of management. We think that investors would benefit from
this disclosure by being able to consider it when reviewing the
disclosure currently required about all directors' past business
experience. The proposal to require companies to file copies of their
codes of ethics would allow investors to better understand the ethical
principles that guide executives of companies in which they invest.
With respect to registered investment companies, these code of ethics
disclosure requirements would apply to a registrant's investment
adviser and principal underwriter also, and, in the case of a unit
investment trust, would apply to the trust's sponsor, depositor and
trustee. The proposals also would require companies, other than
investment companies, to make quarterly evaluations of their internal
controls and procedures for financial reporting. In addition to the
above stated benefits of greater transparency, to the extent companies
currently do not perform such evaluations, we believe that the proposed
requirements would increase the effectiveness of such controls, which
would increase the overall quality of financial disclosures in publicly
filed reports, as well as companies' internal operations.
B. Costs
The proposals would require companies to disclose additional
information about financial experts on a company's audit committee and
the existence of a code of conduct for financial executives. This
information is readily available to management and the board of
directors of a company. Therefore, we expect that the cost of compiling
and reporting this information should be minimal. The proposals would
also require management to assess its system of controls and the
independent public accountant to attest to, and report on, that
assessment.
As stated above, in limited instances, we propose to require more
disclosure than mandated by the Sarbanes-Oxley Act. For example, if
adopted, we expect that companies will incur added costs to disclose
the names of financial experts, file codes of ethics in the first year
of the rules' effectiveness, and disclose in their periodic reports
that they intend to disclose changes in, and waivers from, their codes
of ethics via their websites in lieu of publicly filing such disclosure
on Form 8–K, or in the case of registered investment companies,
Form NSAR or Form N–CSR.
With respect to the additional disclosures related to financial
experts, we believe the added burden would be minimal. We do not expect
that the disclosure of the names of the financial experts itself would
increase the legal obligations or potential liability of such
individuals. In addition, for companies other than investment
companies, the proposed rules would require a quarterly evaluation of a
company's internal controls and procedures for financial reporting. We
believe the costs of such evaluations would be mitigated by the fact
that companies are already required to perform such evaluations of
their disclosure controls and procedures. In several aspects, these
disclosure controls and procedures would overlap with internal controls
and procedures. To the extent that companies would already be
evaluating particular controls and procedures, there would be no added
cost.
We also note that we are proposing to require registered investment
companies to provide disclosure of any codes of ethics of certain of
their principal service providers. This additional disclosure may
impose certain costs. We note, however, that investment companies,
pursuant to Investment Company Act Rule 17j–1, must already
provide disclosure regarding the codes of ethics of their investment
advisers and principal underwriters that are required under the rule
with respect to the personal trading of their employees. We estimate
the additional costs to investment companies in complying with these
provisions would be limited. Furthermore, although investment companies
are not subject to section 404 of the Sarbanes-Oxley Act, we are
proposing certain technical amendments to our rules and forms
implementing section 302 of the Sarbanes-Oxley Act. We estimate that
these technical amendments will not result in any additional costs to
investment companies.
We believe that these additional requirements are necessary to
implement the purposes of the Sarbanes-Oxley Act and pose minimal
additional burden on companies. Such costs do not include the costs
imposed on companies by the Sarbanes-Oxley Act itself. Rather, they
reflect the costs of our proposed requirements beyond the requirements
of the Sarbanes-Oxley Act. For purposes of the Paperwork Reduction Act,
we have estimated that these required activities and reporting will
result in an approximate cost of $65,000,000.
We request comment on issues related to this cost-benefit analysis.
In particular, are there additional benefits and costs associated with
the proposed rules? We are especially interested in obtaining data
regarding the estimated cost of the proposed internal control
evaluation and auditor attestation requirements, as we expect that
these costs could be significant. Please provide any quantitative data
on which you rely in formulating your comments.
V. Effect on Efficiency, Competition and Capital Formation
Section 23(a)(2)&thnsp;\140\ of the Exchange Act requires us, when
adopting rules under the Exchange Act, to consider the impact that any
new rule would have on competition. In addition, section 23(a)(2)
prohibits us from adopting any rule that would impose a burden on
competition not necessary or appropriate in furtherance of the purposes
of the Exchange Act.
---------------------------------------------------------------------------
\140\&thnsp;15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------
The proposed amendments are intended to increase transparency
regarding the competence of the audit committee, the application of
ethics codes of conduct to certain of a company's executive officers,
and the adequacy of a company's internal controls and procedures for
financial reporting. We anticipate that these proposals would enhance
the proper functioning of the capital markets by giving investors
greater insight into the inner workings of public companies. This
increases the competitiveness of companies participating in the U.S.
capital markets. However, because only companies subject to the
reporting requirements of sections 13 and 15 of the Exchange Act (and
all registered investment companies with respect to the financial
expert and code of ethics disclosure requirements) would be required to
make the disclosures in this proposal, competitors not subject to
[[Page 66228]]
those reporting requirements potentially could gain an informational
advantage.
We request comment on whether the proposed amendments, if adopted,
would impose a burden on competition. Commenters are requested to
provide empirical data and other factual support for their views if
possible.
Section 2(b)&thnsp;\141\ of the Securities Act and section
3(f)&thnsp;\142\ of the Exchange Act require us, when engaging in
rulemaking where we are required to consider or determine whether an
action is necessary or appropriate in the public interest, to consider,
in addition to the protection of investors, whether the action will
promote efficiency, competition, and capital formation. The proposed
amendments would enhance our reporting requirements. The purpose of the
amendments is to increase transparency of the inner workings of public
companies. This should improve investors' ability to make informed
investment and voting decisions. Informed investor decisions generally
promote market efficiency and capital formation. As noted above,
however, the proposals could have certain indirect consequences, which
could adversely impact their ability to raise capital. The possibility
of these effects and their magnitude if they were to occur are
difficult to quantify.
---------------------------------------------------------------------------
\141\&thnsp;15 U.S.C. 77b(b).
\142\&thnsp;15 U.S.C. 78c(f).
---------------------------------------------------------------------------
We request comment on whether the proposed amendments, if adopted,
would promote efficiency, competition, and capital formation.
Commenters are requested to provide empirical data and other factual
support for their views if possible.
VI. Initial Regulatory Flexibility Analysis
This Initial Regulatory Flexibility Analysis has been prepared in
accordance with 5 U.S.C. 603. It relates to proposed revisions to
Exchange Act Form 10–K, Form 10–KSB, Form 10–Q, Form
10–QSB, Form 20–F, Form 40–F, Form 8–K, Form
12b–25, Rule 12b–25, Rule 13a–14, Rule 13a–15,
Rule 15d–14 and Rule 15d–15 under the Exchange Act and
Regulation S–K and Regulation S–B and Exchange Act and
Investment Company Act Form N–SAR and Form N–CSR, Rule
30a–2 and Rule 30a–3 under the Investment Company Act.
A. Reasons for the Proposed Action
We are proposing these disclosure requirements to comply with the
mandate of, and fulfill the purposes underlying the provisions of, the
Sarbanes-Oxley Act of 2002.
B. Objectives
The proposals are intended to enhance investor confidence in the
fairness and integrity of the securities markets by increasing
transparency regarding the expertise of the audit committee, the ethics
codes of that apply to companies' principal executive officer and
senior financial officers, and the adequacy of a company's internal
controls and procedures for financial reporting. We believe that these
proposals would help investors to understand and assess the inner-
workings of public companies.
C. Legal Basis
We are proposing the amendments to Form 10–K, Form
10–KSB, Form 10–Q, Form 10–QSB, Form 20–F, Form
40–F, Form 8–K, Form N–SAR, Form N–CSR, Form
12b–25, Rule 12b–25, Rule 13a–14, Rule 13a–15,
Rule 15d–14, Rule 15d–15, Rule 30a–2, Rule
30a–3, Regulation S–K and Regulation S–B under the
authority set forth in sections 5, 6, 7, 10, 17 and 19 of the
Securities Act, sections 12, 13, 15, 23 and 36 of the Exchange Act,
sections 8, 30, 31 and 38 of the Investment Company Act, and sections
3(a), 404, 406 and 407 of the Sarbanes-Oxley Act of 2002.
D. Small Entities Subject to the Proposed Revisions
The proposed changes would affect issuers that are small entities.
Exchange Act Rule 0–10(a)&thnsp;\143\ defines an issuer, other
than an investment company, to be a “small business” or
“small organization” if it had total assets of $5 million
or less on the last day of its most recent fiscal year. As of February
20, 2002, we estimated that there were approximately 2,500 issuers,
other than investment companies, that may be considered small entities.
We estimate that there are 225 registered investment companies that may
be considered small entities. The proposed revisions would apply to any
small entity that is subject to Exchange Act reporting requirements.
---------------------------------------------------------------------------
\143\&thnsp;17 CFR 240.0–10(a).
---------------------------------------------------------------------------
E. Reporting, Recordkeeping, and Other Compliance Requirements
The proposals would require companies to disclose information
regarding whether a financial expert serves on the audit committee, the
ethics codes companies have created that apply to certain senior
officers, and the adequacy of a company's internal controls and
procedures for financial reporting. All small entities that are subject
to the reporting requirements of section 13(a) or 15(d) of the Exchange
Act (and all small entities that are registered investment companies,
with respect to the code of ethics and financial expert disclosure
requirements) would be subject to these amendments. Because reporting
companies already file the forms proposed to be amended, no additional
professional skills beyond those currently possessed by these filers
would be necessary to prepare the proposed new disclosure. We expect
that reporting information in response to these new disclosure items
would increase costs incurred by small entities because they would
require these entities to compile and report more information. In
addition, to the extent that some small entities may have difficulty
attracting qualified financial experts onto their boards, such negative
disclosure may have an impact on the market price of their securities.
We expect that the added cost of the quarterly evaluations of internal
controls and procedures for financial reporting would be mitigated by
the fact that such entities currently are required to evaluate their
disclosure controls and procedures. In large part, we believe there is
significant overlap between these two types of controls and procedures.
We have calculated for purposes of the Paperwork Reduction Act that
each company, including a small entity, would be subject to an added
annual reporting burden of up to 26 hours and an estimated annual
average cost of up to $2,650 for disclosure assistance from outside
counsel as a result of the amendments.
F. Duplicative, Overlapping, or Conflicting Federal Rules
The proposed disclosure would not duplicate, overlap, or conflict
with other federal rules. The Federal Deposit Insurance Corporation has
in place rules that, among other things, require insured depository
institutions with total assets of $500 million or more to prepare an
annual internal control report of management containing information
similar to information that would be required under the proposed rules.
Insured depository institutions would not be subject to the proposed
disclosure requirements; however, the FDIC's rules permit an insured
depository institution that is the subsidiary of a holding company to
satisfy its internal control report requirement with an internal
control report of the consolidated holding company. Bank and thrift
holding companies that are required to file reports under section 13(a)
or 15(d) of the Exchange Act would be subject to the disclosure
requirements under the proposed rules. We are coordinating
[[Page 66229]]
with the FDIC and other federal banking regulators to eliminate, to the
extent possible, any unnecessary duplication between our proposed
disclosure and the FDIC's annual internal control report requirements.
There are no other requirements that companies file or provide similar
information.
G. Significant Alternatives
The Regulatory Flexibility Act directs the Commission to consider
significant alternatives that would accomplish the stated objective,
while minimizing any significant adverse impact on small entity
issuers. In connection with the proposed revisions, we considered the
following alternatives: (a) The establishment of differing compliance
or reporting requirements or timetables that take into account the
resources available to small entities; (b) the clarification,
consolidation, or simplification of the reporting requirements for
small entities; (c) the use of performance rather than design
standards; and (d) an exemption from coverage of the requirements, or
any part thereof, for small entities.
We believe that different compliance or reporting requirements or
timetables for small entities would interfere with achieving the
primary goal of increasing transparency of corporate activities and
internal procedures. We do, however, solicit comment on whether small
business issuers, which is a broader category of issuers than small
entities,\144\ should be subject to fewer disclosure requirements than
other issuers. Although we generally believe that an exemption for
small entities from coverage of the proposed revisions is not
appropriate and inconsistent with the policies underlying the Sarbanes-
Oxley Act, we solicit comment on the propriety of a complete or partial
exemption from the requirements for small business issuers. We also
think that the current and proposed disclosure requirements are clear
and straightforward. The proposed new financial expert and code of
ethics disclosure requirements would require brief disclosure. The
proposed annual internal control requirement would require more.
Therefore, it does not seem necessary to develop separate requirements
for small entities. We have used design rather than performance
standards in connection with the proposed revisions because we want
this disclosure to appear in a specific type of disclosure filing so
that investors will know where to find the information. We also want
the information to be filed electronically with us using the EDGAR
filing system. We do not believe that performance standards for small
entities would be consistent with the purpose of the proposed
revisions.
---------------------------------------------------------------------------
\144\&thnsp;Item 10 of Regulation S–B (17 CFR 228.10)
defines a small business issuer as a company that has revenues of
less than $25 million, is a U.S. or Canadian issuer, is not an
investment company, and has a public float of less than $25 million.
Also, if it is a majority owned subsidiary, the parent corporation
also must be a small business issuer. Rule 0–10 of the
Exchange Act (17 CFR 240.10) defines a small entity for purposes of
the Regulatory Flexibility Act as a company that, on the last day of
its most recent fiscal year, had total assets of $5 million or less.
---------------------------------------------------------------------------
H. Solicitation of Comments
We encourage the submission of comments with respect to any aspect
of this Initial Regulatory Flexibility Analysis. In particular, we
request comments regarding: (i) The number of small entity issuers that
may be affected by the proposed revisions; (ii) the existence or nature
of the potential impact of the proposed revisions on small entity
issuers discussed in the analysis; and (iii) how to quantify the impact
of the proposed revisions. Commenters are asked to describe the nature
of any impact and provide empirical data supporting the extent of the
impact. Such comments will be considered in the preparation of the
Final Regulatory Flexibility Analysis, if the proposed revisions are
adopted, and will be placed in the same public file as comments on the
proposed amendments themselves.
VII. Small Business Regulatory Enforcement Fairness Act
For purposes of the Small Business Regulatory Enforcement Fairness
Act of 1996 (“SBREFA”),\145\ a rule is “major”
if it has resulted, or is likely to result in:
---------------------------------------------------------------------------
\145\&thnsp;Pub. L. 104–121, Title II, 110 Stat. 857
(1996).
---------------------------------------------------------------------------
&sbull; An annual effect on the economy of $100 million or
more;
&sbull; A major increase in costs or prices for consumers or
individual industries; or
&sbull; Significant adverse effects on competition, investment
or innovation.
Commenters should provide empirical data on (a) the annual effect
on the economy; (b) any increase in costs or prices for consumers or
individual industries; and (c) any effect on competition, investment or
innovation. We request your comments on the reasonableness of this
estimate.
VIII. Statutory Basis
We are proposing the amendments to Securities Exchange Act Form
10–K, Form 10–KSB, Form 10–Q, Form 10–QSB, Form
20–F, Form 40–F, Form 8–K, Form 12b–25,
Securities Exchange Act and Investment Company Act Form N–SAR and
Form N–CSR, Securities Exchange Act Rule 12b–25, Rule
13a–14, Rule 13a–15, Rule 15d–14 and Rule
15d–15, Investment Company Act Rule 30a–2 and Rule
30a–3, and Regulations S–B, S–K and S–X
pursuant to sections 5, 6, 7, 10, 17 and 19 of the Securities Act, as
amended, sections 12, 13, 15, 23 and 36 of the Securities Exchange Act,
as amended, sections 8, 30, 31 and 38 of the Investment Company Act, as
amended, and sections 3(a), 404, 406 and 407 of the Sarbanes-Oxley Act
of 2002.
Text of the Proposed Amendments
List of Subjects
17 CFR Part 210
Accountants, Accounting, Reporting and recordkeeping requirements,
Securities.
17 CFR Part 228
Reporting and recordkeeping requirements, Securities, Small
businesses.
17 CFR Parts 229, 240 and 249
Reporting and recordkeeping requirements, Securities.
17 CFR Parts 270 and 274
Investment companies, Reporting and recordkeeping requirements,
Securities.
For the reasons set out above, we propose to amend title 17,
chapter II of the Code of Federal Regulations as follows:
PART 210—FORM AND CONTENT OF AND REQUIREMENTS FOR FINANCIAL
STATEMENTS, SECURITIES ACT OF 1933, SECURITIES EXCHANGE ACT OF
1934, PUBLIC UTILITY HOLDING COMPANY ACT OF 1935, INVESTMENT
COMPANY ACT OF 1940, INVESTMENT ADVISERS ACT OF 1940, AND ENERGY
POLICY AND CONSERVATION ACT OF 1975
1. The authority citation for Part 210 is amended by adding the
following citations:
Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77z–2,
77z–3, 77aa(25), 77aa(26), 78c, 78j–1, 78l, 78m, 78n,
78o(d), 78q, 78u–5, 78w(a), 78ll, 78mm, 79e(b), 79j(a), 79n,
79t(a), 80a–8, 80a–20, 80a–29, 80a–30,
80a–37(a), 80b–3, 80b–11 unless otherwise noted.
Section 210.1–02 is also issued under secs. 3(a) and 404,
Pub. L. No. 107–204, 116 Stat. 745.
Section 210.2–02 is also issued under secs. 3(a) and 404,
Pub. L. No. 107–204, 116 Stat. 745.
2. Amend §&thnsp;210.1–02 by:
a. Removing the authority citation following
§&thnsp;210.1–02;
[[Page 66230]]
b. Redesignating paragraphs (a) through (bb) as (b) through (cc);
and
c. Adding new paragraph (a) to read as follows:
§&thnsp;210.1–02 Definition of terms used in Regulation
S–X (17 CFR part 210).
(a) Accountant's attestation. The term accountant's attestation
means a document in which a registered public accounting firm expresses
an opinion concerning a registrant's assertion about the effectiveness
of its internal controls and procedures for financial reporting in
accordance with standards for attestation engagements. The attestation
indicates the scope of the accountant's examination and sets forth the
accountant's opinion as to whether the registrant's assertion about the
effectiveness of its internal controls and procedures for financial
reporting is fairly stated, in all material respects, or includes an
opinion to the effect that an overall opinion cannot be expressed. When
an overall opinion cannot be expressed, the registered public
accounting firm must explain why it is unable to express such an
opinion.
* * * * *
3. Amend §&thnsp;210.2–02 by:
a. Revising the section heading;
b. Revising the headings of paragraphs (a), (b), (c) and (d); and
c. Adding new paragraph (f).
The additions and revisions read as follows.
§&thnsp;210.2–02 Accountants' reports and attestations.
(a) Technical requirements for accountants' reports.
* * *
(b) Representations as to the audit included in accountants'
reports. * * *
(c) Opinions to be expressed in accountants' reports.
* * *
(d) Exceptions identified in accountants' reports. * * *
* * * * *
(f) Accountants' attestations. Every registered public accounting
firm that issues or prepares an accountant's report for a registrant,
other than an investment company registered under section 8 of the
Investment Company Act of 1940 (15 U.S.C. 80a–8), must examine,
attest to, and report separately on, the internal control report of
management concerning the effectiveness of the registrant's internal
controls and procedures for financial reporting. The accountant's
attestation shall be dated, signed manually, identify the period
covered by the report and clearly state the opinion of the accountant
as to whether the registrant's disclosure about the effectiveness of
its internal controls and procedures for financial reporting is fairly
stated in all material respects, or must include an opinion to the
effect that an overall opinion cannot be expressed. If an overall
opinion cannot be expressed, explain why.
PART 228—INTEGRATED DISCLOSURE SYSTEM FOR SMALL BUSINESS
ISSUERS
4. The authority citation for Part 228 is revised to read as
follows:
Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s,
77z–2, 77z–3, 77aa(25), 77aa(26), 77ddd, 77eee, 77ggg,
77hhh, 77jjj, 77nnn, 77sss, 78l, 78m, 78n, 78o, 78u–5, 78w,
78ll, 78mm, 80a–8, 80a–29, 80a–30, 80a–37
and 80b–11.
Section 228.307 is also issued under secs. 3(a), 302 and 404,
Pub. L. No. 107–204, 116 Stat. 745.
Section 228.309 is also issued under secs. 3(a) and 407, Pub. L.
No. 107–204, 116 Stat. 745.
Section 228.406 is also issued under secs. 3(a) and 406, Pub. L.
No. 107–204, 116 Stat. 745.
5. Revise §&thnsp;228.307 to read as follows:
§&thnsp;228.307 (Item 307) Controls and procedures.
(a) Evaluation of disclosure controls and procedures and internal
controls and procedures for financial reporting. Disclose the
conclusions of the small business issuer's principal executive officer
or officers and principal financial officer or officers, or persons
performing similar functions, about the effectiveness of the small
business issuer's disclosure controls and procedures and internal
controls and procedures for financial reporting based on management's
evaluation of these controls and procedures in accordance with
§§&thnsp;240.13a–15 or 240.15d–this chapter as of
the end of the period covered by the quarterly or annual report that
includes the disclosure required by this paragraph.
(b) Changes to internal controls and procedures for financial
reporting.
Disclose any significant changes to the small business issuer's
internal controls and procedures for financial reporting made during
the period covered by the quarterly or annual report that includes the
disclosure required by this paragraph, including any actions taken to
correct significant deficiencies and material weaknesses in the small
business issuer's internal controls and procedures for financial
reporting.
(c) Report on management's responsibilities. Furnish an internal
control report of management that includes:
(1) A statement of management's responsibilities for establishing
and maintaining adequate internal controls and procedures for financial
reporting for the small business issuer;
(2) Conclusions about the effectiveness of the small business
issuer's internal controls and procedures for financial reporting based
on management's evaluation of those controls and procedures in
accordance with §§&thnsp;240.13a–15 or 240.15d–15
of this chapter as of the end of the small business issuer's most
recent fiscal year;
(3) A statement that the registered public accounting firm that
prepared or issued the small business issuer's audit report relating to
the financial statements included in the report containing the
disclosure required by this Item has attested to, and reported on,
management's evaluation of the small business issuer's internal
controls and procedures for financial reporting; and
(4) The attestation report of the registered public accounting firm
that audited or reviewed the financial statements included in the
annual report containing the disclosure required by this Item.
Instructions to Item 307
1. A small business issuer that is an Asset-Backed Issuer (as
defined in §&thnsp;240.13a–14(g) and
§&thnsp;240.15d–14(g) of this chapter) is not required to
disclose the information required by this Item.
2. For purposes of this Item, the terms “disclosure controls
and procedures” and “internal controls and procedures for
financial reporting” shall have the meanings specified in
§&thnsp;240.13a–14 and §&thnsp;240.15d–14 of this
chapter.
3. If the conclusions of the small business issuer's principal
executive and financial officers are reflected in the conclusions
disclosed pursuant to paragraph (c)(2) of this Item, the small business
issuer does not have to include any separate disclosure required by
paragraph (a) of this Item regarding the effectiveness of the small
business issuer's internal controls and procedures for financial
reporting as of the end of the small business issuer's most recent
fiscal year.
4. The small business issuer is encouraged, but not required, to
include the annual report disclosure required by paragraph (b) of this
Item in the internal control report required by paragraph (c) of this
Item, rather than disclosing it elsewhere in the annual report.
6. Add §&thnsp;228.309 to read as follows:
§&thnsp;228.309 (Item 309) Audit committee financial experts.
Disclose the number and names of the persons that the small
business issuer's board of directors has determined to be
[[Page 66231]]
the financial expert or experts serving on the small business issuer's
audit committee, as defined in section 3(a)(58) of the Exchange Act (15
U.S.C. 78c(a)(58)). Also disclose whether the financial expert or
experts are independent, as that term is used in section 10A(m)(3) of
the Exchange Act (15 U.S.C. 78j–1(m)(3)) and if not, an
explanation of why they are not. If the small business issuer's board
of directors has not determined that a financial expert is serving on
its audit committee, the small business issuer must disclose that fact
and explain why it does not have such an expert.
Instructions to Item 309
1. For purposes of the determination by the board of directors
under this Item 309, the term “financial expert” means a
person who has, through education and experience as a public accountant
or auditor, or a principal financial officer, controller, or principal
accounting officer, of a company that, at the time the person held such
position, was required to file reports pursuant to section 13(a) or
15(d) of the Exchange Act (15 U.S.C. 78m(a) and 78o(d)), or experience
in one or more positions that involve the performance of similar
functions (or that results, in the judgment of the board of directors,
in the person's having similar expertise and experience), the following
attributes:
a. An understanding of generally accepted accounting principles and
financial statements;
b. Experience applying such generally accepted accounting
principles in connection with the accounting for estimates, accruals,
and reserves that are generally comparable to the estimates, accruals
and reserves, if any, used in the small business issuer's financial
statements;
c. Experience preparing or auditing financial statements that
present accounting issues that are generally comparable to those raised
by the small business issuer's financial statements;
d. Experience with internal controls and procedures for financial
reporting; and
e. An understanding of audit committee functions.
2. If the board of directors has determined that a person is a
financial expert because, in the board's judgment, he or she has
similar expertise and experience to those enumerated, the small
business issuer must disclose the basis for that determination.
3. In evaluating the education and experience of a person, the
board of directors should consider the following factors in the
aggregate:
a. The level of the person's accounting or financial education,
including whether the person has earned an advanced degree in finance
or accounting;
b. Whether the person is a certified public accountant, or the
equivalent, in good standing, and the length of time that the person
actively has practiced as a certified public accountant, or the
equivalent;
c. Whether the person is certified or otherwise identified as
having accounting or financial experience by a recognized private body
that establishes and administers standards in respect of such
expertise, whether that person is in good standing with the recognized
private body, and the length of time that the person has been actively
certified or identified as having this expertise;
d. Whether the person has served as a principal financial officer,
controller or principal accounting officer of a company that, at the
time the person held such position, was required to file reports
pursuant to section 13(a) or 15(d) of the Exchange Act, and if so, for
how long;
e. The person's specific duties while serving as a public
accountant, auditor, principal financial officer, controller, principal
accounting officer or position involving the performance of similar
functions;
f. The person's level of familiarity and experience with all
applicable laws and regulations regarding the preparation of financial
statements that must be included in reports filed under section 13(a)
or 15(d) of the Exchange Act;
g. The level and amount of the person's direct experience
reviewing, preparing, auditing or analyzing financial statements that
must be included in reports filed under section 13(a) or 15(d) of the
Exchange Act;
h. The person's past or current membership on one or more audit
committees of companies that, at the time the person held such
membership, were required to file reports pursuant to section 13(a) or
15(d) of the Exchange Act;
i. The person's level of familiarity and experience with the use
and analysis of financial statements of public companies;
j. Whether the person has any other relevant qualifications or
experience that would assist him or her in understanding and evaluating
the small business issuer's financial statements and other financial
information and to make knowledgeable and thorough inquiries whether:
i. The financial statements fairly present the financial condition,
results of operations and cash flows of the small business issuer in
accordance with generally accepted accounting principles; and
ii. The financial statements and other financial information, taken
together, fairly present the financial condition, results of operations
and cash flows of the small business issuer; and
k. In the case of a foreign private issuer, the person's level of
experience in respect of public companies in the foreign private
issuer's home country, generally accepted accounting principles used by
the issuer, and the reconciliation of financial statements with U.S.
generally accepted accounting principles.
4. Although the board of directors should consider the factors
listed in Instruction 3, those factors are not replacements for, and a
financial expert must satisfy, all of the attributes listed in
Instruction 1 to this Item.
5. In the case of foreign private issuers with two-tier boards of
directors, for purposes of this Item 309, the term “board of
directors” means the supervisory or non-management board.
6. A small business issuer that is an Asset-Backed Issuer (as
defined in §&thnsp;240.13a–14(g) and
§&thnsp;240.15d–14(g) of this chapter) is not required to
disclose the information required by this Item.
7. Add §&thnsp;228.406 to read as follows:
§&thnsp;228.406 (Item 406) Code of ethics.
(a) Disclose whether the small business issuer has adopted a
written code of ethics that applies to the small business issuer's
principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar
functions. If the small business issuer has not adopted such a code of
ethics, explain why it has not done so.
(b) If the small business issuer plans to elect to disclose any
amendments to, or waivers from, its code of ethics on its Internet
website, disclose the small business issuer's Internet address and its
intention to disclose these events on its website. If the small
business issuer elects to disclose this information through its
website, it must make such information available for at least a 12-
month period. Following the 12-month period, the small business issuer
must retain the information for a period of five years. Upon request,
the small business issuer must furnish to the Commission or its staff a
copy of any or all information retained pursuant to this requirement.
Instructions to Item 406
1. For purposes of this Item 406, the term “code of
ethics” means a codification of such standards that is
[[Page 66232]]
reasonably designed to deter wrongdoing and to promote:
(a) Honest and ethical conduct, including the ethical handling of
actual or apparent conflicts of interest between personal and
professional relationships;
(b) Avoidance of conflicts of interest, including disclosure to an
appropriate person or persons identified in the code of any material
transaction or relationship that reasonably could be expected to give
rise to such a conflict;
(c) Full, fair, accurate, timely, and understandable disclosure in
reports and documents that a registrant files with, or submits to, the
Commission and in other public communications made by the small
business issuer;
(d) Compliance with applicable governmental laws, rules and
regulations;
(e) The prompt internal reporting to an appropriate person or
persons identified in the code of violations of the code; and
(f) Accountability for adherence to the code.
2. A small business issuer that is an Asset-Backed Issuer (as
defined in §&thnsp;240.13a–14(g) and
§&thnsp;240.15d–14(g) of this chapter) is not required to
disclose the information required by this Item.
8. Amend §&thnsp;228.601 by:
a. Removing the “No exhibit required” designation for
exhibit (14) and adding “Code of ethics” in its place in
the Exhibit Table;
b. Removing “N/A” corresponding to exhibit (14) under
all captions in the Exhibit Table;
c. Adding an “X” corresponding to exhibit (14) under
the caption “Exchange Act Forms,” “8–K and
“10–KSB” in the Exhibit Table; and
d. Adding the text of paragraph (b)(14).
The addition reads as follows:
§&thnsp;228.601 (Item 601) Exhibits.
* * * * *
(b) Description of exhibits. * * *
(14) Code of ethics. Any written code of ethics, or amendment to
that code of ethics, that applies to the small business issuer's
principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar
functions, subject to disclosure under Item 406 of Regulation S–B
(§&thnsp;228.406) or Item 5.05 of Form 8–K
(§&thnsp;249.308 of this chapter).
* * * * *
PART 229—STANDARD INSTRUCTIONS FOR FILING FORMS UNDER
SECURITIES ACT OF 1933, SECURITIES EXCHANGE ACT OF 1934 AND ENERGY
POLICY AND CONSERVATION ACT OF 1975—REGULATION S–K
9. The authority citation for Part 229 is revised to read as
follows:
Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s,
77z–2, 77z–3, 77aa(25), 77aa(26), 77ddd, 77eee, 77ggg,
77hhh, 77iii, 77jjj, 77nnn, 77sss, 78c, 78i, 78j, 78l, 78m, 78n,
78o, 78u–5, 78w, 78ll(d), 78mm, 79e, 79n, 79t, 80a–8,
80a–29, 80a–30, 80a–31(c), 80a–37,
80a–38(a) and 80b–11, unless otherwise noted.
Section 229.307 is also issued under secs. 3(a), 302 and 404,
Pub. L. 107–204, 116 Stat. 745.
Section 229.309 is also issued under secs. 3(a) and 407, Pub. L.
107–204, 116 Stat. 745.
Section 229.406 is also issued under secs. 3(a) and 406, Pub. L.
107–204, 116 Stat. 745.
Section 229.601 is also issued under secs. 3(a) and 406, Pub. L.
107–204, 116 Stat. 745.
10. Revise §&thnsp;229.307 to read as follows.
§&thnsp;229.307 (Item 307) Controls and procedures.
(a) Evaluation of disclosure controls and procedures and internal
controls and procedures for financial reporting. Disclose the
conclusions of the registrant's principal executive officer or officers
and principal financial officer or officers, or persons performing
similar functions, about the effectiveness of the registrant's
disclosure controls and procedures and internal controls and procedures
for financial reporting based on management's evaluation of these
controls and procedures in accordance with
§§&thnsp;240.13a–15 and 240.15d–15 of this
chapter as of the end of the period covered by the quarterly or annual
report that includes the disclosure required by this paragraph.
(b) Changes to internal controls and procedures for financial
reporting. Disclose any significant changes to the registrant's
internal controls and procedures for financial reporting made during
the period covered by the quarterly or annual report that includes the
disclosure required by this paragraph, including any actions taken to
correct significant deficiencies and material weaknesses in the
registrant's internal controls and procedures for financial reporting.
(c) Report on management's responsibilities. Furnish an internal
control report of management that includes:
(1) A statement of management's responsibilities for establishing
and maintaining adequate internal controls and procedures for financial
reporting for the registrant;
(2) Conclusions about the effectiveness of the registrant's
internal controls and procedures for financial reporting based on
management's evaluation of those controls and procedures in accordance
with §§&thnsp;240.13a–15 or 240.15d–15 of this
chapter as of the end of the registrant's most recent fiscal year;
(3) A statement that the registered public accounting firm that
prepared or issued the registrant's audit report relating to the
financial statements included in the report containing the disclosure
required by this Item has attested to, and reported on, management's
evaluation of the registrant's internal controls and procedures for
financial reporting; and
(4) The attestation report of the registered public accounting firm
that audited or reviewed the financial statements included in the
annual report containing the disclosure required by this Item.
Instructions to Item 307
1. A registrant that is an Asset-Backed Issuer (as defined in
§&thnsp;240.13a–14(g) and §&thnsp;240.15d–14(g)
of this chapter) is not required to disclose the information required
by this Item.
2. For purposes of this Item, the terms “disclosure controls
and procedures” and “internal controls and procedures for
financial reporting” shall have the meanings specified in
§&thnsp;240.13a–14 and §&thnsp;240.15d–14 of this
chapter.
3. If the conclusions of the registrant's principal executive and
financial officers are reflected in the conclusions disclosed pursuant
to paragraph (c)(2) of this Item, the registrant does not have to
include any separate disclosure required by paragraph (a) of this Item
regarding the effectiveness of the registrant's internal controls and
procedures for financial reporting as of the end of the registrant's
most recent fiscal year.
4. The registrant is encouraged, but not required, to include the
annual report disclosure required by paragraph (b) of this Item in the
internal control report required by paragraph (c) of this Item, rather
than disclosing it elsewhere in the annual report.
11. Add §&thnsp;229.309 to read as follows:
§&thnsp;229.309 (Item 309) Audit committee financial experts.
Disclose the number and names of the persons that the registrant's
board of directors has determined to be the financial experts serving
on the registrant's audit committee, as defined in section 3(a)(58) of
the Exchange Act (15 U.S.C. 78c(a)(58)). Also disclose
[[Page 66233]]
whether the financial expert or experts are independent as that term is
used in section 10A(m)(3) of the Exchange Act (15 U.S.C.
78j–1(m)(3)), and if not, an explanation of why they are not. If
the registrant's board of directors has not determined that a financial
expert is serving on its audit committee, the registrant must disclose
that fact and explain why it does not have such an expert.
Instructions to Item 309
1. For purposes of the determination by the board of directors
under this Item 309, the term “financial expert” means a
person who has, through education and experience as a public accountant
or auditor, or a principal financial officer, controller, or principal
accounting officer, of a company that, at the time the person held such
position, was required to file reports pursuant to section 13(a) or
15(d) of the Exchange Act (15 U.S.C. 78m(a) and 78o(d)), or experience
in one or more positions that involve the performance of similar
functions (or that results, in the judgment of the board of directors,
in the person's having similar expertise and experience), the following
attributes:
a. An understanding of generally accepted accounting principles and
financial statements;
b. Experience applying such generally accepted accounting
principles in connection with the accounting for estimates, accruals,
and reserves that are generally comparable to the estimates, accruals
and reserves, if any, used in the registrant's financial statements;
c. Experience preparing or auditing financial statements that
present accounting issues that are generally comparable to those raised
by the registrant's financial statements;
d. Experience with internal controls and procedures for financial
reporting; and
e. An understanding of audit committee functions.
2. If the board of directors has determined that a person is a
financial expert because, in the board's judgment, he or she has
similar expertise and experience to those enumerated, the registrant
must disclose the basis for that determination.
3. In evaluating the education and experience of a person, the
board of directors should consider the following factors in the
aggregate:
a. The level of the person's accounting or financial education,
including whether the person has earned an advanced degree in finance
or accounting;
b. Whether the person is a certified public accountant, or the
equivalent, in good standing, and the length of time that the person
actively has practiced as a certified public accountant, or the
equivalent;
c. Whether the person is certified or otherwise identified as
having accounting or financial experience by a recognized private body
that establishes and administers standards in respect of such
expertise, whether that person is in good standing with the recognized
private body, and the length of time that the person has been actively
certified or identified as having this expertise;
d. Whether the person has served as a principal financial officer,
controller or principal accounting officer of a company that, at the
time the person held such position, was required to file reports
pursuant to section 13(a) or 15(d) of the Exchange Act, and if so, for
how long;
e. The person's specific duties while serving as a public
accountant, auditor, principal financial officer, controller, principal
accounting officer or position involving the performance of similar
functions;
f. The person's level of familiarity and experience with all
applicable laws and regulations regarding the preparation of financial
statements that must be included in reports filed under section 13(a)
or 15(d) of the Exchange Act;
g. The level and amount of the person's direct experience
reviewing, preparing, auditing or analyzing financial statements that
must be included in reports filed under section 13(a) or 15(d) of the
Exchange Act;
h. The person's past or current membership on one or more audit
committees of companies that, at the time the person held such
membership, were required to file reports pursuant to section 13(a) or
15(d) of the Exchange Act;
i. The person's level of familiarity and experience with the use
and analysis of financial statements of public companies;
j. Whether the person has any other relevant qualifications or
experience that would assist him or her in understanding and evaluating
the registrant's financial statements and other financial information
and to make knowledgeable and thorough inquiries whether:
i. The financial statements fairly present the financial condition,
results of operations and cash flows of the registrant in accordance
with generally accepted accounting principles; and
ii. The financial statements and other financial information, taken
together, fairly present the financial condition, results of operations
and cash flows of the registrant; and
k. In the case of a foreign private issuer, the person's level of
experience in respect of public companies in the foreign private
issuer's home country, generally accepted accounting principles used by
the issuer, and the reconciliation of financial statements with U.S.
generally accepted accounting principles.
4. Although the board of directors should consider the factors
listed in Instruction 3, those factors are not replacements for, and a
financial expert must satisfy, all of the attributes listed in
Instruction 1 to this Item.
5. In the case of foreign private issuers with two-tier boards of
directors, for purposes of this Item 309, the term “board of
directors” means the supervisory or non-management board.
6. A registrant that is an Asset-Backed Issuer (as defined in
§&thnsp;240.13a–14(g) and §&thnsp;240.15d–14(g)
of this chapter) is not required to disclose the information required
by this Item.
12. Add §&thnsp;229.406 to read as follows:
§&thnsp;229.406 (Item 406) Code of ethics.
(a) Disclose whether the registrant has adopted a written code of
ethics that applies to the registrant's principal executive officer,
principal financial officer, principal accounting officer or
controller, or persons performing similar functions. If the registrant
has not adopted such a code of ethics, explain why it has not done so.
(b) If the registrant plans to elect to disclose any amendments to,
or waivers from, its code of ethics on its Internet website, disclose
the registrant's Internet address and its intention to disclose these
events on its website. If the registrant elects to disclose this
information through its website, it must make such information
available for at least a 12-month period. Following the 12-month
period, the registrant must retain the information for a period of not
less than five years. Upon request, the registrant must furnish to the
Commission or its staff a copy of any or all information retained
pursuant to this requirement.
Instructions to Item 406
1. For purposes of this Item 406, the term “code of
ethics” means a codification of such standards that is reasonably
designed to deter wrongdoing and to promote:
(a) Honest and ethical conduct, including the ethical handling of
actual or apparent conflicts of interest between personal and
professional relationships;
(b) Avoidance of conflicts of interest, including disclosure to an
appropriate
[[Page 66234]]
person or persons identified in the code of any material transaction or
relationship that reasonably could be expected to give rise to such a
conflict;
(c) Full, fair, accurate, timely, and understandable disclosure in
reports and documents that a registrant files with, or submits to, the
Commission and in other public communications made by the registrant;
(d) Compliance with applicable governmental laws, rules and
regulations;
(e) The prompt internal reporting to an appropriate person or
persons identified in the code of violations of the code; and
(f) Accountability for adherence to the code.
2. A registrant that is an Asset-Backed Issuer (as defined in
§&thnsp;240.13a–14(g) and §&thnsp;240.15d–14(g)
of this chapter) is not required to disclose the information required
by this Item.
13. Amend §&thnsp;229.601 by:
a. Removing the “reserved” designation for exhibit (14)
and adding “Code of ethics” in its place in the Exhibit
Table;
b. Removing “N/A” corresponding to exhibit (14) under
all captions in the Exhibit Table;
c. Adding an “X” corresponding to exhibit (14) under
the caption “Exchange Act Forms”, “8–K”
and “10–K” in the Exhibit Table; and
d. Adding the text of paragraph (b)(14).
The addition reads as follows:
§&thnsp;229.601 (Item 601) Exhibits.
* * * * *
(b) Description of exhibits. * * *
(14) Code of ethics. Any written code of ethics, or amendment to
that code of ethics, that applies to the registrant's principal
executive officer, principal financial officer, principal accounting
officer or controller, or persons performing similar functions, subject
to disclosure under Item 406 of Regulation S–K
(§&thnsp;229.406) or Item 5.05 of Form 8–K
(§&thnsp;249.308 of this chapter).
* * * * *
PART 240—GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE
ACT OF 1934
14. The authority citation for Part 240 is amended by revising the
specific authority for “Section 240.13a–15” and
“Section 240.15d–15” and adding an authority in
numerical order to read as follows:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z–2,
77z–3, 77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78e, 78f,
78g, 78i, 78j, 78j–1, 78k, 78k–1, 78l, 78m, 78n, 78o,
78p, 78q, 78s, 78u–5, 78w, 78x, 78ll, 78mm, 79q, 79t,
80a–20, 80a–23, 80a–29, 80a–37, 80b–3,
80b–4 and 80b–11, unless otherwise noted.
* * * * *
Section 240.13a–15 is also issued under secs. 3(a), 302
and 404, Pub. L. 107–204, 116 Stat. 745.
* * * * *
Section 240.14a–101 is also issued under secs. 3(a) and
407, Pub. L. 107–204, 116 Stat. 745.
* * * * *
Section 240.15d–15 is also issued under secs. 3(a), 302
and 404, Pub. L. 107–204, 116 Stat. 745.
* * * * *
15. As proposed in 67 FR 42914, amend §&thnsp;240.12b–25
by revising the section heading and paragraphs (a) and (b)(2)(ii) to
read as follows:
§&thnsp;240.12b–25 Notification of inability to timely file
all or any required portion of a Form 10–K, 10–KSB,
20–F, 11–K, N–SAR, N–CSR, 10–Q,
10–QSB or 8–K.
(a) If all or any required portion of an annual or transition
report on Form 10–K, 10–KSB, 20–F or 11–K (17
CFR 249.310, 249.310b, 249.220f or 249.311), or a quarterly or
transition report on Form 10–Q or 10–QSB (17 CFR 249.308a
or 249.308b), or a current report on Form 8–K (17 CFR 249.308)
required to be filed pursuant to sections 13 or 15(d) of the Act (15
U.S.C. 78m or 78o(d)) and rules thereunder, or if all or any portion of
a semi-annual, annual or transition report on Form N–SAR or
N–CSR (17 CFR 274.101 or 274.128 of this chapter) required to be
filed pursuant to sections 13 or 15(d) of the Act or section 30 of the
Investment Company Act of 1940 (15 U.S.C. 80a–29) and the rules
thereunder is not filed within the time period prescribed for such
report, the registrant, no later than one business day after the due
date for such report, shall file a Form 12b–25 (17 CFR 249.322 of
this chapter) with the Commission which shall contain disclosure of its
inability to file the report timely and the reasons therefor in
reasonable detail.
(b) * * *
(1) * * *
(2) * * *
(i) * * *
(ii) The subject annual report, semi-annual report or transition
report on Form 10–K, 10–KSB, 20–F, 11–K,
N–SAR, or N–CSR, or portion thereof, will be filed no later
than the fifteenth calendar day following the prescribed due date; or
the subject quarterly report or transition report on Form 10–Q or
10–QSB, or portion thereof, will be filed no later than the fifth
calendar day following the prescribed due date; or the subject current
report on Form 8–K, or portion thereof, will be filed no later
than the second business day following the prescribed due date and, in
the case of Form 8–K, specifying the Item number or numbers to be
included in the filing; and
16. Amend §&thnsp;240.13a–14 by:
a. Revising paragraph (b)(4);
b. Redesignating paragraphs (d), (e), (f) and (g) as paragraphs
(e), (f), (g) and (h); and
c. Adding new paragraph (d).
The revisions and additions read as follows:
§&thnsp;240.13a–14 Certification of disclosure in annual
and quarterly reports.
* * * * *
(b) * * *
(4) He or she and the other certifying officers are responsible for
establishing and maintaining disclosure controls and procedures and
internal controls and procedures for financial reporting (as such terms
are defined in paragraphs (c) and (d) of this section) for the issuer
and have:
(i) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under their
supervision, to ensure that material information relating to the
issuer, including its consolidated subsidiaries, is made known to them
by others within those entities, particularly during the period in
which periodic reports are being prepared;
(ii) Designed such internal controls and procedures for financial
reporting, or caused such internal controls and procedures for
financial reporting to be designed under their supervision, to provide
reasonable assurances that the registrant's financial statements are
fairly presented in conformity with generally accepted accounting
principles;
(iii) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and internal controls and procedures for
financial reporting as of the end of the period covered by the report
(“Evaluation Date”);
(iv) Presented in the report their conclusions about the
effectiveness of the disclosure controls and procedures and internal
controls and procedures for financial reporting, in each case based on
their evaluation as of the Evaluation Date;
(v) Disclosed to the registrant's auditors and the audit committee
of the board of directors (or persons fulfilling the equivalent
function):
(A) All significant deficiencies and material weaknesses in the
design or operation of internal controls and procedures for financial
reporting which could adversely affect the registrant's
[[Page 66235]]
ability to record, process, summarize and report financial information
required to be disclosed by the registrant in the reports that it files
or submits under the Act (15 U.S.C. 78a et seq.), within the time
periods specified in the Commission's rules and forms; and
(B) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls and procedures for financial reporting; and
(vi) Indicated in the report any significant changes in the
registrant's internal controls and procedures for financial reporting
or in other factors that could significantly affect internal controls
and procedures for financial reporting made during the period covered
by the report, including any actions taken to correct significant
deficiencies and material weaknesses in the registrant's internal
controls and procedures for financial reporting.
* * * * *
(d) For purposes of this section and §&thnsp;240.13a–15,
the term internal controls and procedures for financial reporting means
controls that pertain to the preparation of financial statements for
external purposes that are fairly presented in conformity with
generally accepted accounting principles as addressed by the
Codification of Statements on Auditing Standards §&thnsp;319 or
any superseding definition or other literature that is issued or
adopted by the Public Company Accounting Oversight Board.
* * * * *
17. Amend §&thnsp;240.13a–15 by:
a. Revising the section heading and paragraph (b); and
b. Adding paragraph (c).
The revisions and addition read as follows:
§&thnsp;240.13a–15 Controls and procedures.
* * * * *
(b) In connection with each report, including transition reports,
filed on Form 10–Q, Form 10–QSB, Form 10–K, Form
10–KSB, Form 20–F or Form 40–F
(§§&thnsp;249.308a, 249.308b, 249.310, 249.310b, 249.220f or
249.240f of this chapter) under section 13(a) of the Act (15 U.S.C.
78m(a)), other than a report filed by an Asset-Backed Issuer (as
defined in §&thnsp;240.13a–14), the issuer's management must
conduct an evaluation, with the participation of the issuer's principal
executive officer or officers and principal financial officer or
officers, or persons performing similar functions, of the
effectiveness, as of the end of the period covered by the report, of
the design and operation of the issuer's disclosure controls and
procedures and the issuer's internal controls and procedures for
financial reporting.
(c) In connection with each report, including transition reports,
filed on Form N–CSR (§§&thnsp;249.331 and 274.128 of
this chapter) or Form N–SAR (§§&thnsp;249.330 and
274.101 of this chapter) that requires certification under
§&thnsp;270.30a–2 of this chapter, the issuer's management
must conduct an evaluation, with the participation of the issuer's
principal executive officer or officers and principal financial officer
or officers, or persons performing similar functions, of the
effectiveness, as of the end of the period covered by the report, of
the design and operation of the issuer's disclosure controls and
procedures.
18. Amend §&thnsp;240.15d–14 by:
a. Revising paragraph (b)(4);
b. Redesignating paragraphs (d), (e), (f) and (g) as paragraphs
(e), (f), (g) and (h); and
c. Adding new paragraph (d).
The revisions and additions read as follows:
§&thnsp;240.15d–14 Certification of disclosure in annual
and quarterly reports.
* * * * *
(b) * * *
(4) He or she and the other certifying officers are responsible for
establishing and maintaining disclosure controls and procedures and
internal controls and procedures for financial reporting (as such terms
are defined in paragraphs (c) and (d) of this section) for the issuer
and have:
(i) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under their
supervision, to ensure that material information relating to the
issuer, including its consolidated subsidiaries, is made known to them
by others within those entities, particularly during the period in
which periodic reports are being prepared;
(ii) Designed such internal controls and procedures for financial
reporting, or caused such internal controls and procedures for
financial reporting to be designed under their supervision, to provide
reasonable assurances that the registrant's financial statements are
fairly presented in conformity with generally accepted accounting
principles;
(iii) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and internal controls and procedures for
financial reporting as of the end of the period covered by the report
(“Evaluation Date”);
(iv) Presented in the report their conclusions about the
effectiveness of the disclosure controls and procedures and internal
controls and procedures for financial reporting, in each case based on
their evaluation as of the Evaluation Date;
(v) Disclosed to the registrant's auditors and the audit committee
of the board of directors (or persons fulfilling the equivalent
function):
(A) All significant deficiencies and material weaknesses in the
design or operation of internal controls and procedures for financial
reporting which could adversely affect the registrant's ability to
record, process, summarize and report financial information required to
be disclosed by the registrant in the reports that it files or submits
under the Act (15 U.S.C. 78a et seq.), within the time periods
specified in the Commission's rules and forms; and
(B) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls and procedures for financial reporting; and
(vi) Indicated in the report any significant changes in the
registrant's internal controls and procedures for financial reporting
or in other factors that could significantly affect internal controls
and procedures for financial reporting made during the period covered
by the report, including any actions taken to correct significant
deficiencies and material weaknesses in the registrant's internal
controls and procedures for financial reporting.
* * * * *
(d) For purposes of this section and §&thnsp;240.15d–15,
the term internal controls and procedures for financial reporting means
controls that pertain to the preparation of financial statements for
external purposes that are fairly presented in conformity with
generally accepted accounting principles as addressed by the
Codification of Statements on Auditing Standards §&thnsp;319 or
any superseding definition or other literature that is issued or
adopted by the Public Company Accounting Oversight Board.
* * * * *
19. Amend §&thnsp;240.15d–15 by:
a. Revising the section heading and paragraph (b); and
b. Adding paragraph (c).
The revisions and addition read as follows:
§&thnsp;240.15d–15 Controls and procedures.
* * * * *
(b) In connection with each report, including transition reports,
filed on
[[Page 66236]]
Form 10–Q, Form 10–QSB, Form 10–K, Form 10–KSB,
Form 20–F or Form 40–F (§§&thnsp;249.308a,
249.308b, 249.310, 249.310b, 249.220f or 249.240f of this chapter)
under section 15(d) of the Act (15 U.S.C. 78o(d)), other than a report
filed by an Asset-Backed Issuer (as defined in
§&thnsp;240.15d–14), the issuer's management must conduct an
evaluation, with the participation of the issuer's principal executive
officer or officers and principal financial officer or officers, or
persons performing similar functions, of the effectiveness, as of the
end of the period covered by the report, of the design and operation of
the issuer's disclosure controls and procedures and the issuer's
internal controls and procedures for financial reporting.
(c) In connection with each report, including transition reports,
filed on Form N–CSR (§§&thnsp;249.331 and 274.128 of
this chapter) or Form N–SAR (§§&thnsp;249.330 and
274.101 of this chapter) that requires certification under
§&thnsp;270.30a–2 of this chapter, the issuer's management
must conduct an evaluation, with the participation of the issuer's
principal executive officer or officers and principal financial officer
or officers, or persons performing similar functions, of the
effectiveness, as of the end of the period covered by the report, of
the design and operation of the issuer's disclosure controls and
procedures.
PART 249—FORMS, SECURITIES EXCHANGE ACT OF 1934
20. The authority citation for Part 249 is revised to read as
follows:
Authority: 15 U.S.C. 78a et seq., unless otherwise noted.
Section 249.220f is also issued under secs. 3(a), 302, 404 and
407, Pub. L. 107–204, 116 Stat. 745.
Section 249.240f is also issued under secs. 3(a), 302, 404 and
407, Pub. L. 107–204, 116 Stat. 745.
Section 249.308 is also issued under 15 U.S.C. 80a–29 and
secs. 3(a), 302 and 404, Pub. L. 107–204, 116 Stat. 745.
Section 249.308a is also issued under secs. 3(a), 302 and 404,
Pub. L. 107–204, 116 Stat. 745.
Section 249.308b is also issued under secs. 3(a), 302 and 404,
Pub. L. 107–204, 116 Stat. 745.
Section 249.310 is also issued under secs. 3(a), 302, 404 and
407, Pub. L. 107–204, 116 Stat. 745.
Section 249.310b is also issued under secs. 3(a), 302, 404 and
407, Pub. L. 107–204, 116 Stat. 745.
Section 249.326(T) is also issued under 15 U.S.C. 78m(f)(1).
Section 249.330 is also issued under secs. 3(a), 302, 406, and
407, Pub. L. 107–204, 116 Stat. 745.
Section 249.331 is also issued under secs. 3(a), 302, 406, and
407, Pub. L. 107–204, 116 Stat. 745.
21. As proposed in 67 FR 42914, amend Form 8–K (referenced in
§&thnsp;249.308) by adding Item 5.05 to read as follows:
Note: The text of Form 8–K does not, and this amendment
will not, appear in the Code of Federal Regulations.
Form 8–K
Current Report
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
* * * * *
Item 5.05. Amendments to the Registrant's Code of Ethics, or Waiver of
a Provision of the Code of Ethics
If the registrant has amended its code of ethics that applies to
its principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar
functions or granted a waiver, including an implicit waiver, from a
provision of the code of ethics to one of these officers or persons,
the registrant must briefly describe the nature of the amendment or
waiver. Disclosure regarding waivers must include the name of the
person to whom the waiver was granted, and the date of the waiver.
Instruction
The registrant does not need to provide any information pursuant to
this Item if it discloses the required information on its Internet
website within two business days following the date of the amendment or
waiver and the registrant has disclosed in its most recently filed
annual report its Internet address and intention to provide disclosure
in this manner. If the registrant elects to disclose the information
required by this Item through its website, such information must remain
available on the website for at least a 12-month period. Following the
12-month period, the registrant must retain the information for a
period of not less than five years. Upon request, the registrant must
furnish to the Commission or its staff a copy of any or all information
retained pursuant to this requirement.
* * * * *
22. Amend Form 10–Q (referenced in §&thnsp;249.308a) by:
a. Revising Item 4 in Part I—Financial Information; and
b. Revising the “Certifications” section.
The revisions read as follows:
Note: The text of Form 10–Q does not, and this amendment
will not, appear in the Code of Federal Regulations.
Form 10–Q
* * * * *
Part I—Financial Information
* * * * *
Item 4. Controls and Procedures
Furnish the information required by Item 307(a) and (b) of
Regulation S–K (§&thnsp;229.307(a) and (b) of this chapter).
* * * * *
Certifications*
I, [identify the certifying individual], certify that:
1. I have reviewed this quarterly report on Form 10–Q of
[identify registrant];
2. Based on my knowledge, this report 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 under which
such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures and
internal controls and procedures for financial reporting (as defined in
Exchange Act Rules 13a–14 and 15d–14) for the registrant
and we have:
(a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
issuer, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which
this report is being prepared;
(b) Designed such internal controls and procedures for financial
reporting, or caused such internal controls and procedures for
financial reporting to be designed under their supervision, to provide
reasonable assurances that the registrant's financial statements are
fairly presented in conformity with generally accepted accounting
principles;
(c) Evaluated the effectiveness of the registrant's disclosure
controls and
[[Page 66237]]
procedures and internal controls and procedures for financial reporting
as of the end of the period covered by this report (“Evaluation
Date”);
(d) Presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures and internal
controls and procedures for financial reporting based on our evaluation
as of the Evaluation Date;
(e) Disclosed to the registrant's auditors and the audit committee
of the board of directors (or persons fulfilling the equivalent
function):
(i) All significant deficiencies and material weaknesses in the
design or operation of internal controls and procedures for financial
reporting which could adversely affect the registrant's ability to
record, process, summarize and report financial information required to
be disclosed by the registrant in the reports that it files or submits
under the Act (15 U.S.C. 78a et seq.), within the time periods
specified in the U.S. Securities and Exchange Commission's rules and
forms; and
(ii) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's
internal controls and procedures for financial reporting; and
(f) Indicated in this report any significant changes in the
registrant's internal controls and procedures for financial reporting
or in other factors that could significantly affect internal controls
and procedures for financial reporting made during the period covered
by this report, including any actions taken to correct significant
deficiencies and material weaknesses in the registrant's internal
controls and procedures for financial reporting.
Date:------------------------------------------------------------------
&fxsp0;----------------------------------------------------------------
[Signature]
&fxsp0;----------------------------------------------------------------
[Title]
*&thnsp;Provide a separate certification for each principal
executive officer and principal financial officer of the registrant.
See Rules 13a–14 and 15d–14. The required certification
must be in the exact form set forth above.
23. Amend Form 10–QSB (referenced in §&thnsp;249.308b)
by:
a Revising Item 3 in Part I—Financial Information; and
b. Revising the “Certifications” section.
The revisions read as follows:
Note: The text of Form 10–QSB does not, and this amendment
will not, appear in the Code of Federal Regulations.
Form 10–QSB
* * * * *
Part I—Financial Information
* * * * *
Item 3. Controls and Procedures
Furnish the information required by Item 307(a) and (b) of
Regulation S–B (§&thnsp;228.307(a) and (b) of this chapter).
* * * * *
Certifications*
I, [identify the certifying individual], certify that:
1. I have reviewed this quarterly report on Form 10–QSB of
[identify registrant];
2. Based on my knowledge, this report 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 under which
such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the small business issuer as of, and for, the periods
presented in this report;
4. The small business issuer's other certifying officers and I are
responsible for establishing and maintaining disclosure controls and
procedures and internal controls and procedures for financial reporting
(as defined in Exchange Act Rules 13a–14 and 15d–14) for
the small business issuer and we have:
(a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
issuer, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which
this report is being prepared;
(b) Designed such internal controls and procedures for financial
reporting, or caused such internal controls and procedures for
financial reporting to be designed under their supervision, to provide
reasonable assurances that the small business issuer's financial
statements are fairly presented in conformity with generally accepted
accounting principles;
(c) Evaluated the effectiveness of the small business issuer's
disclosure controls and procedures and internal controls and procedures
for financial reporting as of the end of the period covered by this
report (“Evaluation Date”);
(d) Presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures and internal
controls and procedures for financial reporting based on our evaluation
as of the Evaluation Date;
(e) Disclosed to the small business issuer's auditors and the audit
committee of the board of directors (or persons fulfilling the
equivalent function):
(i) All significant deficiencies and material weaknesses in the
design or operation of internal controls and procedures for financial
reporting which could adversely affect the small business issuer's
ability to record, process, summarize and report financial information
required to be disclosed by the small business issuer in the reports
that it files or submits under the Act (15 U.S.C. 78a et seq.), within
the time periods specified in the U.S. Securities and Exchange
Commission's rules and forms; and
(ii) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the small business
issuer's internal controls and procedures for financial reporting; and
(f) Indicated in this report any significant changes in the small
business issuer's internal controls and procedures for financial
reporting or in other factors that could significantly affect internal
controls and procedures for financial reporting made during the period
covered by this report, including any actions taken to correct
significant deficiencies and material weaknesses in the small business
issuer's internal controls and procedures for financial reporting.
Date:------------------------------------------------------------------
&fxsp0;----------------------------------------------------------------
[Signature]
&fxsp0;----------------------------------------------------------------
[Title]
*&thnsp;Provide a separate certification for each principal
executive officer and principal financial officer of the small business
issuer. See Rules 13a–14 and 15d–14. The required
certification must be in the exact form set forth above.
24. Amend Form 20–F (referenced in §&thnsp;249.220f) by:
a. Adding Item 15;
b. Redesignating paragraph 10 of “Instructions as to
Exhibits” as paragraph 11;
c. Adding new paragraph 10 to “Instructions as to
Exhibits”; and
d. Revising the “Certifications” section.
[[Page 66238]]
The additions and revisions read as follows:
Note: The text of Form 20–F does not, and this amendment
will not, appear in the Code of Federal Regulations.
Form 20–F
* * * * *
Item 15 Certain Disclosures
(a) Controls and Procedures
(1) Evaluation of Disclosure Controls and Procedures and Internal
Controls and Procedures for Financial Reporting. Disclose the
conclusions of the registrant's principal executive officer or officers
and principal financial officer or officers, or persons performing
similar functions, about the effectiveness of the registrant's
disclosure controls and procedures and internal controls and procedures
for financial reporting based on management's evaluation of these
controls and procedures in accordance with
§§&thnsp;240.13a–15 or 240.15d–15 of this chapter
as of the end of the period covered by the annual report that includes
the disclosure required by this paragraph.
(2) Changes to Internal Controls and Procedures for Financial
Reporting. Disclose any significant changes to the registrant's
internal controls and procedures for financial reporting made during
the period covered by the annual report that includes the disclosure
required by this paragraph, including any actions taken to correct
significant deficiencies and material weaknesses in the registrant's
internal controls and procedures for financial reporting.
(3) Report on management's responsibilities. Furnish an internal
control report of management that includes:
(i) A statement of management's responsibilities for establishing
and maintaining adequate internal controls and procedures for financial
reporting for the registrant;
(ii) Conclusions about the effectiveness of the registrant's
internal controls and procedures for financial reporting based on
management's evaluation of those controls and procedures in accordance
with §§&thnsp;240.13a–15 or 240.15d–15 of this
chapter as of the end of the registrant's most recent fiscal year;
(iii) A statement that the registered public accounting firm that
prepared or issued the registrant's audit report relating to the
financial statements included in the report containing the disclosure
required by this Item has attested to, and reported on, management's
evaluation of the registrant's internal controls and procedures for
financial reporting; and
(iv) The attestation report of the registered public accounting
firm that audited or reviewed the financial statements included in the
annual report containing the disclosure required by this Item 15(a)(3).
Instructions to Item 15(a)
1. You do not need to provide the information called for by this
Item 15(a) unless you are using this form as an annual report.
2. A registrant that is an Asset-Backed Issuer (as defined in
§&thnsp;240.13a–14(g) and §&thnsp;240.15d–14(g))
is not required to disclose the information required by this Item
15(a).
3. For purposes of this Item, the terms “disclosure controls
and procedures” and “internal controls and procedures for
financial reporting” shall have the meanings specified in
§&thnsp;240.13a–14 and §&thnsp;240.15d–14 of this
chapter.
4. If the conclusions of the registrant's principal executive and
financial officers are reflected in the conclusions disclosed pursuant
to paragraph (c)(2) of this Item, the registrant does not have to
include any separate disclosure required by paragraph (a) of this Item
regarding the effectiveness of the registrant's internal controls and
procedures for financial reporting as of the end of the registrant's
most recent fiscal year.
5. The registrant is encouraged, but not required, to include the
annual report disclosure required by paragraph (a)(2) of this Item in
the internal control report required by paragraph (a)(3) of this Item,
rather than disclosing it elsewhere in the annual report.
(b) Audit Committee Financial Experts
Disclose the number and names of the persons that the registrant's
board of directors has determined to be the financial experts serving
on the registrant's audit committee, as defined in section 3(a)(58) of
the Exchange Act. Also disclose whether the financial expert or experts
are independent as that term is used in section 10A(m)(3) of the
Exchange Act, and if not, an explanation of why they are not. If the
registrant's board of directors has not determined that a financial
expert is serving on its audit committee, the registrant must disclose
that fact and explain why it does not have such an expert.
Instructions to Item 15(b)
1. You do not need to provide the information called for by this
Item 15(b) unless you are using this form as an annual report.
2. For purposes of the determination by the board of directors
under this Item 15(b), the term “financial expert” means a
person who has, through education and experience as a public accountant
or auditor, or a principal financial officer, controller, or principal
accounting officer, of a company that, at the time the person held such
position, was required to file reports pursuant to section 13(a) or
15(d) of the Exchange Act, or experience in one or more positions that
involve the performance of similar functions (or that result, in the
judgment of the board of directors, in the person's having similar
expertise and experience), the following attributes:
a. An understanding of financial statements and generally accepted
accounting principles used by the registrant in its primary financial
statements;
b. Experience applying such generally accepted accounting
principles in connection with the accounting for estimates, accruals,
and reserves that are generally comparable to the estimates, accruals
and reserves, if any, used in the registrant's financial statements;
c. Experience preparing or auditing financial statements that
present accounting issues that are generally comparable to those raised
by the registrant's financial statements;
d. Experience with internal controls and procedures for financial
reporting; and
e. An understanding of audit committee functions.
3. If the board of directors has determined that a person is a
financial expert because, in the board's judgment, he or she has
similar expertise and experience to those enumerated, the registrant
must disclose the basis for that determination.
4. In evaluating the education and experience of a person, the
board of directors should consider the following factors in the
aggregate:
a. The level of the person's accounting or financial education,
including whether the person has earned an advanced degree in finance
or accounting;
b. Whether the person is a certified public accountant, or the
equivalent, in good standing, and the length of time that the person
actively has practiced as a certified public accountant, or the
equivalent;
c. Whether the person is certified or otherwise identified as
having accounting or financial experience by a recognized private body
that establishes and administers standards in respect of such
expertise, whether that person is in good standing with the recognized
[[Page 66239]]
private body, and the length of time that the person has been actively
certified or identified as having this expertise;
d. Whether the person has served as a principal financial officer,
controller or principal accounting officer of a company that, at the
time the person held such position, was required to file reports
pursuant to section 13(a) or 15(d) of the Exchange Act, and if so, for
how long;
e. The person's specific duties while serving as a public
accountant, auditor, principal financial officer, controller, principal
accounting officer or position involving the performance of similar
functions;
f. The person's level of familiarity and experience with all
applicable laws and regulations regarding the preparation of financial
statements that must be included in reports filed under section 13(a)
or 15(d) of the Exchange Act;
g. The level and amount of the person's direct experience
reviewing, preparing, auditing or analyzing financial statements that
must be included in reports filed under section 13(a) or 15(d) of the
Exchange Act;
h. The person's past or current membership on one or more audit
committees of companies that, at the time the person held such
membership, were required to file reports pursuant to section 13(a) or
15(d) of the Exchange Act;
i. The person's level of familiarity and experience with the use
and analysis of financial statements of public companies;
j. Whether the person has any other relevant qualifications or
experience that would assist him or her in understanding and evaluating
the registrant's financial statements and other financial information
and to make knowledgeable and thorough inquiries whether:
i. The financial statements fairly present the financial condition,
results of operations and cash flows of the registrant in accordance
with generally accepted accounting principles; and
ii. The financial statements and other financial information, taken
together, fairly present the financial condition, results of operations
and cash flows of the registrant; and
k. The person's level of experience with reconciliation of
financial statements with U.S. generally accepted accounting
principles.
5. Although the board of directors should consider the factors
listed in Instruction 4, those factors are not replacements for, and a
financial expert must satisfy, all of the attributes listed in
Instruction 2 to this Item 15(b).
6. In the case of foreign private issuers with two-tier boards of
directors, for purposes of this Item 15(b), the term “board of
directors” means the supervisory or non-management board.
7. A registrant that is an Asset-Backed Issuer (as defined in
§&thnsp;240.13a–14(g) and §&thnsp;240.15d–14(g)
of this chapter) is not required to disclose the information required
by this Item.
(c) Code of Ethics
(1) Disclose whether the registrant has adopted a written code of
ethics that applies to the registrant's principal executive officer,
principal financial officer, principal accounting officer or
controller, or persons performing similar functions. If the registrant
has not adopted such a code of ethics, explain why it has not done so.
(2) If, during the last fiscal year, the registrant has amended its
code of ethics that applies to its principal executive officer,
principal financial officer, principal accounting officer or
controller, or persons performing similar functions, or granted a
waiver from a provision of the code of ethics to one of these officers
or persons, the registrant must briefly describe the nature of the
amendment or waiver. Disclosure regarding waivers must include the name
of the person to whom the waiver was granted, and the date of the
waiver.
Instructions to Item 15(c)
1. You do not need to provide the information called for by this
Item 15(c) unless you are using this form as an annual report.
2. A registrant that is an Asset-Backed Issuer (as defined in
§&thnsp;240.13a–14(g) and §&thnsp;240.15d–14(g)
of this chapter) is not required to disclose the information required
by this Item 15(c).
3. For purposes of this Item 15(c), the term “code of
ethics” means a codification of such standards that is reasonably
designed to deter wrongdoing and to promote:
a. Honest and ethical conduct, including the ethical handling of
actual or apparent conflicts of interest between personal and
professional relationships;
b. Avoidance of conflicts of interest, including disclosure to an
appropriate person or persons identified in the code of any material
transaction or relationship that reasonably could be expected to give
rise to such a conflict;
c. Full, fair, accurate, timely, and understandable disclosure in
reports and documents that a registrant files with, or submits to, the
Commission and in other public communications made by the registrant;
d. Compliance with applicable governmental laws, rules and
regulations;
e. The prompt internal reporting to an appropriate person or
persons identified in the code of violations of the code; and
f. Accountability for adherence to the code.
* * * * *
Certifications*
I, [identify the certifying individual], certify that:
1. I have reviewed this annual report on Form 20–F of
[identify registrant];
2. Based on my knowledge, this report 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 under which
such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures and
internal controls and procedures for financial reporting (as defined in
Exchange Act Rules 13a–14 and 15d–14) for the registrant
and we have:
(a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
issuer, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which
this report is being prepared;
(b) Designed such internal controls and procedures for financial
reporting, or caused such internal controls and procedures for
financial reporting to be designed under their supervision, to provide
reasonable assurances that the registrant's financial statements are
fairly presented in conformity with generally accepted accounting
principles;
(c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and internal controls and procedures for
financial reporting as of the end of the period covered by this report
(“Evaluation Date”);
(d) Presented in this report our conclusions about the
effectiveness of
[[Page 66240]]
the disclosure controls and procedures and internal controls and
procedures for financial reporting based on our evaluation as of the
Evaluation Date;
(e) Disclosed to the registrant's auditors and the audit committee
of the board of directors (or persons fulfilling the equivalent
function):
(i) All significant deficiencies and material weaknesses in the
design or operation of internal controls and procedures for financial
reporting which could adversely affect the registrant's ability to
record, process, summarize and report financial information required to
be disclosed by the registrant in the reports that it files or submits
under the Act (15 U.S.C. 78a et seq.), within the time periods
specified in the U.S. Securities and Exchange Commission's rules and
forms; and
(ii) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's
internal controls and procedures for financial reporting; and
(f) Indicated in this report any significant changes in the
registrant's internal controls and procedures for financial reporting
or in other factors that could significantly affect internal controls
and procedures for financial reporting made during the period covered
by this report, including any actions taken to correct significant
deficiencies and material weaknesses in the registrant's internal
controls and procedures for financial reporting.
Date:------------------------------------------------------------------
&fxsp0;----------------------------------------------------------------
[Signature]
&fxsp0;----------------------------------------------------------------
[Title]
*&thnsp;Provide a separate certification for each principal
executive officer and principal financial officer of the registrant.
See Rules 13a–14 and 15d–14. The required certification
must be in the exact form set forth above.
Instructions as to Exhibits
* * * * *
10. Any written code of ethics, or amendment to that code of
ethics, that applies to the registrant's principal executive officer,
principal financial officer, principal accounting officer or
controller, or persons performing similar functions, subject to
disclosure under Item 15(c) of this Form.
* * * * *
25. Amend Form 40–F (referenced in §&thnsp;249.240f) by:
a. Adding paragraphs (7), (8) and (9) to General Instruction B; and
b. Revising the “Certifications” section.
The additions and revisions read as follows.
Note: The text of Form 40–F does not, and this amendment
will not, appear in the Code of Federal Regulations.
Form 40–F
* * * * *
General Instructions
* * * * *
B. Information To Be Filed on This Form
* * * * *
(7) Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures and Internal
Controls and Procedures for Financial Reporting. Disclose the
conclusions of the registrant's principal executive officer or officers
and principal financial officer or officers, or persons performing
similar functions, about the effectiveness of the registrant's
disclosure controls and procedures and internal controls and procedures
for financial reporting based on management's evaluation of these
controls and procedures in accordance with
§§&thnsp;240.13a–15 or 240.15d–15 of this chapter
as of the end of the period covered by the annual report that includes
the disclosure required by this paragraph.
(b) Changes to Internal Controls and Procedures for Financial
Reporting. Disclose any significant changes to the registrant's
internal controls and procedures for financial reporting made during
the period covered by the annual report that includes the disclosure
required by this paragraph, including any actions taken to correct
significant deficiencies and material weaknesses in the registrant's
internal controls and procedures for financial reporting.
(c) Report on management's responsibilities. Furnish an internal
control report of management that includes:
(1) A statement of management's responsibilities for establishing
and maintaining adequate internal controls and procedures for financial
reporting for the registrant;
(2) Conclusions about the effectiveness of the registrant's
internal controls and procedures for financial reporting based on
management's evaluation of those controls and procedures in accordance
with §§&thnsp;240.13a–15 of 240.15d–15 of this
chapter as of the end of the registrant's most recent fiscal year;
(3) A statement that the registered public accounting firm that
prepared or issued the registrant's audit report relating to the
financial statements included in the report containing the disclosure
required by this Instruction B.(7)(c) has attested to, and reported on,
management's evaluation of the registrant's internal controls and
procedures for financial reporting;
(4) The attestation report of the registered public accounting firm
that audited or reviewed the financial statements included in the
annual report containing the disclosure required by this Instruction
B.(7)(c).
Notes to Instruction B.(7)
1. You do not need to provide the information called for by this
Instruction B.(7) unless you are using this form as an annual report.
2. A registrant that is an Asset-Backed Issuer (as defined in
§&thnsp;240.13a–14(g) and §&thnsp;240.15d–14(g))
is not required to disclose the information required by this
Instruction B.(7).
3. For purposes of this Instruction B.(7), the terms
“disclosure controls and procedures” and “internal
controls and procedures for financial reporting” shall have the
meanings specified in §&thnsp;240.13a–14 and
§&thnsp;240.15d–14 of this chapter.
4. If the conclusions of the registrant's principal executive and
financial officers are reflected in the conclusions disclosed pursuant
to paragraph (c)(2) of this Instruction B.(7), the registrant does not
have to include any separate disclosure required by paragraph (a) of
this Item regarding the effectiveness of the registrant's internal
controls and procedures for financial reporting as of the end of the
registrant's most recent fiscal year.
5. The registrant is encouraged, but not required, to include the
annual report disclosure required by paragraph (b) of this Instruction
B.(7) in the internal control report required by paragraph (c) of this
Instruction B.(7), rather than disclosing it elsewhere in the annual
report.
(8) Audit Committee Financial Experts
(a) Disclose the number and names of the persons that the board of
directors has determined to be the financial experts serving on the
registrant's audit committee, as defined in section 3(a)(58) of the
Exchange Act. Also disclose whether the financial expert or experts are
independent as that term is used in section 10A(m)(3) of the Exchange
Act, and if not, an explanation of why they are not. If the
registrant's board of directors has not determined that a financial
expert is serving on its audit committee, the registrant must disclose
that fact and explain why it does not have such an expert.
[[Page 66241]]
Notes to Instruction B.(8)
1. You do not need to provide the information called for by this
Instruction B.(8) unless you are using this form as an annual report.
2. For purposes of the determination by the board of directors
under this Instruction B.(8), the term “financial expert”
means a person who has, through education and experience as a public
accountant or auditor, or a principal financial officer, controller, or
principal accounting officer, of a company that, at the time the person
held such position, was required to file reports pursuant to section
13(a) or 15(d) of the Exchange Act, or experience in one or more
positions that involve the performance of similar functions (or that
result, in the judgment of the board of directors, in the person's
having similar expertise and experience), the following attributes:
a. An understanding of financial statements and generally accepted
accounting principles used by the registrant in its primary financial
statements;
b. Experience applying such generally accepted accounting
principles in connection with the accounting for estimates, accruals,
and reserves that are generally comparable to the estimates, accruals
and reserves, if any, used in the registrant's financial statements;
c. Experience preparing or auditing financial statements that
present accounting issues that are generally comparable to those raised
by the registrant's financial statements;
d. Experience with internal controls and procedures for financial
reporting; and
e. An understanding of audit committee functions.
3. If the board of directors has determined that a person is a
financial expert because, in the board's judgment, he or she has
similar expertise and experience to those enumerated, the registrant
must disclose the basis for that determination.
4. In evaluating the education and experience of a person, the
board of directors should consider the following factors in the
aggregate:
a. The level of the person's accounting or financial education,
including whether the person has earned an advanced degree in finance
or accounting;
b. Whether the person is a certified public accountant, or the
equivalent, in good standing, and the length of time that the person
actively has practiced as a certified public accountant, or the
equivalent;
c. Whether the person is certified or otherwise identified as
having accounting or financial experience by a recognized private body
that establishes and administers standards in respect of such
expertise, whether that person is in good standing with the recognized
private body, and the length of time that the person has been actively
certified or identified as having this expertise;
d. Whether the person has served as a principal financial officer,
controller or principal accounting officer of a company that, at the
time the person held such position, was required to file reports
pursuant to section 13(a) or 15(d) of the Exchange Act, and if so, for
how long;
e. The person's specific duties while serving as a public
accountant, auditor, principal financial officer, controller, principal
accounting officer or position involving the performance of similar
functions;
f. The person's level of familiarity and experience with all
applicable laws and regulations regarding the preparation of financial
statements that must be included in reports filed under section 13(a)
or 15(d) of the Exchange Act;
g. The level and amount of the person's direct experience
reviewing, preparing, auditing or analyzing financial statements that
must be included in reports filed under section 13(a) or 15(d) of the
Exchange Act;
h. The person's past or current membership on one or more audit
committees of companies that, at the time the person held such
membership, were required to file reports pursuant to section 13(a) or
15(d) of the Exchange Act;
i. The person's level of familiarity and experience with the use
and analysis of financial statements of public companies;
j. Whether the person has any other relevant qualifications or
experience that would assist him or her in understanding and evaluating
the registrant's financial statements and other financial information
and to make knowledgeable and thorough inquiries whether:
i. The financial statements fairly present the financial condition,
results of operations and cash flows of the registrant in accordance
with generally accepted accounting principles; and
ii. The financial statements and other financial information, taken
together, fairly present the financial condition, results of operations
and cash flows of the registrant; and
k. The person's level of experience with reconciliation of
financial statements with U.S. generally accepted accounting
principles.
5. Although the board of directors should consider the factors
listed in Note 4, those factors are not replacements for, and a
financial expert must satisfy, all of the attributes listed in Note 2
to this Instruction B.(8).
6. In the case of foreign private issuers with two-tier boards of
directors, for purposes of this Instruction B.(8), the term
“board of directors” means the supervisory or non-
management board.
7. A registrant that is an Asset-Backed Issuer (as defined in
§&thnsp;240.13a–14(g) and §&thnsp;240.15d–14(g)
of this chapter) is not required to disclose the information required
by this Instruction B.(8).
(9) Code of Ethics
(a) Disclose whether the registrant has adopted a written code of
ethics that applies to the registrant's principal executive officer,
principal financial officer, principal accounting officer or
controller, or persons performing similar functions. Such code of
ethics, or amendment to that code of ethics, must be attached as an
exhibit and filed with this Form. If the registrant has not adopted
such a code of ethics, explain why it has not done so.
(b) If, during the last fiscal year, the registrant has amended its
code of ethics that applies to its principal executive officer,
principal financial officer, principal accounting officer or
controller, or persons performing similar functions, or granted a
waiver from a provision of the code of ethics to one of these officers
or persons, the registrant must briefly describe the nature of the
amendment or waiver. Disclosure regarding waivers must include the name
of the person to whom the waiver was granted, and the date of the
waiver.
Notes to Instruction B.(9)
1. You do not need to provide the information called for by this
Instruction B.(9) unless you are using this form as an annual report.
2. A registrant that is an Asset-Backed Issuer (as defined in
§&thnsp;240.13a–14(g) and §&thnsp;240.15d–14(g)
of this chapter) is not required to disclose the information required
by this Instruction B.(9).
3. For purposes of the required disclosures, the term “code
of ethics” means a codification of such standards that is
reasonably designed to deter wrongdoing and to promote:
(a) Honest and ethical conduct, including the ethical handling of
actual or apparent conflicts of interest between personal and
professional relationships;
(b) Avoidance of conflicts of interest, including disclosure to an
appropriate person or persons identified in the code of any material
transaction or relationship that reasonably could be expected to give
rise to such a conflict;
[[Page 66242]]
(c) Full, fair, accurate, timely, and understandable disclosure in
reports and documents that a registrant files with, or submits to, the
Commission and in other public communications made by the registrant;
(d) Compliance with applicable governmental laws, rules and
regulations;
(e) The prompt internal reporting to an appropriate person or
persons identified in the code of violations of the code; and
(f) Accountability for adherence to the code.
* * * * *
Certifications*
I, [identify the certifying individual], certify that:
1. I have reviewed this annual report on Form 40–F of
[identify registrant];
2. Based on my knowledge, this report 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 under which
such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures and
internal controls and procedures for financial reporting (as defined in
Exchange Act Rules 13a–14 and 15d–14) for the registrant
and we have:
(a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
issuer, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which
this report is being prepared;
(b) Designed such internal controls and procedures for financial
reporting, or caused such internal controls and procedures for
financial reporting to be designed under their supervision, to provide
reasonable assurances that the registrant's financial statements are
fairly presented in conformity with generally accepted accounting
principles;
(c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and internal controls and procedures for
financial reporting as of the end of the period covered by this report
(“Evaluation Date”);
(d) Presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures and internal
controls and procedures for financial reporting based on our evaluation
as of the Evaluation Date;
(e) Disclosed to the registrant's auditors and the audit committee
of the board of directors (or persons fulfilling the equivalent
function):
(i) All significant deficiencies and material weaknesses in the
design or operation of internal controls and procedures for financial
reporting which could adversely affect the registrant's ability to
record, process, summarize and report financial information required to
be disclosed by the registrant in the reports that it files or submits
under the Act (15 U.S.C. 78a et seq.), within the time periods
specified in the U.S. Securities and Exchange Commission's rules and
forms; and
(ii) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's
internal controls and procedures for financial reporting; and
(f) Indicated in this report any significant changes in the
registrant's internal controls and procedures for financial reporting
or in other factors that could significantly affect internal controls
and procedures for financial reporting made during the period covered
by this report, including any actions taken to correct significant
deficiencies and material weaknesses in the registrant's internal
controls and procedures for financial reporting.
Date:------------------------------------------------------------------
&fxsp0;----------------------------------------------------------------
[Signature]
&fxsp0;----------------------------------------------------------------
[Title]
*&thnsp;Provide a separate certification for each principal
executive officer and principal financial officer of the registrant.
See Rules 13a–14 and 15d–14. The required certification
must be in the exact form set forth above.
26. Amend Form 10–K (referenced in §&thnsp;249.310) by:
a. Revising Item 10 in Part III;
b. Redesignating Item 15 as Item 16 in Part IV;
c. Adding new Item 15 to Part III; and
d. Revising the “Certifications” section.
The revisions and additions read as follows:
Note: The text of Form 10–K does not, and this amendment
will not, appear in the Code of Federal Regulations.
Form 10–K
Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
* * * * *
Part III
* * * * *
Item 10. Directors and Executive Officers of the Registrant
Furnish the information required by Items 401, 405 and 406 of
Regulation S–K (§§&thnsp;229.401, 229.405 and 229.406
of this chapter).
* * * * *
Item 15. Audit Committee Financial Experts
Furnish the information required by Item 309 of Regulation
S–K (§&thnsp;229.309 of this chapter).
* * * * *
Certifications*
I, [identify the certifying individual], certify that:
1. I have reviewed this annual report on Form 10–K of
[identify registrant];
2. Based on my knowledge, this report 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 under which
such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures and
internal controls and procedures for financial reporting (as defined in
Exchange Act Rules 13a–14 and 15d–14) for the registrant
and we have:
(a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
issuer, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which
this report is being prepared;
(b) Designed such internal controls and procedures for financial
reporting, or caused such internal controls and procedures for
financial reporting to be
[[Page 66243]]
designed under their supervision, to provide reasonable assurances that
the registrant's financial statements are fairly presented in
conformity with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and internal controls and procedures for
financial reporting as of the end of the period covered by this report
(“Evaluation Date”);
(d) Presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures and internal
controls and procedures for financial reporting based on our evaluation
as of the Evaluation Date;
(e) Disclosed to the registrant's auditors and the audit committee
of the board of directors (or persons fulfilling the equivalent
function):
(i) All significant deficiencies and material weaknesses in the
design or operation of internal controls and procedures for financial
reporting which could adversely affect the registrant's ability to
record, process, summarize and report financial information required to
be disclosed by the registrant in the reports that it files or submits
under the Act (15 U.S.C. 78a et seq.), within the time periods
specified in the U.S. Securities and Exchange Commission's rules and
forms; and
(ii) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's
internal controls and procedures for financial reporting; and
(f) Indicated in this report any significant changes in the
registrant's internal controls and procedures for financial reporting
or in other factors that could significantly affect internal controls
and procedures for financial reporting made during the period covered
by this report, including any actions taken to correct significant
deficiencies and material weaknesses in the registrant's internal
controls and procedures for financial reporting.
Date:------------------------------------------------------------------
&fxsp0;----------------------------------------------------------------
[Signature]
&fxsp0;----------------------------------------------------------------
[Title]
*&thnsp;Provide a separate certification for each principal
executive officer and principal financial officer of the registrant.
See Rules 13a–14 and 15d–14. The required certification
must be in the exact form set forth above.
* * * * *
29. Amend Form 10–KSB (referenced in §&thnsp;249.310b)
by:
a. Revising Item 9 in Part III;
b. Adding Item 15 in Part III; and
c. Revising the “Certifications” section.
The revisions and addition read as follows:
Note: The text of Form 10–KSB does not, and this amendment
will not, appear in the Code of Federal Regulations.
Form 10–KSB
[ ] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
* * * * *
Part III
* * * * *
Item 9. Directors and Executive Officers of the Registrant
Furnish the information required by Items 401, 405 and 406 of
Regulation S–B (§§&thnsp;228.401, 228.405, and 228.406
of this chapter).
* * * * *
Item 15. Audit Committee Financial Experts
Provide the information required by Item 309 of Regulation
S–B (§&thnsp;228.309 of this chapter).
* * * * *
Certifications*
I, [identify the certifying individual], certify that:
1. I have reviewed this annual report on Form 10–KSB of
[identify registrant];
2. Based on my knowledge, this report 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 under which
such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the small business issuer as of, and for, the periods
presented in this report;
4. The small business issuer's other certifying officers and I are
responsible for establishing and maintaining disclosure controls and
procedures and internal controls and procedures for financial reporting
(as defined in Exchange Act Rules 13a–14 and 15d–14) for
the small business issuer and we have:
(a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
issuer, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which
this report is being prepared;
(b) Designed such internal controls and procedures for financial
reporting, or caused such internal controls and procedures for
financial reporting to be designed under their supervision, to provide
reasonable assurances that the small business issuer's financial
statements are fairly presented in conformity with generally accepted
accounting principles;
(c) Evaluated the effectiveness of the small business issuer's
disclosure controls and procedures and internal controls and procedures
for financial reporting as of the end of the period covered by this
report (“Evaluation Date”);
(d) Presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures and internal
controls and procedures for financial reporting based on our evaluation
as of the Evaluation Date;
(e) Disclosed to the small business issuer's auditors and the audit
committee of the board of directors (or persons fulfilling the
equivalent function):
(i) All significant deficiencies and material weaknesses in the
design or operation of internal controls and procedures for financial
reporting which could adversely affect the small business issuer's
ability to record, process, summarize and report financial information
required to be disclosed by the small business issuer in the reports
that it files or submits under the Act (15 U.S.C. 78a et seq.), within
the time periods specified in the U.S. Securities and Exchange
Commission's rules and forms; and
(ii) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the small business
issuer's internal controls and procedures for financial reporting; and
(f) Indicated in this report any significant changes in the small
business issuer's internal controls and procedures for financial
reporting or in other factors that could significantly affect internal
controls and procedures for financial reporting made during the period
covered by this report, including any actions taken to correct
significant deficiencies and material weaknesses in the small business
issuer's internal controls and procedures for financial reporting.
Date:------------------------------------------------------------------
[[Page 66244]]
-----------------------------------------------------------------------
&fxsp0;----------------------------------------------------------------
[Signature]
&fxsp0;----------------------------------------------------------------
[Title]
*&thnsp;Provide a separate certification for each principal
executive officer and principal financial officer of the small business
issuer. See Rules 13a–14 and 15d–14. The required
certification must be in the exact form set forth above.
* * * * *
30. Amend §&thnsp;249.322 by revising paragraph (a) to read as
follows:
§&thnsp;249.322 Form 12b–25—Notification of late
filing.
(a) This form shall be filed pursuant to
§&thnsp;240.12b–25 of this chapter by issuers who are unable
to file timely all or any required portion of an annual or transition
report on Form 10–K and Form 10–KSB, 20–F, or
11–K (§§&thnsp;249.310, 249.310b, 249.220f or 249.311)
or a quarterly or transition report on Form 10–Q and Form
10–QSB (§§&thnsp;249.308a and 249.308b) or a current
report on Form 8–K (§&thnsp;249.308) pursuant to section 13
or 15(d) of the Act (15 U.S.C. 78m or 78o(d)) or a semi-annual, annual
or transition report on Form N–SAR or Form N–CSR (17 CFR
274.101 or 274.128) pursuant to section 13 or 15(d) of the Act or
section 30 of the Investment Company Act of 1940 (15 U.S.C.
80a–29). The filing shall consist of a signed original and three
conformed copies, and shall be filed with the Commission at Washington,
DC 20549, no later than one business day after the due date for the
periodic report in question. Copies of this form may be obtained from
“Publications,” Securities and Exchange Commission, 450 5th
Street, NW., Washington, DC 20549 and at our Web site at http://
www.sec.gov.
* * * * *
31. Amend Form 12b–25 (referenced in §&thnsp;249.322)
by:
a. Revising the preamble;
b. Revising paragraph (b) of Part II; and
c. Revising Part III to read as follows:
Note: The text of Form 12b–25 does not, and this amendment
will not, appear in the Code of Federal Regulations.
Form 12b–25
Notification of Late Filing
(Check One): &lowbarm; Form 10–K &lowbarm; Form 20–F
&lowbarm; Form 11–K &lowbarm; Form 10–Q &lowbarm; Form
8–K &lowbarm; Form N–SAR &lowbarm; Form N–CSR
* * * * *
Part II—Rules 12b–25(b) and (c)
* * * * *
(b) The subject annual report, semi-annual report, transition
report on Form 10–K, Form 20–F, Form 11–K, Form
N–SAR or Form N–CSR, or portion thereof, will be filed on
or before the fifteenth calendar day following the prescribed due date;
or the subject quarterly report or transition report on Form
10–Q, or portion thereof, will be filed on or before the fifth
calendar day following the prescribed due date; or the subject current
report on Form 8–K will be filed on or before the second business
day following the prescribed due date; and
* * * * *
Part III—Narrative
State below in reasonable detail why Forms 10–K, 20–F,
11–K, 10–Q, 8–K, N–SAR, N–CSR, or the
transition report or portion thereof, could not be filed within the
prescribed time period.
* * * * *
PART 270—RULES AND REGULATIONS, INVESTMENT COMPANY ACT OF
1940
32. The general authority citation for part 270 is revised to read
as follows:
Authority: 15 U.S.C. 80a–1 et seq., 80a–34(d),
80a–37, and 80a–39, unless otherwise noted;
* * * * *
33. Amend §&thnsp;270.30a–2 by:
a. Revising paragraph (b)(4);
b. Removing paragraphs (b)(5) and (b)(6); and
c. Adding paragraph (d).
The revisions and additions read as follows:
§&thnsp;270.30a–2 Certification of disclosure in annual and
semi-annual reports.
* * * * *
(b) * * *
(4) He or she and the other certifying officers are responsible for
establishing and maintaining disclosure controls and procedures and
internal controls and procedures for financial reporting (as such terms
are defined in paragraphs (c) and (d) of this section) for the
investment company and have:
(i) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under their
supervision, to ensure that material information relating to the
investment company, including its consolidated subsidiaries, is made
known to them by others within those entities, particularly during the
period in which periodic reports are being prepared;
(ii) Designed such internal controls and procedures for financial
reporting, or caused such internal controls and procedures for
financial reporting to be designed under their supervision, to provide
reasonable assurances that the investment company's financial
statements are fairly presented in conformity with generally accepted
accounting principles;
(iii) Evaluated the effectiveness of the investment company's
disclosure controls and procedures as of the end of the period covered
by the report (“Evaluation Date”);
(iv) Presented in the report their conclusions about the
effectiveness of the disclosure controls and procedures based on their
evaluation as of the Evaluation Date; and
(v) Disclosed to the investment company's auditors and the audit
committee of the board of directors (or persons fulfilling the
equivalent function):
(A) All significant deficiencies and material weaknesses in the
design or operation of internal controls and procedures for financial
reporting which could adversely affect the investment company's ability
to record, process, summarize, and report financial information
required to be disclosed by the investment company in the reports that
it files or submits under the Securities Exchange Act of 1934 (15
U.S.C. 78a et seq.) and the Investment Company Act of 1940 (15 U.S.C.
80a–1 et seq.), within the time periods specified in the
Commission's rules and forms; and
(B) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the investment company's
internal controls and procedures for financial reporting; and
(vi) Indicated in the report any significant changes in the
investment company's internal controls and procedures for financial
reporting or in other factors that could significantly affect internal
controls and procedures for financial reporting made during the period
covered by the report, including any actions taken to correct
significant deficiencies and material weaknesses in the investment
company's internal controls and procedures for financial reporting.
* * * * *
(d) For purposes of this section, the term internal controls and
procedures for financial reporting means controls that pertain to the
preparation of financial statements for external purposes that are
fairly presented in conformity with generally accepted accounting
principles as addressed by the Codification of Statements on Auditing
Standards §&thnsp;319 or any superseding definition or other
literature that is issued or adopted by the Public Company Accounting
Oversight Board.
[[Page 66245]]
34. Amend §&thnsp;270.30a–3 (as proposed in 67 FR 57298
(9/9/02)) by revising paragraph (b) to read as follows:
§&thnsp;270.30a–3 Disclosure controls and procedures
related to preparation of required filings.
* * * * *
(b) In connection with each report, including transition reports,
that requires certification under §&thnsp;270.30a–2, the
registered investment company's management must conduct an evaluation,
with the participation of the registered investment company's principal
executive officer or officers and principal financial officer or
officers, or persons performing similar functions, of the
effectiveness, as of the end of the period covered by the report, of
the design and operation of the registered investment company's
disclosure controls and procedures.
PART 274—FORMS PRESCRIBED UNDER THE INVESTMENT COMPANY ACT OF
1940
35. The authority citation for Part 274 is revised to read as
follows:
Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 78c(b), 78l, 78m,
78n, 78o(d), 80a–8, 80a–24, 80a–26, and
80a–29, unless otherwise noted.
Section 274.101 is also issued under secs. 3(a), 302, 406, and
407, Pub. L. No. 107–204, 116 Stat. 745.
Section 274.128 is also issued under secs. 3(a), 302, 406, and
407, Pub. L. No. 107–204, 116 Stat. 745.
PART 249—FORMS, SECURITIES EXCHANGE ACT OF 1934
PART 274—FORMS PRESCRIBED UNDER THE INVESTMENT COMPANY ACT OF
1940
36. Amend Form N–SAR (referenced in
§§&thnsp;249.330 and 274.101) by:
a. Revising the reference “133” in item 6 to read
“134”;
b. Redesignating item 133 as item 134;
c. Adding new item 133;
d. Revising newly redesignated item 134;
e. Revising the reference “items 77 and 102” in
paragraph (1) of General Instruction D, “Preparation of
Report,” to read “items 77, 102, and 134(b)”;
f. Revising the reference “133” in the fifth
paragraph of General Instruction A to read “134”;
g. Revising paragraphs (a)(i) and (a)(ii) of sub-item 77Q3 in
Instructions to Specific Items;
h. Revising the Certification contained in paragraph (a)(iii) of
sub-item 77Q3 in Instructions to Specific Items;
i. Designating the current Instruction to sub-item 102P3 as
Instruction (c);
j. Adding Instructions (a) and (b) to sub-item 102P3;
k. Adding an Instruction to item 133;
l. Revising the Instruction to newly redesignated item 134; and
m. Revising the reference “133” in the Instructions
to the Signature Page to read “134.”
These additions and revisions read as follows:
Note: The text of Form N–SAR does not, and this amendment
will not, appear in the Code of Federal Regulations.
Form N–SAR
* * * * *
Item 133: Code of Ethics
(a) Disclose whether each of the registrant's sponsor, depositor,
trustee, and principal underwriter has adopted a written code of ethics
that applies to the principal executive officer, principal financial
officer, principal accounting officer or controller, or persons
performing similar functions of, respectively, the registrant's
sponsor, depositor, trustee, and principal underwriter. If any of the
registrant's sponsor, depositor, trustee, and principal underwriter has
not adopted such a code of ethics, explain why it has not done so.
(b) If the registrant's sponsor, depositor, trustee, or principal
underwriter has amended its code of ethics that applies to its
principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar
functions, or granted a waiver, including an implicit waiver, from a
provision of the code of ethics to one of these officers or persons,
the registrant must briefly describe the nature of the amendment or
waiver. Disclosure regarding waivers must include the name of the
person to whom the waiver was granted, and the date of the waiver.
(c) If the registrant plans to elect to disclose any amendments to,
or waivers from, its sponsor's, depositor's, trustee's, or principal
underwriter's codes of ethics on the registrant's Internet website,
disclose the registrant's Internet address and its intention to
disclose these events on its website.
Item 134
Include the following exhibits:
(a)The certifications required by rule 30a–2 under the
Investment Company Act (17 CFR 270.30a–2).
(b) Any written code of ethics, or amendment to that code of
ethics, that applies to the principal executive officer, principal
financial officer, principal accounting officer or controller, or
persons performing similar functions of registrant's sponsor,
depositor, trustee, or principal underwriter, subject to disclosure
under Item 133 of this Form.
* * * * *
Instructions to Specific Items
* * * * *
Sub-Item 77Q3
* * * * *
(a) * * *
(i) Disclose the conclusions of the registrant's principal
executive officer or officers and principal financial officer or
officers, or persons performing similar functions, about the
effectiveness of the registrant's disclosure controls and procedures
(as defined in rule 30a–2(c) under the Act (17 CFR
270.30a–2(c))) based on management's evaluation of these controls
and procedures in accordance with Rule 13a–15(c) or
15d–15(c) under the 1934 Act (17 CFR 240.13a–15(c) or
15d–15(c)) and Rule 30a–3(b) under the Act (17 CFR
270.30a–3(b)) as of the end of the period covered by the report
that includes the disclosure required by this paragraph.
(ii) Disclose any significant changes to the registrant's internal
controls and procedures for financial reporting (as defined in rule
30a–2(d) under the Act (17 CFR 270.30a–2(d))) made during
the period covered by the report that includes the disclosure required
by this paragraph, including any actions taken to correct significant
deficiencies and material weaknesses in the registrant's internal
controls and procedures for financial reporting.
(iii) * * *
Certifications
I, [identify the certifying individual], certify that:
1. I have reviewed this report on Form N–SAR, including
exhibits, of [identify registrant];
2. Based on my knowledge, this report, including exhibits, 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 under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial information included in
this report, including exhibits, and the financial statements on which
the financial information is based, fairly present in all material
respects the financial condition, results of operations, changes in net
assets, and cash flows (if the financial statements are required to
include a statement of cash flows) of the registrant as of, and for,
the periods presented in this report;
[[Page 66246]]
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures and
internal controls and procedures for financial reporting (as defined in
rule 30a–2(c) and (d) under the Investment Company Act) for the
registrant and we have:
(a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal controls and procedures for financial
reporting, or caused such internal controls and procedures for
financial reporting to be designed under our supervision, to provide
reasonable assurances that the registrant's financial statements are
fairly presented in conformity with generally accepted accounting
principles;
(c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of the end of the period covered by this
report (“Evaluation Date”);
(d) Presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
(e) Disclosed to the registrant's auditors and the audit committee
of the board of directors (or persons fulfilling the equivalent
function):
(i) All significant deficiencies and material weaknesses in the
design or operation of internal controls and procedures for financial
reporting which could adversely affect the registrant's ability to
record, process, summarize, and report financial information required
to be disclosed by the registrant in the reports that it files or
submits under the Securities Exchange Act of 1934 and the Investment
Company Act of 1940, within the time periods specified in the U.S.
Securities and Exchange Commission's rules and forms; and
(ii) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's
internal controls and procedures for financial reporting; and
(f) Indicated in this report any significant changes in the
registrant's internal controls and procedures for financial reporting
or in other factors that could significantly affect internal controls
and procedures for financial reporting made during the period covered
by this report, including any actions taken to correct significant
deficiencies and material weaknesses in the registrant's internal
controls and procedures for financial reporting.
Date:------------------------------------------------------------------
&fxsp0;----------------------------------------------------------------
[Signature]
&fxsp0;----------------------------------------------------------------
[Title]
* * * * *
Sub-Item 102P3
* * * * *
Instructions: (a)(1) Disclose whether each of the registrant, its
investment adviser, and its principal underwriter has adopted a written
code of ethics that applies to the principal executive officer,
principal financial officer, principal accounting officer or
controller, or persons performing similar functions of, respectively,
the registrant, its investment adviser, and its principal underwriter.
If any of the registrant, its investment adviser, and its principal
underwriter has not adopted such a code of ethics, explain why it has
not done so.
(2) If the registrant, its investment adviser, or its principal
underwriter has amended its code of ethics that applies to its
principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar
functions, or granted a waiver, including an implicit waiver, from a
provision of the code of ethics to one of these officers or persons,
the registrant must briefly describe the nature of the amendment or
waiver. Disclosure regarding waivers must include the name of the
person to whom the waiver was granted, and the date of the waiver. The
registrant does not need to provide any information pursuant to this
paragraph (a)(2) if it discloses the required information on its
Internet website within two business days following the date of the
amendment or waiver and the registrant has disclosed in its most
recently filed report on this form its Internet address and intention
to provide disclosure in this manner. If the amendment or waiver occurs
on a Saturday, Sunday, or holiday on which the Commission is not open
for business, then the two business day period shall begin to run on
and include the first business day thereafter. If the registrant elects
to disclose this information through its website, such information must
remain available on the website for at least a 12-month period. The
registrant must retain the information for a period of not less than
six years following the end of the fiscal year in which the amendment
or waiver occurred. Upon request, the registrant must furnish to the
Commission or its staff a copy of any or all information retained
pursuant to this requirement.
(3) If the registrant plans to elect to disclose any amendments to,
or waivers from, its code of ethics, or its investment adviser's or
principal underwriter's codes of ethics, on the registrant's Internet
website, disclose the registrant's Internet address and its intention
to disclose these events on its website.
(4) Include any written code of ethics, or amendment to that code
of ethics, that applies to the principal executive officer, principal
financial officer, principal accounting officer or controller, or
persons performing similar functions of the registrant, its investment
adviser, or its principal underwriter, subject to disclosure under
paragraphs (a)(1) and (a)(2) of this Instruction.
(5) The requirements of paragraphs (a)(1) through (a)(4) of this
Instruction do not apply with respect to a code of ethics of any
principal underwriter of the registrant unless:
(i) The principal underwriter is an affiliated person of the
registrant or the registrant's investment adviser; or
(ii) An officer, director, or general partner of the principal
underwriter serves as an officer, director, or general partner of the
registrant or of the registrant's investment adviser.
(6) For purposes of this Instruction 102P3(a), the term “code
of ethics” means a codification of such standards that is
reasonably designed to deter wrongdoing and to promote:
(i) Honest and ethical conduct, including the ethical handling of
actual or apparent conflicts of interest between personal and
professional relationships;
(ii) Avoidance of conflicts of interest, including disclosure to an
appropriate person or persons identified in the code of any material
transaction or relationship that reasonably could be expected to give
rise to such a conflict;
(iii) Full, fair, accurate, timely, and understandable disclosure
in reports and documents that are filed with, or submitted to, the
Commission and in other public communications;
(iv) Compliance with applicable governmental laws, rules and
regulations;
(v) The prompt internal reporting to an appropriate person or
persons identified in the code of violations of the code; and
(vi) Accountability for adherence to the code.
(7) The information required by paragraph (a)(1) of this
Instruction is
[[Page 66247]]
only required for a report on this form filed for the registrant's
fiscal year.
(b)(1) Disclose the number and names of the persons that the
registrant's board of directors has determined to be the financial
experts serving on the registrant's audit committee, as defined in
section 3(a)(58) of the 1934 Act, as of the end of the period covered
by the report. Also disclose whether the financial expert or experts
are “independent,” and if not, an explanation of why they
are not. For this purpose, a financial expert would be considered to be
“independent” if he or she (i) meets the criteria set forth
in section 10A(m)(3)(B)(i) of the 1934 Act; and (ii) is not an
“interested person” of the investment company as defined in
section 2(a)(19) of the Act. If the registrant's board of directors has
not determined that a financial expert is serving on its audit
committee, the registrant must disclose that fact and explain why it
does not have such an expert.
(2) For purposes of the determination by the board of directors
under this Instruction 102P3(b), the term “financial
expert” means a person who has, through education and experience
as a public accountant or auditor, or a principal financial officer,
controller, or principal accounting officer, of a company that, at the
time the person held such position, was required to file reports
pursuant to section 13(a) or 15(d) of the 1934 Act, or experience in
one or more positions that involve the performance of similar functions
(or that results, in the judgment of the board of directors, in the
person's having similar expertise and experience), the following
attributes:
(i) An understanding of generally accepted accounting principles
and financial statements;
(ii) Experience applying such generally accepted accounting
principles in connection with the accounting for estimates, accruals,
and reserves that are generally comparable to the estimates, accruals,
and reserves, if any, used in the registrant's financial statements;
(iii) Experience preparing or auditing financial statements that
present accounting issues that are generally comparable to those raised
by the registrant's financial statements;
(iv) Experience with internal controls and procedures for financial
reporting; and
(v) An understanding of audit committee functions.
(3) If the board of directors has determined that a person is a
financial expert because, in the board's judgment, he or she has
similar expertise and experience to those enumerated, the registrant
must disclose the basis for that determination.
(4) In evaluating the education and experience of a person, the
board of directors should consider the following factors in the
aggregate:
(i) The level of the person's accounting or financial education,
including whether the person has earned an advanced degree in finance
or accounting;
(ii) Whether the person is a certified public accountant, or the
equivalent, in good standing, and the length of time that the person
actively has practiced as a certified public accountant, or the
equivalent;
(iii) Whether the person is certified or otherwise identified as
having accounting or financial experience by a recognized private body
that establishes and administers standards in respect of such
expertise, whether that person is in good standing with the recognized
private body, and the length of time that the person has been actively
certified or identified as having this expertise;
(iv) Whether the person has served as a principal financial
officer, controller, or principal accounting officer of a company that,
at the time the person held such position, was required to file reports
pursuant to section 13(a) or 15(d) of the 1934 Act, and if so, for how
long;
(v) The person's specific duties while serving as a public
accountant, auditor, principal financial officer, controller, principal
accounting officer or position involving the performance of similar
functions;
(vi) The person's level of familiarity and experience with all
applicable laws and regulations regarding the preparation of financial
statements that must be included in reports filed under section 13(a)
or 15(d) of the 1934 Act;
(vii) The level and amount of the person's direct experience
reviewing, preparing, auditing, or analyzing financial statements that
must be included in reports filed under section 13(a) or 15(d) of the
1934 Act;
(viii) The person's past or current membership on one or more audit
committees of companies that, at the time the person held such
membership, were required to file reports pursuant to section 13(a) or
15(d) of the 1934 Act;
(ix) The person's level of familiarity and experience with the use
and analysis of financial statements of public companies; and
(x) Whether the person has any other relevant qualifications or
experience that would assist him or her in understanding and evaluating
the registrant's financial statements and other financial information
and to make knowledgeable and thorough inquiries whether: (A) the
financial statements fairly present the financial condition, results of
operations, and cash flows of the registrant in accordance with
generally accepted accounting principles; and (B) the financial
statements and other financial information, taken together, fairly
present the financial condition, results of operations, and cash flows
of the registrant.
(5) Although the board of directors should consider the factors
listed in paragraph (b)(4) of this Instruction, those factors are not
replacements for, and a financial expert must satisfy, all of the
attributes listed in paragraph (b)(2) of this Instruction.
(c) * * *
* * * * *
Item 133
* * * * *
Instructions: (a) The requirements of Item 133 do not apply with
respect to a code of ethics of any principal underwriter of the
registrant unless:
(1) The principal underwriter is an affiliated person of the
registrant or the registrant's sponsor, depositor, or trustee; or
(2) An officer, director, or general partner of the principal
underwriter serves as an officer, director, or general partner of the
registrant's sponsor, depositor, or trustee.
(b) For purposes of Item 133, the term “code of ethics”
means a codification of such standards that is reasonably designed to
deter wrongdoing and to promote:
(1) Honest and ethical conduct, including the ethical handling of
actual or apparent conflicts of interest between personal and
professional relationships;
(2) Avoidance of conflicts of interest, including disclosure to an
appropriate person or persons identified in the code of any material
transaction or relationship that reasonably could be expected to give
rise to such a conflict;
(3) Full, fair, accurate, timely, and understandable disclosure in
reports and documents that are filed with, or submitted to, the
Commission and in other public communications;
(4) Compliance with applicable governmental laws, rules and
regulations;
(5) The prompt internal reporting to an appropriate person or
persons identified in the code of violations of the code; and
(6) Accountability for adherence to the code.
(c) The registrant does not need to provide any information
pursuant to
[[Page 66248]]
paragraph (b) of this Item if it discloses the required information on
its Internet website within two business days following the date of the
amendment or waiver and the registrant has disclosed in its most
recently filed report on this form its Internet address and intention
to provide disclosure in this manner. If the amendment or waiver occurs
on a Saturday, Sunday, or holiday on which the Commission is not open
for business, then the two business day period shall begin to run on
and include the first business day thereafter. If the registrant elects
to disclose this information through its website, such information must
remain available on the website for at least a 12-month period. The
registrant must retain the information for a period of not less than
six years following the end of the fiscal year in which the amendment
or waiver occurred. Upon request, the registrant must furnish to the
Commission or its staff a copy of any or all information retained
pursuant to this requirement.
Item 134
In responding to sub-item 134(a), include the exhibit required by
instruction (a) for sub-item 77Q3. The registrant may omit paragraph 3
of the certification required by instruction (a)(iii).
* * * * *
37. Amend Form N–CSR (referenced in
§§&thnsp;249.331 and 274.128; as proposed in 67 FR 57298 (9/
9/02) and 67 FR 60828 (9/26/02)) by:
a. Revising General Instruction D;
b. Redesignating General Instruction E as General Instruction F;
c. Adding new General Instruction E;
d. Removing Item 1;
e. Redesignating Items 2, 3, and 4 as Items 1, 2, and 5;
f. Adding new Items 3, 4 and 6;
g. Revising newly redesignated Item 5; and
h. Revising the “Certifications” section, to read as
follows:
Note: The text of Form N–CSR does not, and this amendment
will not, appear in the Code of Federal Regulations
Form N–CSR
* * * * *
General Instructions
* * * * *
D. Incorporation by Reference
A registrant may incorporate by reference information required by
Item 6(b), but no other Items of the Form shall be answered by
incorporating any information by reference. All incorporation by
reference must comply with the requirements of this Form and the
following rules on incorporation by reference: Rule 10(d) of Regulation
S–K under the Securities Act of 1933 [17 CFR 229.10(d)] (general
rules on incorporation by reference, which, among other things,
prohibit, unless specifically required by this Form, incorporating by
reference a document that includes incorporation by reference to
another document, and limits incorporation to documents filed within
the last 5 years, with certain exceptions); Rule 303 of Regulation
S–T [17 CFR 232.303] (specific requirements for electronically
filed documents); Rules 12b–23 and 12b–32 under the
Securities Exchange Act of 1934 (additional rules on incorporation by
reference for reports filed pursuant to Sections 13 and 15(d) of the
Securities Exchange Act of 1934); and Rules 0–4, 8b–23, and
8b–32 under the Investment Company Act of 1940 [17 CFR
270.0–4, 270.8b–23, and 270.8b–32] (additional rules
on incorporation by reference for investment companies).
E. Definitions
Unless the context clearly indicates the contrary, terms used in
this Form N–CSR have meanings as defined in the Investment
Company Act of 1940 and the rules and regulations thereunder. Unless
otherwise indicated, all references in the form to statutory sections
or to rules are sections of the Investment Company Act of 1940 and the
rules and regulations thereunder.
* * * * *
Item 3. Code of Ethics
(a) Disclose whether, as of the end of the period covered by the
report, each of the registrant, its investment adviser, and its
principal underwriter has adopted a written code of ethics that applies
to the principal executive officer, principal financial officer,
principal accounting officer or controller, or persons performing
similar functions of, respectively, the registrant, its investment
adviser, and its principal underwriter. If any of the registrant, its
investment adviser, and its principal underwriter has not adopted such
a code of ethics, explain why it has not done so.
Instruction. The information required by this Item 3(a) is only
required in a report on this Form N–CSR that is required by Item
6(a) to include a copy of an annual report transmitted to stockholders.
(b) If the registrant, its investment adviser, or its principal
underwriter has, during the period covered by the report, amended its
code of ethics that applies to its principal executive officer,
principal financial officer, principal accounting officer or
controller, or persons performing similar functions or granted a
waiver, including an implicit waiver, from a provision of the code of
ethics to one of these officers or persons, the registrant must briefly
describe the nature of the amendment or waiver. Disclosure regarding
waivers must include the name of the person to whom the waiver was
granted, and the date of the waiver.
(c) If the registrant plans to elect to disclose any amendments to,
or waivers from, its code of ethics, or its investment adviser's or
principal underwriter's codes of ethics, on the registrant's Internet
website, disclose the registrant's Internet address and its intention
to disclose these events on its website.
Instructions. 1. The requirements of this Item 3 do not apply with
respect to a code of ethics of any principal underwriter of the
registrant unless:
(a) The principal underwriter is an affiliated person of the
registrant or the registrant's investment adviser; or
(b) An officer, director, or general partner of the principal
underwriter serves as an officer, director, or general partner of the
registrant or of the registrant's investment adviser.
2. For purposes of this Item 3, the term “code of
ethics” means a codification of such standards that is reasonably
designed to deter wrongdoing and to promote:
(a) Honest and ethical conduct, including the ethical handling of
actual or apparent conflicts of interest between personal and
professional relationships;
(b) Avoidance of conflicts of interest, including disclosure to an
appropriate person or persons identified in the code of any material
transaction or relationship that reasonably could be expected to give
rise to such a conflict;
(c) Full, fair, accurate, timely, and understandable disclosure in
reports and documents that are filed with, or submitted to, the
Commission and in other public communications;
(d) Compliance with applicable governmental laws, rules and
regulations;
(e) The prompt internal reporting to an appropriate person or
persons identified in the code of violations of the code; and
(f) Accountability for adherence to the code.
3. The registrant does not need to provide any information pursuant
to this Item if it discloses the required information on its Internet
website within two business days following the date of the amendment or
waiver and the registrant has disclosed in its most recently filed
report on this Form N–CSR its Internet address and intention to
[[Page 66249]]
provide disclosure in this manner. If the amendment or waiver occurs on
a Saturday, Sunday, or holiday on which the Commission is not open for
business, then the two business day period shall begin to run on and
include the first business day thereafter. If the registrant elects to
disclose this information through its website, such information must
remain available on the website for at least a 12-month period. The
registrant must retain the information for a period of not less than
six years following the end of the fiscal year in which the amendment
or waiver occurred. Upon request, the registrant must furnish to the
Commission or its staff a copy of any or all information retained
pursuant to this requirement.
Item 4. Audit Committee Financial Experts
Disclose the number and names of the persons that the registrant's
board of directors has determined to be the financial experts serving
on the registrant's audit committee, as defined in section 3(a)(58) of
the Securities Exchange Act of 1934, as of the end of the period
covered by the report. Also disclose whether the financial expert or
experts are “independent,” and if not, an explanation of
why they are not. For this purpose, a financial expert would be
considered to be “independent” if he or she (i) meets the
criteria set forth in section 10A(m)(3)(B)(i) of the Securities
Exchange Act of 1934; and (ii) is not an “interested
person” of the investment company as defined in section 2(a)(19)
of the Investment Company Act of 1940. If the registrant's board of
directors has not determined that a financial expert is serving on its
audit committee, the registrant must disclose that fact and explain why
it does not have such an expert.
Instructions. 1. The information required by this Item 4 is only
required in a report on this Form N-CSR that is required by Item 6(a)
to include a copy of an annual report transmitted to stockholders.
2. For purposes of the determination by the board of directors
under this Item 4, the term “financial expert” means a
person who has, through education and experience as a public accountant
or auditor, or a principal financial officer, controller, or principal
accounting officer, of a company that, at the time the person held such
position, was required to file reports pursuant to section 13(a) or
15(d) of the Securities Exchange Act of 1934, or experience in one or
more positions that involve the performance of similar functions (or
that results, in the judgment of the board of directors, in the
person's having similar expertise and experience), the following
attributes:
a. An understanding of generally accepted accounting principles and
financial statements;
b. Experience applying such generally accepted accounting
principles in connection with the accounting for estimates, accruals,
and reserves that are generally comparable to the estimates, accruals,
and reserves, if any, used in the registrant's financial statements;
c. Experience preparing or auditing financial statements that
present accounting issues that are generally comparable to those raised
by the registrant's financial statements;
d. Experience with internal controls and procedures for financial
reporting; and
e. An understanding of audit committee functions.
3. If the board of directors has determined that a person is a
financial expert because, in the board's judgment, he or she has
similar expertise and experience to those enumerated, the registrant
must disclose the basis for that determination.
4. In evaluating the education and experience of a person, the
board of directors should consider the following factors in the
aggregate:
a. The level of the person's accounting or financial education,
including whether the person has earned an advanced degree in finance
or accounting;
b. Whether the person is a certified public accountant, or the
equivalent, in good standing, and the length of time that the person
actively has practiced as a certified public accountant, or the
equivalent;
c. Whether the person is certified or otherwise identified as
having accounting or financial experience by a recognized private body
that establishes and administers standards in respect of such
expertise, whether that person is in good standing with the recognized
private body, and the length of time that the person has been actively
certified or identified as having this expertise;
d. Whether the person has served as a principal financial officer,
controller, or principal accounting officer of a company that, at the
time the person held such position, was required to file reports
pursuant to section 13(a) or 15(d) of the Securities Exchange Act of
1934, and if so, for how long;
e. The person's specific duties while serving as a public
accountant, auditor, principal financial officer, controller, principal
accounting officer or position involving the performance of similar
functions;
f. The person's level of familiarity and experience with all
applicable laws and regulations regarding the preparation of financial
statements that must be included in reports filed under section 13(a)
or 15(d) of the Securities Exchange Act of 1934;
g. The level and amount of the person's direct experience
reviewing, preparing, auditing, or analyzing financial statements that
must be included in reports filed under section 13(a) or 15(d) of the
Securities Exchange Act of 1934;
h. The person's past or current membership on one or more audit
committees of companies that, at the time the person held such
membership, were required to file reports pursuant to section 13(a) or
15(d) of the Securities Exchange Act of 1934;
i. The person's level of familiarity and experience with the use
and analysis of financial statements of public companies; and
j. Whether the person has any other relevant qualifications or
experience that would assist him or her in understanding and evaluating
the registrant's financial statements and other financial information
and to make knowledgeable and thorough inquiries whether: (i) the
financial statements fairly present the financial condition, results of
operations and cash flows of the registrant in accordance with
generally accepted accounting principles; and (ii) the financial
statements and other financial information, taken together, fairly
present the financial condition, results of operations, and cash flows
of the registrant.
5. Although the board of directors should consider the factors
listed in Instruction 4, those factors are not replacements for, and a
financial expert must satisfy, all of the attributes listed in
Instruction 2 to this Item.
Item 5. Controls and Procedures
(a) Disclose the conclusions of the registrant's principal
executive officer or officers and principal financial officer or
officers, or persons performing similar functions, about the
effectiveness of the registrant's disclosure controls and procedures
(as defined in rule 30a–2(c) under the Investment Company Act of
1940 (17 CFR 270.30a–2(c))) based on management's evaluation of
these controls and procedures in accordance with Rule 13a–15(c)
or 15d–15(c) under the Securities Exchange Act of 1934 (17 CFR
240.13a–15(c) or 240.15d–15(c)) and Rule 30a–3(b)
under the Investment Company Act of 1940 (17 CFR 270.30a–3(b)) as
of the end of the period covered
[[Page 66250]]
by the report that includes the disclosure required by this paragraph.
(b) Disclose any significant changes to the registrant's internal
controls and procedures for financial reporting (as defined in rule
30a–2(d) under the Investment Company Act of 1940 (17 CFR
270.30a–2(d))) made during the period covered by the report that
includes the disclosure required by this paragraph, including any
actions taken to correct significant deficiencies and material
weaknesses in the registrant's internal controls and procedures for
financial reporting.
Item 6. Exhibits
File the exhibits listed below as part of this Form. Letter or
number the exhibits in the sequence indicated.
(a) A copy of the report transmitted to stockholders pursuant to
Rule 30e–1 under the Investment Company Act of 1940 (17 CFR
270.30e–1).
(b) Any written code of ethics, or amendment to that code of
ethics, that applies to the principal executive officer, principal
financial officer, principal accounting officer or controller, or
persons performing similar functions of the registrant, its investment
adviser, or its principal underwriter, subject to disclosure under Item
3.
* * * * *
Certifications*
I, [identify the certifying individual], certify that:
1. I have reviewed this report on Form N–CSR, including
exhibits, of [identify registrant];
2. Based on my knowledge, this report, including exhibits, 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 under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other
financial information included in this report, including exhibits,
fairly present in all material respects the financial condition,
results of operations, changes in net assets, and cash flows (if the
financial statements are required to include a statement of cash flows)
of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures and
internal controls and procedures for financial reporting (as defined in
rule 30a–2(c) and (d) under the Investment Company Act of 1940)
for the registrant and we have:
(a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal controls and procedures for financial
reporting, or caused such internal controls and procedures for
financial reporting to be designed under our supervision, to provide
reasonable assurances that the registrant's financial statements are
fairly presented in conformity with generally accepted accounting
principles;
(c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of the end of the period covered by this
report (“Evaluation Date”);
(d) Presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
(e) Disclosed to the registrant's auditors and the audit committee
of the board of directors (or persons fulfilling the equivalent
function):
(i) All significant deficiencies and material weaknesses in the
design or operation of internal controls and procedures for financial
reporting which could adversely affect the registrant's ability to
record, process, summarize, and report financial information required
to be disclosed by the registrant in the reports that it files or
submits under the Securities Exchange Act of 1934 and the Investment
Company Act of 1940, within the time periods specified in the U.S.
Securities and Exchange Commission's rules and forms; and
(ii) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's
internal controls and procedures for financial reporting; and
(f) Indicated in this report any significant changes in the
registrant's internal controls and procedures for financial reporting
or in other factors that could significantly affect internal controls
and procedures for financial reporting made during the period covered
by this report, including any actions taken to correct significant
deficiencies and material weaknesses in the registrant's internal
controls and procedures for financial reporting.
Date:------------------------------------------------------------------
&fxsp0;----------------------------------------------------------------
[Signature]
&fxsp0;----------------------------------------------------------------
[Title]
*&thnsp;Provide a separate certification for each principal
executive officer and principal financial officer of the registrant.
See Rule 30a–2 under the Investment Company Act of 1940 (17 CFR
270.30a–2). The required certification must be in the exact form
set forth above.
By the Commission.
Dated: October 22, 2002.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02–27302 Filed 10–29–02; 8:45 am]
BILLING CODE 8010–01–P