SEC Implements Certification Requirements of Section 302 of Sarbanes-Oxley Act
 
September 3, 2002
 

The Securities and Exchange Commission issued final rules, effective August 29, 2002, requiring principal executive officers and principal financial officers each to certify the contents of their company's quarterly and annual reports.  In addition, Forms 10-K and 10-Q have been amended effective immediately to require disclosure concerning company "Controls and Procedures."

The new rules apply to companies that file quarterly and annual reports under Section 13(a) or 15(d) of the Exchange Act, including foreign private issuers, banks and savings associations, issuers of asset-backed securities, small business issuers and registered investment companies. 

Contents of Certification

The rules require principal executive officers and principal financial officers each to certify, with respect to their company's quarterly and annual reports filed or submitted under Section 13(a) or 15(d) of the Exchange Act, that:

• he or she has reviewed the report
   
• 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
   
• based on his or her knowledge, the financial statements, and other financial information included in the report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in the report
   
• he or she and the other certifying officers:
   
  • are responsible for establishing and maintaining "disclosure controls and procedures" (as defined below) for the company
     
  • 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
     
  • have evaluated the effectiveness of the company's disclosure controls and procedures within 90 days of the date of the report
     
  • 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
     
• he or she and the other certifying officers have disclosed to the company's auditors and to the audit committee of the board of directors (or persons fulfilling the equivalent function):
   
  • all significant deficiencies in the design or operation of internal controls (a pre-existing term relating to internal controls regarding financial reporting) that could adversely affect the company's ability to record, process, summarize and report financial data and have identified for the company's auditors any material weaknesses in internal controls
     
  • any fraud, whether or not material, that involves management or other employees who have a significant role in the company's internal controls
     
• he or she and the other certifying officers have indicated in the report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls after the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses

Disclosure Controls and Procedures

• The SEC defines “disclosure controls and procedures” as:
  • “Controls and other procedures of [a company] that are designed to ensure that information required to be disclosed by the [company] in the reports filed or submitted by it under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms.”
• Disclosure controls and procedures include:
  • controls and procedures designed to ensure that information required to be disclosed by an company in its Exchange Act reports is accumulated and communicated to the company's management, including its principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure
• The new rules:
  • require each public company to maintain disclosure controls and procedures
  • complement existing requirements for public companies to maintain systems of internal controls with respect to their financial information pursuant to the provisions of the Foreign Corrupt Practices Act
  • are intended to ensure that public companies maintain commensurate procedures for gathering, analyzing and disclosing all information that is required to be disclosed in their Exchange Act reports
  • require public companies, under the supervision of their principal executive officer and principal financial officer, to conduct an evaluation of the effectiveness of the design and operation of their disclosure controls and procedures within 90 days of the filing date of any quarterly or annual report

Amendments to Forms 10-K and 10-Q

• Form 10-K has been amended by adding a new Item 14, "Controls and Procedures," which requires the company to furnish the information required by new Item 307 of Regulation S-K.  Former Item 14 of Form 10-K has been renumbered to Item 15.
• Similarly, Form 10-Q has been amended by adding a new Item 4.  Controls and Procedures and renumbering the subsequent items.

Liability, Logistics and Transition Period

• An officer providing false certification faces liability under the antifraud provisions of the federal securities laws.
• Certification must be made in the exact form prescribed in the amended Forms 10-K and  10-Q (or counterpart) and must follow immediately after the signature sections of these reports, rather than as exhibits.
• The required certification is in addition to, and, thus, does not alter, the current signature requirements for quarterly and annual reports filed under the Exchange Act.
• Certifications may not be made pursuant to a power of attorney and must be re-made in the event of amendments.
• The rules do not apply to current reports, such as Forms 6-K and 8-K. 
• The SEC is still considering whether it will extend a certification requirement to other documents filed under the Exchange Act, such as definitive proxy statements.
• Paragraphs (b)(1),(2) and (3) of the rules (first three points under Contents of Certification above) apply to quarterly and annual reports, including transition reports, filed after August 29, 2002.
• Paragraphs (b)(4), (5) and (6) of the rules (remaining points under Contents of Certification above) apply to quarterly and annual reports, including transition reports, filed for periods ending after August 29, 2002.
• Calendar-year companies must have in place disclosure controls and procedures by the time they file their Form 10-Q for the period ended September 30, 2002 (on or before November 14, 2002).
• Paragraph (b) of the rules (last point under Disclosure Controls and Procedures above) applies to quarterly and annual reports, including transition reports, filed for periods ending after August 29, 2002.

For more information, contact Michael Jamieson at mjamieson@hklaw.com or Steven Sonberg at ssonberg@hklaw.com. They both may be reached through our toll-free telephone number, 888-688-8500.