Client Alert

SEC Adopts Changes to CEO/CFO Certifications

6/25/2003

On May 27, 2003, the Securities and Exchange Commission (the "SEC") amended[fn1] the corporate officer certification required by Section 302 of the Sarbanes-Oxley Act of 2002 (the "Act") and required companies to provide the certifications required by Sections 302 and 906 of the Act as exhibits to the periodic reports to which they relate. For most public companies, these changes are generally effective for reports due on or after August 14, 2003.

Changes to Section 302 Certification

In connection with issuing final rules under Section 404 of the Act regarding management reports on "internal control over financial reporting", the SEC amended the rules governing the required Section 302 certification by:

  • Adding a statement that the principal executive and financial officers are responsible for designing internal controls and procedures for financial reporting or for having such controls and procedures designed under their supervision;
  • Clarifying that disclosure controls and procedures may be designed under the supervision of the principal executive and financial officers (emphasis added);
  • Changing the date as of which the principal executive and financial officers' conclusions regarding the effectiveness of disclosure controls and procedures must be made to "as of the end of the period covered by [the] report" to which the Section 302 certification relates, although the final rules do not specify the date on which the evaluation itself should be performed;
  • Replacing the reference to "internal controls" with the phrase "internal control over financial reporting";
  • Amending the clause relating to changes in internal control over financial reporting to be consistent with the actual process of evaluation and disclosure, so that the certification refers to changes that occurred during the applicable quarter and that have materially affected or are reasonably likely to materially affect internal control over financial reporting (previously the certification referred to changes in controls that occurred since the date of the evaluation of the internal controls); and
  • Reorganizing the statements in the certification.

The Section 302 certification, marked to reflect these changes, is attached to this Alert.

Filing the Certifications as Exhibits

The SEC now requires that both the Section 302 and the Section 906 certifications be filed as exhibits to the reports to which they relate. The purpose of this change is to make it easier for investors, the SEC staff and the Department of Justice to access the certifications.

Failure to furnish the Section 906 certification as an exhibit will cause the related periodic report to be incomplete, thereby violating Section 13(a) of the Securities Exchange Act of 1934 (the "Exchange Act"). However, because the Act requires only that a Section 906 certification "accompany" the periodic filing, the Section 906 certification exhibit will not be deemed "filed," and, therefore, will not be subject to liability under Section 18 of the Exchange Act. In addition, the Section 906 certifications will not be subject to automatic incorporation by reference into a company's public offering filings, thereby avoiding liability under Section 11 of the Securities Act of 1933, unless the company takes steps to include the certifications in a registration statement.

When are the Changes to the Certifications Effective?

A public company (other than, under some circumstances, a registered investment company) must include the revised Section 302 certification in its first quarterly, semi-annual or annual report due on or after August 14, 2003 except that the language in the introduction to paragraph 4 of the Section 302 certification that refers to the certifying officers' responsibility for establishing and maintaining internal control over financial reporting for the company and all of paragraph 4(b), which discusses the certifying officers' responsibility for designing, or supervising the design of, the company's internal control over financial reporting, are not required to be included in the Section 302 certification until management's internal control report is required.[fn1] However, the certification contained in paragraph 4(d) with respect to changes that occurred during the applicable quarter and that have materially affected or are reasonably likely to materially affect internal control over financial reporting is required to be given starting with that first report due on or after August 14, 2003. Therefore, management may have to report as part of the certification obligation in upcoming quarterly reports on material changes to its internal control over financial reporting at the same time as the company implements changes to its internal control over financial reporting in preparation for the annual control report and attestation requirement under Section 404 of the Act.

The obligation to file the certifications as exhibits also is effective with respect to all periodic reports due on or after August 14, 2003. Therefore, the revised Section 302 certification and Section 906 certification must be included as exhibits to Quarterly Reports on Form 10-Q for the quarter ended June 30, 2003, whether or not the report is filed before August 14th.

Pending effectiveness of the changes to the certifications, the SEC is encouraging companies to submit the Section 906 certifications as exhibits to the periodic report to which they relate. However, until effectiveness, there is no penalty for continuing to provide the Section 906 certifications as correspondence accompanying the related periodic report.

Comments From Senator Biden Complicate Interpretation of Section 906

On April 11, 2003, Senator Joseph Biden introduced a statement into the Congressional Record (which he intended to be viewed as part of the legislative history of the Act) that asserted that the Section 906 certification is required not only for the periodic annual and quarterly reports but also for any report that contains financial statements, including reports on Forms 6-K, 8-K and 11-K. In light of Senator Biden's comments, the SEC stated in the adopting release that it is considering, in consultation with the Department of Justice, further rulemaking or interpretive guidance as to the applicability of Section 906 to current reports on Forms 6-K and 8-K and annual reports on Form 11-K. As a result, you should consult counsel before filing a Form 6-K, 8-K or 11-K that contains financial statements.



Footnotes

1: Release Nos. 33-8238, 34-47986, IC-26068; File Nos. S7-40-02 and S7-06-03; http://www.sec.gov/rules/final/33-8238.htm.

2: See our alert, Securities and Exchange Commission Requires Internal Control Report for Annual Reports of Public Companies, June 2003. Generally, an "accelerated filer" with a December 31st fiscal year-end will first have to include the internal control report in its Form 10-K for the fiscal year ending December 31, 2004 while all other public companies with calendar year fiscal year-ends will have to first include internal control reports in their annual reports for the fiscal year ending December 31, 2005.

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