SEC to Require Certification of Reports and New Current Report Disclosures and Deadlines
 
June 14, 2002
 

On June 12, 2002, the Securities and Exchange Commission (SEC) proposed new rules that will:

• require the principal executive officer and the principal financial officer to certify the contents of their company's quarterly and annual reports
• increase disclosure requirements on current reports, and
• shorten the filing deadline for current reports

The proposed rules follow the SEC's February 13, 2002 announcement that the proposed changes to the corporate disclosure rules would be the first step in its efforts to improve the financial reporting and disclosure system.

Certification of Quarterly and Annual Reports

Under the proposed rules, the company's quarterly and annual reports must be certified by both the principal executive officer and principal financial officer of a company. Specifically, these officers must certify that:

• he or she has read the report
• to his or her knowledge, the information in the report is true in all important respects as of the last day of the period covered by the report, and
• the report contains all information about the company of which he or she is aware that he or she believes is important to a reasonable investor as of the last day of the period covered by the report

Information is considered "important to a reasonable investor" if:

• there is a substantial likelihood that a reasonable investor would view the information as significantly altering the total mix of information in the report, and
• the report would be misleading to a reasonable investor if the information was omitted from the report.

New Current Report Disclosures and Deadlines

The proposed rules will also increase the disclosure requirements for current reports on Form 8-K, and shorten the filing deadlines for these reports.

The new items or events required to be disclosed on current reports include:

• entry into a material agreement not made in the ordinary course of business
• termination of a material agreement not made in the ordinary course of business
• termination or reduction of a business relationship with a customer that constitutes a specified amount of the company's revenues
• creation of a direct or contingent financial obligation that is material to the company
• events triggering a direct or contingent financial obligation that is material to the company, including any default or acceleration of an obligation
• exit activities including any material write-off or restructuring
• any material impairment
• a change in a rating agency decision, issuance of a credit watch or change in a company outlook
• movement of the company's securities from one national securities exchange or inter-dealer quotation system of a registered national securities association to another, delisting of the company's securities from an exchange or quotation system, or a notice that a company does not comply with a listing standard
• notice to the company from its currently or previously engaged independent accountant that the independent accountant is withdrawing a previously issued audit report or that the company may not rely on a previously issued audit report, and
• any material limitation, restriction or prohibition, including the beginning and end of lock-out periods, regarding the company's employee benefit, retirement and stock ownership plans

Two disclosure items required in the annual and quarterly reports will be moved to current reports under the proposed rules:

• unregistered sales of equity securities by the company
• material modifications to rights of holders of the company's securities

The proposed rules also amend several existing current report disclosure items to include:

• disclosure regarding the departure of a director for reasons other than a disagreement or removal for cause
• the appointment or departure of a principal officer, and the election of new directors, and
• disclosure regarding any material amendment to a company's certificate of incorporation or bylaws

With respect to the filing deadlines for the current reports under the proposed rules, disclosures about changes in a company's independent accountant and resignations of directors will be required within two business days, rather than five business days and 15 calendar days, respectively.

The SEC is currently soliciting public comment on the proposed rules.

For more information, contact Steven Sonberg at ssonberg@hklaw.com, or Richard Montes de Oca at rmontes@hklaw.com