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/ September
/ Monday, September 09, 2002
[Federal Register: September 9, 2002 (Volume 67, Number 174)]
[Rules and Regulations]
[Page 57275-57297]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr09se02-17]
[[Page 57275]]
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Part II
Securities and Exchange Commission
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17 CFR Parts 228, 229, et al.
Certification of Disclosure in Companies' Quarterly and Annual Reports,
Management Investment Company Shareholder Reports and Designation of
Certified Shareholder Reports as Exchange Act Periodic Reporting Forms;
Final Rule and Proposed Rule
[[Page 57276]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 228, 229, 232, 240, 249, 270 and 274
[Release Nos. 33-8124, 34-46427, IC-25722; File No. S7-21-02]
RIN 3235-AI54
Certification of Disclosure in Companies' Quarterly and Annual
Reports
AGENCY: Securities and Exchange Commission.
ACTION: Final rule; request for comments.
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SUMMARY: As directed by Section 302(a) of the Sarbanes-Oxley Act of
2002, we are adopting rules to require an issuer's principal executive
and financial officers each to certify the financial and other
information contained in the issuer's quarterly and annual reports. The
rules also require these officers to certify that: they are responsible
for establishing, maintaining and regularly evaluating the
effectiveness of the issuer's internal controls; they have made certain
disclosures to the issuer's auditors and the audit committee of the
board of directors about the issuer's internal controls; and they have
included information in the issuer's quarterly and annual reports about
their evaluation and whether there have been significant changes in the
issuer's internal controls or in other factors that could significantly
affect internal controls subsequent to the evaluation. In addition, we
are adopting previously proposed rules to require issuers to maintain,
and regularly evaluate the effectiveness of, disclosure controls and
procedures designed to ensure that the information required in reports
filed under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported on a timely basis.
DATES: Effective Date: August 29, 2002.
Comment Date: Comments on the extension of the certification
requirement to definitive proxy and information statements should be
received by October 9, 2002.
ADDRESSES: Comments should be submitted in triplicate to Jonathan G.
Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street,
NW., Washington, DC 20549-0609. Comments also may be submitted
electronically at the following electronic mail address: rule-
comments@sec.gov. To help us process and review your comments more
efficiently, comments should be submitted by one method only. All
comment letters should refer to File No. S7-21-02; this file number
should be included in the subject line if electronic mail is used.
Comment letters will be available for public inspection and copying in
the Commission's Public Reference Room, 450 Fifth Street, NW.,
Washington, DC 20549. Electronically submitted comment letters will be
posted on the Commission's Internet Web site (http://www.sec.gov).\1\
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\1\ We do not edit personal identifying information, such as
names or electronic mail addresses, from electronic submissions. You
should submit only information that you wish to make available
publicly.
FOR FURTHER INFORMATION CONTACT: Mark A. Borges, Special Counsel, or
Elizabeth M. Murphy, Chief, Office of Rulemaking, Division of
Corporation Finance, at (202) 942-2910, or, with respect to issuers of
asset-backed securities, Paula Dubberly, Chief Counsel, Division of
Corporation Finance, at (202) 942-2900, or, with respect to investment
companies, Tara L. Royal, Attorney, Office of Disclosure Regulation,
Division of Investment Management, at (202) 942-0721, at the Securities
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and Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549.
SUPPLEMENTARY INFORMATION: We are adopting new Item 307 \2\ of
Regulation S-B,\3\ new Item 307 \4\ of Regulation S-K,\5\ new Rules
13a-14,\6\ 13a-15,\7\ 15d-14 \8\ and 15d-15 \9\ under the Securities
Exchange Act of 1934 (``Exchange Act'') \10\ and new Rule 30a-2 \11\
under the Investment Company Act of 1940 (``Investment Company
Act'').\12\ We also are adopting amendments to Rules 12b-15,\13\ 13a-10
\14\ and 15d-10 \15\ and Forms 10-Q,\16\ 10-QSB,\17\ 10-K,\18\ 10-
KSB,\19\ 20-F \20\ and 40-F \21\ under the Exchange Act, Rule 30b1-3
under the Investment Company Act,\22\ Rule 302 of Regulation S-T \23\
and Form N-SAR \24\ under the Exchange Act and the Investment Company
Act.
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\2\ 17 CFR 228.307.
\3\ 17 CFR 228.10 et seq.
\4\ 17 CFR 229.307.
\5\ 17 CFR 229.10 et seq.
\6\ 17 CFR 240.13a-14.
\7\ 17 CFR 240.13a-15.
\8\ 17 CFR 240.15d-14.
\9\ 17 CFR 240.15d-15.
\10\ 15 U.S.C. 78a et seq.
\11\ 17 CFR 270.30a-2.
\12\ 15 U.S.C. 80a-1 et seq.
\13\ 17 CFR 240.12b-15.
\14\ 17 CFR 240.13a-10.
\15\ 17 CFR 240.15d-10.
\16\ 17 CFR 249.308a.
\17\ 17 CFR 249.308b.
\18\ 17 CFR 249.310.
\19\ 17 CFR 249.310b.
\20\ 17 CFR 249.220f.
\21\ 17 CFR 249.240f.
\22\ 17 CFR 270.30b1-3.
\23\ 17 CFR 232.302.
\24\ 17 CFR 249.330; 17 CFR 274.101.
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I. Introduction
On July 30, 2002, the Sarbanes-Oxley Act of 2002 (the ``Act'') was
enacted.\25\ Section 302 of the Act, entitled ``Corporate
Responsibility for Financial Reports,'' requires the Commission to
adopt final rules that must be effective by August 29, 2002, 30 days
after the date of enactment, under which the principal executive
officer or officers and the principal financial officer or officers, or
persons providing similar functions, of an issuer each must certify the
information contained in the issuer's quarterly and annual reports.
Section 302 also requires these officers to certify that: they are
responsible for establishing, maintaining and regularly evaluating the
effectiveness of, the issuer's internal controls; they have made
certain disclosures to the issuer's auditors and the audit committee of
the board of directors about the issuer's internal controls; and they
have included information in the issuer's quarterly and annual reports
about their evaluation and whether there have been significant changes
in the issuer's internal controls or in other factors that could
significantly affect internal controls subsequent to the evaluation.
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\25\ Pub. L. 107-204, 116 Stat. 745 (2002).
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On June 14, 2002, we proposed rules that would have required a
company's principal executive officer and principal financial officer
to certify the contents of the company's quarterly and annual
reports.\26\ The June Proposals also would have required companies to
maintain procedures to provide reasonable assurance that they are able
to collect, process and disclose the information required in their
Exchange Act reports. Finally, the June Proposals would have required
companies to undertake an annual evaluation of these procedures under
the supervision of management. Shortly after enactment of the Act, we
provided supplemental information on the Act and the June
Proposals.\27\
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\26\ See Release No. 34-46079 (June 14, 2002) [67 FR 41877] (the
``June Proposals'').
\27\ See Release No. 34-46300 (Aug. 2, 2002) [67 FR 51508]
notifying interested parties of the rules that we are required to
adopt pursuant to Section 302 of the Act and highlighting some of
the major differences between those rules and the June Proposals.
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In light of Congress' directive in Section 302 of the Act, we are
adopting rules that implement the certification mandated by the Act
instead of the
[[Page 57277]]
certification contained in the June Proposals. We received 102 comment
letters in response to the June Proposals.\28\ Although responding to
the form of certification set forth in the June Proposals, a majority
of the commenters supported a certification requirement for senior
corporate officers.\29\ In addition, the comment letters we have
received since the enactment of the Act also express support for a
certification requirement.\30\ Because Section 302 of the Act
prescribes the form of certification that we are to adopt, the new
rules do not reflect many of the comments and suggestions that we
received on the June Proposals.
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\28\ The commenters included 56 individual and institutional
investors, 21 companies and company associations, one domestic
governmental agency, one foreign governmental agency and 23 members
of the accounting and legal communities. These comment letters and a
summary of comments are available for public inspection and copying
in our Public Reference Room, 450 Fifth Street, NW., Washington, DC
20549, in File No. S7-21-02. Public comments submitted
electronically and the summary of comments are available on our Web
site <http://www.sec.gov.
\29\ See, for example, the Letter dated June 13, 2002 of Robert
E. Jones, the Letter dated June 24, 2002 of Dan Jamieson and the
Letter dated July 5, 2002 of T. Jeffrey Mangin.
\30\ See, for example, the Letter dated August 9, 2002 of the
American Society of Corporate Securities and the Letter dated August
14, 2002 of the National Association of Real Estate Investment
Trusts.
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While Section 302 of the Act requires an issuer's principal
executive and financial officers to make specific certifications
regarding their responsibilities to establish and maintain internal
controls, it does not directly address the issuer's responsibility for
controls and procedures related to the issuer's Exchange Act reporting
obligations.\31\ The June Proposals included requirements that
companies maintain sufficient procedures to provide reasonable
assurances that they are able to collect, process and disclose, within
the time periods specified in the Commission's rules and forms, the
information required to be disclosed in their Exchange Act reports.\32\
We have adopted this requirement largely as proposed. Because of the
broad scope of Section 302 of the Act, the new rules are applicable to
all types of issuers that file 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.\33\
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\31\ Separately, Section 404 of the Act directs the Commission
to prescribe rules for issuers to state in their annual reports
required by Section 13(a) or 15(d) of the Exchange Act the
responsibility of management for establishing and maintaining an
adequate internal control structure and procedures for financial
reporting.
\32\ See proposed Exchange Act Rules 13a-15 and 15d-15.
\33\ See Section IV below for a discussion of registered
investment companies. Registered investment companies generally are
required to file periodic reports under Section 13(a) or 15(d) of
the Exchange Act on Form N-SAR and, therefore, would provide the
certification required by Section 302 of the Act. However, because
Section 302 of the Act only applies to issuers that file periodic
reports under Section 13(a) or 15(d) of the Exchange Act, the rules
we are adopting today will not apply to registered investment
companies that do not file periodic reports under either Section
13(a) or 15(d).
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II. Certification of Quarterly and Annual Reports
A. Rule Requirements
As adopted, new Exchange Act Rules 13a-14 and 15d-14 require an
issuer's principal executive officer or officers and the principal
financial officer or officers, or persons performing similar functions,
each to certify in each quarterly and annual report, including
transition reports, filed or submitted by the issuer under Section
13(a) or 15(d) of the Exchange Act \34\ that:
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\34\ 15 U.S.C. 78m(a) or 78o(d). Section 13(a) of the Exchange
Act requires every issuer of a security registered pursuant to
Section 12 of the Exchange Act [15 U.S.C. 78l] to file with the
Commission such annual reports and such quarterly reports as the
Commission may prescribe. Section 15(d) of the Exchange Act requires
each issuer that has filed a registration statement that has become
effective pursuant to the Securities Act of 1933 [15 U.S.C. 77a et
seq.] to file such supplementary and periodic information, documents
and reports as may be required pursuant to Section 13 in respect of
a security registered pursuant to Section 12. The duty of an issuer
to file under Section 15(d) is automatically suspended for any
fiscal year, other than a fiscal year in which its registration
statement becomes effective or is required to be updated pursuant to
Section 10(a)(3) of the Securities Act [15 U.S.C. 77j(a)(3)], if an
issuer's securities are held of record by less than 300 persons. See
Exchange Act Rule 12h-3(c) [17 CFR 240.12h-3(c)].
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[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; \35\
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\35\ As permitted under our rules, a registrant may satisfy its
disclosure obligations under Part III of Forms 10-K and 10-KSB by
incorporating the required information by reference from its
definitive proxy or information statement, if that statement
involves the election of directors and is filed not later than 120
days after the end of the fiscal year covered by the annual report.
See General Instruction G(3) to Form 10-K and General Instruction
E(3) to Form 10-KSB. For purposes of this provision, the
certification in the annual report on Form 10-K or 10-KSB would be
considered to cover the Part III information in a registrant's proxy
or information statement as and when filed.
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[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 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:
[sbull] 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 Act) for the issuer;
[sbull] 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;
[sbull] 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
[sbull] 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):
[sbull] All significant deficiencies in the design or operation of
internal controls (a pre-existing term relating to internal controls
regarding financial reporting) \36\ 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
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\36\ See American Institute of Certified Public Accountants
(``AICPA'') Codification of Statements on Auditing Standards, AU
Sec. 319.
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[sbull] 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 new rules, ``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
[[Page 57278]]
under the Exchange Act \37\ is recorded, processed, summarized and
reported, within the time periods specified in the Commission's rules
and forms.\38\ ``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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\37\ 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.
\38\ See new Exchange Act Rules 13a-14(c) and 15d-14(c).
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B. Discussion of Certification Requirement
1. Issuers Subject to Certification Requirement
Section 302 of the Act states that the certification requirement is
to apply to each company filing periodic reports under Section 13(a) or
15(d) of the Exchange Act.\39\ Accordingly, new Exchange Act Rules 13a-
14 and 15d-14 apply to the principal executive officers and principal
financial officers, or persons performing similar functions, of any
issuer that files quarterly and annual reports with the Commission
under either Section 13(a) or 15(d) of the Exchange Act, including
foreign private issuers, banks and savings associations, issuers of
asset-backed securities and small business issuers.\40\
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\39\ See Section 302(a) of the Act.
\40\ The new rules achieve the objective of Section 302(b) of
the Act, which states that nothing in the provision is to be
interpreted or applied in any way to allow any issuer to lessen the
legal force of the certification requirement by an issuer that has
reincorporated or engaged in any other transaction resulting in the
transfer of the corporate domicile or offices of the issuer from
inside of the United States to outside of the United States, because
they are applicable to all issuers without regard to their
jurisdiction of incorporation or domicile.
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(a) Foreign Private Issuers
While the June Proposals would not have applied to foreign private
issuers, \41\ Section 302 of the Act makes no distinction between
domestic and foreign issuers and, by its terms, clearly applies to
foreign private issuers. New Exchange Act Rules 13a-14 and 15d-14,
therefore, apply the certification requirement to the principal
executive officers and principal financial officers of foreign private
issuers that file reports under Section 13(a) or 15(d) of the Exchange
Act.\42\
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\41\ For purposes of the Exchange Act, a ``foreign private
issuer'' is any foreign issuer (other than a foreign government)
except an issuer meeting the following conditions: (1) More than 50%
of the issuer's outstanding voting securities are directly or
indirectly held of record by residents of the U.S.; and (2) the
majority of the executive officers or directors are U.S. citizens or
residents; or more than 50% of the assets of the issuer are located
in the U.S.; or the business of the issuer is administered
principally in the U.S. See Exchange Act Rule 3b-4(c) [17 CFR
240.3b-4(c)]. We sought comment on whether to apply a certification
requirement to foreign private issuers in the June Proposals.
\42\ The new rules do not apply to foreign private issuers that
furnish materials to the Commission pursuant to Exchange Act Rule
12g3-2(b) [17 CFR 240.12g3-2(b)].
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(b) Banks and Saving Associations
The certification requirement of Section 302 of the Act also
applies to principal executive officers and principal financial
officers of banks and savings associations that file periodic reports
under Section 13(a) or 15(d) of the Exchange Act. The Act amended
Section 12(i) of the Exchange Act to make it clear that the federal
banking agencies have the authority to administer and enforce various
provisions of the Act, including the certification required by Section
302.\43\
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\43\ See Section 3(b)(4) of the Act.
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(c) Asset-Backed Securities Issuers
Issuers of asset-backed securities in public offerings have a
reporting obligation under either Section 13(a) or 15(d) of the
Exchange Act, at least for a period of time.\44\ 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.\45\
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\44\ Asset-backed issuers also sometimes voluntarily file
Exchange Act reports in order to comply with provisions in the
indenture or pooling and servicing agreements.
\45\ See, for example, Release No. 34-16520 (Jan. 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 (Feb. 6, 1978) (order granting
application pursuant to Section 12(h) of the Exchange Act of Bank of
America National Trust and Savings Association); Division of
Corporation Finance no-action letters to Key Bank USA, N.A. (May 9,
1997) and Bay View Securitization Corp. (Jan. 15, 1998).
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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 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
reported information for asset-backed issuers differs significantly
from that for other issuers, the certification requirement of Section
302 of the Act must be specifically tailored for asset-backed issuers.
The new rules require asset-backed issuers to certify their reports.
The staff of the Division of Corporation Finance today is providing
guidance for asset-backed issuers regarding compliance with the
certification requirement.
(d) Small Business Issuers
The June Proposals generally did not distinguish between large and
small issuers. Similarly, Section 302 of the Act directs that the
certification requirement apply to any company filing periodic reports
under Section 13(a) or 15(d) of the Exchange Act. Accordingly, new
Rules 13a-14 and 15d-14 apply to all issuers that file Exchange Act
periodic reports regardless of their size. We note, however, that
because many small business issuers do not file Exchange Act reports,
not all small business issuers will be subject to the certification
requirement.
2. Reports Subject to Certification Requirement
Section 302 of the Act states that the required certification is to
be included in each annual or quarterly report filed or submitted under
either Section 13(a) or 15(d) of the Exchange Act.\46\ Accordingly, the
certification requirement applies to annual reports on Forms 10-K, 10-
KSB, 20-F and 40-F.\47\ The certification requirement also applies to
quarterly reports on Forms 10-Q and 10-QSB. Finally, the certification
requirement applies to amendments to, and transition reports on, any of
the foregoing reports.\48\
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\46\ See Section 302(a) of the Act.
\47\ The certification requirement does not apply to annual
reports on Form 11-K [17 CFR 239.311].
\48\ See amended Exchange Act Rules 12b-15, 13a-10 and 15d-10.
In the case of the amendment on or after the compliance date of the
new rules of a quarterly or annual report filed prior to August 29,
2002, the certification requirement will apply.
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Reports that are current reports, such as reports on Forms 6-K \49\
and 8-K, rather than periodic (quarterly and annual) reports are not
covered by the certification requirement.\50\ Disclosure
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controls and procedures, however, are required to be designed,
maintained and evaluated to ensure full and timely disclosure in
current reports, as well as definitive proxy materials and definitive
information statements, even though there is no specific certification
requirement relating to reports on those forms.\51\
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\49\ 17 CFR 249.306.
\50\ A foreign private issuer must furnish under cover of Form
6-K material information that it makes public or is required to make
public under its home country laws or the rules of its home country
stock exchange or that it distributes to security holders. While
foreign private issuers may submit interim financial information
under cover of Form 6-K, they do so pursuant to their home country
requirements and not because of a Commission requirement to submit
updated financial information for specified periods and according to
specified standards. Therefore, we do not believe that a Form 6-K
constitutes a ``periodic'' report analogous to a quarterly report on
Form 10-Q or 10-QSB for which certification is required.
\51\ See new Exchange Act Rules 13a-15 and 15d-15.
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The new rules apply the certification requirement to foreign
private issuers filing annual reports on Form 20-F and Canadian issuers
filing annual reports on Form 40-F under our Multi-jurisdictional
Disclosure System. Although Form 20-F is not required to be signed by
any specific executive officer of a foreign registrant,\52\ we believe
that it is the clear intent of Congress to require that the appropriate
officers execute and submit the required certification in an annual
report filed under the Exchange Act on Form 20-F or 40-F.
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\52\ See General Instruction D to Form 20-F.
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As we first indicated in the June Proposals, we continue to
consider whether we should extend a certification requirement to other
documents filed under the Exchange Act, such as registration statements
on Forms 10 and 10-SB \53\ and definitive proxy and information
statements. We solicit comment on whether any or all of these
documents, or any other documents, should be certified by an issuer's
senior officers.
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\53\ 17 CFR 249.210 and 249.210b.
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3. Content of Certification
Section 302 of the Act states that the required certification is to
made by an issuer's principal executive officer or officers and
principal financial officer or officers, or persons performing similar
functions. The required certification contains several statements. The
certification statement concerning the material accuracy and
completeness of the periodic reports that are covered by the statement
mirrors the existing statutory disclosure standards for ``material''
accuracy and completeness of information contained in reports.\54\
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\54\ See Exchange Act Rules 10b-5(b) [17 CFR 230.10b-5(b)] and
12b-20 [17 CFR 240.12b-20.]. See also Basic, Inc. v. Levinson, 485
U.S. 224 (1988); TSC Industries, Inc. v. Northway, Inc., 426 U.S.
(1976).
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The certification statement regarding fair presentation of
financial statements and other financial information included in the
report was not part of the June Proposals. This statement separately
addresses the presentation of an issuer's financial disclosure. This
financial disclosure includes financial statements (including footnote
disclosure), selected financial data, management's discussion and
analysis of financial condition and results of operations and other
financial information in a report. The certification, as adopted,
states that the overall financial disclosure fairly presents, in all
material respects, the company's financial condition, results of
operations and cash flows. We have added a specific reference to cash
flows even though Section 302 of the Act does not include such an
explicit reference. We believe that it is consistent with Congressional
intent to include both income or loss and cash flows within the concept
of ``fair presentation'' of an issuer's results of operations.
The certification statement regarding fair presentation of
financial statements and other financial information is not limited to
a representation that the financial statements and other financial
information have been presented in accordance with ``generally accepted
accounting principles'' and is not otherwise limited by reference to
generally accepted accounting principles. We believe that Congress
intended this statement to provide assurances that the financial
information disclosed in a report, viewed in its entirety, meets a
standard of overall material accuracy and completeness that is broader
than financial reporting requirements under generally accepted
accounting principles.\55\ In our view, a ``fair presentation'' of an
issuer's financial condition, results of operations and cash flows
encompasses the selection of appropriate accounting policies, proper
application of appropriate accounting policies, disclosure of financial
information that is informative and reasonably reflects the underlying
transactions and events and the inclusion of any additional disclosure
necessary to provide investors with a materially accurate and complete
picture of an issuer's financial condition, results of operations and
cash flows.\56\
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\55\ Presenting financial information in conformity with
generally accepted accounting principles may not necessarily satisfy
obligations under the antifraud provisions of the federal securities
laws. See United States v. Simon, 425 F.2d 796 (2d Cir. 1969). See
also In re Caterpillar, Inc., Release No. 34-30532 (Mar. 31, 1992);
Edison Schools, Inc., Release No. 34-45925 (May 14, 2002).
\56\ See Exchange Act Rule 12b-20 and the case and proceedings
referenced in n. 55 above. In addition, both International
Accounting Standard IAS 1, ] 14 and 15 and AICPA, Codification of
Statements on Auditing Standards, AU Sec. 411.04 speak to the
essential elements that must be considered, within the framework of
generally accepted accounting principles, in evaluating whether an
issuer's financial statements fairly present its financial condition
and results of operations. These statements, without being limited
by reference to generally accepted accounting principles, provide
guidance as to what elements should be considered in determining
whether an issuer's financial information, taken as a whole,
provides a fair presentation of its financial condition and results
of operations. These elements include, without limitation, whether
the accounting principles selected are appropriate in the
circumstances and whether the disclosure is informative and
reasonably reflects the underlying transactions and events.
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Both of the foregoing certification statements are to be made based
on the knowledge of the certifying officer. This is not meant to change
the current obligations of corporate officers in connection with the
discharge of their duties. Both of the foregoing statements are also
made in the context of the requirements of the reports in which they
are included. In particular, quarterly reports on Forms 10-Q and 10-QSB
have less extensive disclosure and financial statement and footnote
requirements than annual reports. The certification requirement is not
intended to require expansion of quarterly reports to satisfy the
requirements of annual reports. Rather, completeness of disclosure will
be determined through application of standards derived from our
existing rules, forms and interpretations.\57\
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\57\ See, for example, In re Caterpillar, Inc., Release No. 34-
30532 (Mar. 31, 1992); Exchange Act Rule 12b-20.
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While the certification described in the June Proposals contained a
statement regarding the completion of a review of an issuer's internal
procedures and controls aimed at assuring adequate disclosure, the
certification required by Section 302 of the Act includes several, more
detailed, statements concerning an issuer's ``internal controls'' and
the ongoing oversight of these controls. For purposes of the
certification required by Section 302(a)(4) of the Act, we have defined
the term ``disclosure controls and procedures'' to incorporate a
broader concept of controls and procedures designed to ensure
compliance with disclosure requirements generally. This definition is
included in new Exchange Act Rules 13a-14 and 15d-14 and applies to the
portion of the certification required by Section 302(a)(4) of the
Act.\58\
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\58\ See new Exchange Act Rules 13a-14(c) and 15d-14(c).
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We have defined the term ``disclosure controls and procedures'' to
make it explicit that the controls contemplated
[[Page 57280]]
by Section 302(a)(4) of the Act are intended to embody controls and
procedures addressing the quality and timeliness of disclosure. We also
have included this definition to differentiate this concept of
disclosure controls and procedures from the pre-existing concept of
``internal controls'' that pertains to an issuer's financial reporting
and control of its assets, as currently embodied in Section 13(b) of
the Exchange Act \59\ and as addressed in Sections 302(a)(5) and (a)(6)
and Section 404 of the Act. We make this distinction based on our
review of Section 302 of the Act as well as to effectuate what we
believe to be Congress' intent--to have senior officers certify that
required material non-financial information, as well as financial
information, is included in an issuer's quarterly and annual reports.
Under this interpretation, we maintain the pre-existing concept of
internal controls without expanding it by relating it to non-financial
information.
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\59\ 15 U.S.C. 78m(b). See also AICPA Professional Standards AU
Section 319.06 (``Internal controls is 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 the following categories: (a) Reliability of
financial reporting, (b) effectiveness and efficiency of operations
and (c) compliance with applicable laws and regulations.'').
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As discussed in the June Proposals, we are not requiring any
particular procedures for conducting the required review and
evaluation. Instead, we expect each issuer to develop a process that is
consistent with its business and internal management and supervisory
practices. We do recommend, however, that, if it has not already done
so, an issuer create a committee with responsibility for considering
the materiality of information and determining disclosure obligations
on a timely basis.\60\ As is implicit in Section 302(a)(4) of the Act,
such a committee would report to senior management, including the
principal executive and financial officers, who bear express
responsibility for designing, establishing, maintaining, reviewing and
evaluating the issuer's disclosure controls and procedures.
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\60\ Officers and employees of an issuer who have an interest
in, and the expertise to serve on, the committee could include the
principal accounting officer (or the controller), the general
counsel or other senior legal official with responsibility for
disclosure matters who reports to the general counsel, the principal
risk management officer, the chief investor relations officer (or an
officer with equivalent responsibilities) and such other officers or
employees, including individuals associated with the issuer's
business units, as the issuer deems appropriate.
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We believe that the concept of ``internal controls'' contemplated
by Sections 302(a)(5) and (6) of the Act concern an issuer's controls
and procedures for financial reporting purposes as required by Section
13(b) of the Exchange Act. They also relate to the ``internal
controls'' addressed in Section 404 of the Act.\61\ The certification
required by new Exchange Act Rules 13a-14 and 15d-14 makes reference to
certain disclosures regarding both disclosure controls and procedures
and internal controls that must be made in the reports in which the
certification is contained. These disclosure requirements appear in new
Item 307 of Regulation S-K, Item 307 of Regulation S-B, Item 15 of Form
20-F and General Instruction B(6) of Form 40-F.
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\61\ The rules called for under Section 404 of the Act will be
the subject of separate Commission rulemaking. See n. 75 below.
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Because the statements involving disclosure controls and procedures
and internal controls require the certifying officers to take certain
specified actions, such as evaluating the effectiveness of the
disclosure controls and procedures prior to the date of the report to
which the certification relates, these statements will be required as
part of the certification only with respect to any reports that cover
periods ending on or after August 29, 2002, the effective date of the
rules required by Section 302 of the Act.\62\
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\62\ See Section V below.
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4. Form of Certification
The certification required by new Exchange Act Rules 13a-14 and
15d-14 must be in the exact form set forth in the amendments to the
affected reports. The wording of the required certification may not be
changed in any respect (even if the change would appear to be
inconsequential in nature).\63\
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\63\ To further emphasize the importance of the required
certification, a principal executive officer or principal financial
officer is not permitted to have the certification signed on his or
her behalf pursuant to a power of attorney or other form of
confirming authority. See new Exchange Act Rules 13a-14(d) and 15d-
14(d).
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5. Location of Certification
Section 302 of the Act states that the required certification is to
be included ``in'' each quarterly or annual report filed or submitted
under either Section 13(a) or 15(d) of the Exchange Act. To implement
this directive, we have amended Forms 10-Q, 10-QSB, 10-K, 10-KSB, 20-F
and 40-F under the Exchange Act to require that the certifications
follow immediately after the signature sections of these reports.
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. The signatures required by the
certifications will be part of these reports, and, therefore, also will
be subject to the signature requirement of our rules.\64\ We have
amended Rule 302 of Regulation S-T \65\ to make it clear that its
requirements apply to the signatures appearing in these certifications.
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\64\ See Exchange Act Rule 12b-11(d) [17 CFR 240.12b-11(d)].
\65\ 17 CFR 232.302.
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6. Liability for False Certification
An issuer's principal executive and financial officers already are
responsible as signatories for the issuer's disclosures under the
Exchange Act liability provisions \66\ and can be liable for material
misstatements or omissions under general antifraud standards \67\ and
under our authority to seek redress against those who cause or aid or
abet securities law violations.\68\ An officer providing a false
certification potentially could be subject to Commission action for
violating Section 13(a) or 15(d) of the Exchange Act and to both
Commission and private actions for violating Section 10(b) of the
Exchange Act \69\ and Exchange Act Rule 10b-5.\70\
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\66\ See Sections 13(a) and 18 of the Exchange Act [15 U.S.C.
78m(a) and 78r].
\67\ See, for example, Howard v. Everex Systems, Inc. 228 F.3d
1057 (9th Cir. 2000) (a corporate officer who signs a Commission
filing containing representations ``makes'' the statement in the
filing and can be liable as a primary violator of Section 10(b) of
the Exchange Act).
\68\ See Sections 20, 21, 21C and 21D of the Exchange Act [15
U.S.C. 78t, 78u, 78u-3 and 78u-4].
\69\ 15 U.S.C. 78j(b).
\70\ A false certification also may have liability consequences
under Sections 11 and 12(a)(2) of the Securities Act [15 U.S.C. 77k
and 77l(a)(2)] where a quarterly or annual report is incorporated by
reference into a registration statement on Form S-3 [17 CFR 239.13]
or F-3 [17 CFR 239.33] or into a prospectus filed pursuant to
Securities Act Rule 424(b) [17 CFR 230.424(b)].
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III. Disclosure Controls and Procedures
A. Rule Requirements
As adopted, new Exchange Act Rules 13a-15 and 15d-15 require each
issuer filing reports under Section 13(a) or Section 15(d) of the
Exchange Act to maintain disclosure controls and procedures (as defined
in new Exchange Act Rules 13a-14(c) and 15d-14(c)). We believe that, to
assist principal executive and financial officers in the discharge of
their responsibilities in making the required certifications, as well
as to discharge their responsibilities in providing accurate and
complete information to security holders, it is necessary for companies
to ensure that their internal
[[Page 57281]]
communications and other procedures operate so that important
information flows to the appropriate collection and disclosure points
in a timely manner.
B. Discussion of Disclosure Controls and Procedures
New Exchange Act Rules 13a-15 and 15d-15 complement existing
requirements for reporting companies to establish and maintain systems
of internal controls with respect to their financial information.\71\
They are intended to ensure that an issuer maintains commensurate
procedures for gathering, analyzing and disclosing all information that
is required to be disclosed in its Exchange Act reports.
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\71\ See Section 13(b)(2) of the Exchange Act [15 U.S.C.
78m(b)(2)] and Rules 13b2-1 and 13b2-2 [17 CFR 240.13b2-1 and
240.13b2-2].
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As discussed in the June Proposals, these procedures are intended
to cover a broader range of information than is covered by an issuer's
internal controls related to financial reporting. For example, the
procedures should ensure timely collection and evaluation of
information potentially subject to disclosure under the requirements of
Regulation S-X,\72\ Regulation S-K or S-B and Forms 20-F and 40-F. The
procedures should capture information that is relevant to an assessment
of the need to disclose developments and risks that pertain to the
issuer's businesses.\73\ They also should cover information that must
be evaluated in the context of the disclosure requirement of Exchange
Act Rule 12b-20. We believe that the new rules will help to ensure that
an issuer's systems grow and evolve with its business and are capable
of producing Exchange Act reports that are timely, accurate and
reliable.\74\
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\72\ 17 CFR 210.1-01 et seq.
\73\ For example, for some businesses, an assessment and
evaluation of operational and regulatory risks may be necessary.
\74\ Accordingly, a company that failed to maintain adequate
procedures, review them and otherwise comply with the rule could be
subject to Commission action for violating Section 13(a) of the
Exchange Act even where the failure did not lead to flawed
disclosure.
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New Exchange Act Rules 13a-15 and 15d-15 also are entirely
complementary to the objectives of Section 302 of the Act. While
Section 302 requires an issuer's principal executive and financial
officers to make specific statements in their certifications and to
take the actions satisfying the representations made in the statements
as to the issuer's disclosure controls and procedures, it does not
directly address the issuer's obligations with respect to these
controls and procedures. The new rules will ensure that an issuer also
has a responsibility to maintain adequate disclosure controls and
procedures, so that its principal executive and financial officers can
supervise and review these periodic evaluations and report the results
to security holders through the issuer's Exchange Act reports.\75\
New Exchange Act Rules 13a-15 and 15d-15 also require the issuer,
under the supervision of the principal executive and financial
officers, to conduct an evaluation of the effectiveness of the design
and operation of the issuer's disclosure controls and procedures within
90 days of the filing date of any quarterly or annual report filed
under the Exchange Act. While the new rules do not provide detailed
procedures for such an evaluation, the evaluation must, at a minimum,
address the matters specified by the rules. We expect that this
evaluation would be carried out in a manner that would form the basis
for the certification statements required by Section 302 of the Act
regarding disclosure controls and procedures required by new Exchange
Act Rules 13a-14(b)(4)(ii)-(iii) and 15d-14(b)(4)(ii)-(iii) in an
issuer's quarterly and annual reports.
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\75\ We note that Section 404 of the Act directs us to prescribe
rules requiring each annual report filed under Section 13(a) or
15(d) of the Exchange Act to contain an internal control report,
which shall: (1) State the responsibility of management for
establishing and maintaining an adequate internal control structure
and procedures for financial reporting: and (2) contain an
assessment, as of the end of the most recent fiscal year of the
issuer, of the effectiveness of the internal control structure and
procedures of the issuer for financial reporting. These rules will
be the subject of a separate rulemaking project.
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We noted in the June Proposals that mandatory requirements
regarding disclosure controls and procedures may raise several issues
for foreign private issuers. Section 302 of the Act, however, does not
provide any exception to the certification requirement for foreign
private issuers. Because we believe that the maintenance of disclosure
controls and procedures is an important part of satisfying the
certification requirement, it is appropriate to require foreign private
issuers to comply with new Exchange Act Rules 13a-15 and 15d-15 with
respect to the implementation of the controls and procedures outlined
in Section 302(a)(4) of the Act.
IV. Certification of Registered Investment Company Annual and Semi-
Annual Reports
We are implementing Section 302 of the Act with respect to
registered investment companies by adopting new Investment Company Act
Rule 30a-2. This rule requires a registered investment company that
files periodic reports under Section 13(a) or 15(d) of the Exchange Act
(that is, Form N-SAR) to include the certification specified by Section
302 in those periodic reports. We are also amending the instructions to
Form N-SAR, the annual and semi-annual reporting form for registered
investment companies, to require the specified certification to be
filed as an exhibit to Form N-SAR.\76\
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\76\ 17 CFR 249.330; 17 CFR 274.101; Item 133 and Instructions
to Items 77Q3, 102P3 and 133 of Form N-SAR.
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Section 302 requires the specified certification to be included in
``each annual or quarterly report filed or submitted'' under either
Section 13(a) or 15(d) of the Exchange Act.\77\ Form N-SAR is the form
designated for registered investment companies to comply with their
reporting requirements under Sections 13(a) and 15(d) of the Exchange
Act, as well as periodic reporting requirements under Sections 30(a)
and 30(b)(1)\78\ of the Investment Company Act.\79\ Registered
management investment companies are required to file annual and semi-
annual reports on Form N-SAR not more than 60 calendar days after the
close of each fiscal year and fiscal second quarter.\80\ Registered
unit investment trusts are required to file annual reports on Form N-
SAR with respect to each calendar year, not more than 60 calendar days
after the close of each year.\81\
Unlike Forms 10-K and 10-Q, Form N-SAR does not require the filing
of financial statements. However, Form N-SAR requires management
investment companies to provide certain financial information based on
the financial statements as of the same date contained in the
investment company's annual and semi-annual reports to
shareholders.\82\ Therefore, we are
[[Page 57282]]
requiring the signing officers of a registered management investment
company to certify under new Investment Company Act Rule 30a-2(b)(3)
that the financial information included in the report 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
investment company.\83\ We have added a specific reference to changes
in net assets and cash flows even though Section 302 of the Act does
not include such an explicit reference. We believe that it is
consistent with Congressional intent to include both income or loss,
and changes in net assets and, in the case where the financial
statements are required to include a statement of cash flows, within
the concept of ``fair presentation'' of an investment company's results
of operations.
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\77\ See n. 34 above. Because Section 302 of the Sarbanes-Oxley
Act only applies to companies that file periodic reports under
Section 13(a) or 15(d) of the Exchange Act, the rules we are
adopting today will not apply to registered investment companies
that do not file periodic reports under Section 13(a) or 15(d).
\78\ 15 U.S.C. 80a-30(a) and (b)(1).
\79\ General Instruction A to Form N-SAR. See Release No. IC-
14299 (Jan. 4, 1985) [50 FR 1442] (release adopting Form N-SAR).
\80\ Investment Company Act Rule 30b1-1 [17 CFR 270.30b1-1];
General Instruction C to Form N-SAR.
\81\ Investment Company Act Rule 30a-1 [17 CFR 270.30a-1];
General Instruction C to Form N-SAR. A unit investment trust 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)].
\82\ See Items 72 and 74 of Form N-SAR and the Instructions to
those items.
\83\ In the case of a master-feeder fund, the report of the
master fund on Form N-SAR would be expected to include a
certification based upon the financial statements of the master fund
included in the report to shareholders of the feeder fund.
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The certification required by new Investment Company Act Rule 30a-2
must be in the exact form set forth in the amendments to Form N-
SAR.\84\ The wording of the required certification may not be changed
in any respect (even if the change would appear to be inconsequential
in nature).
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\84\ The certification must be filed as an exhibit to the report
on Form N-SAR. The EDGAR document type must be EX-99.77Q3 CERT for
an Exhibit filed in response to the instructions to sub-item 77Q3,
EX-99.102P3 CERT for an Exhibit filed in response to the
instructions to sub-item 102P3 and EX-99.133 CERT for an Exhibit
filed in response to the instructions to item 133 of this form.
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Investment companies filing reports on Form N-SAR under Sections
13(a) and 15(d) of the Exchange Act will also be required to maintain
disclosure controls and procedures under new Exchange Act Rules 13a-15
and 15d-15.\85\ New Rules 13a-15 and 15d-15 also require an investment
company, under the supervision and with the participation of the
principal executive and financial officers, to conduct an evaluation of
the effectiveness of the design and operation of the investment
company's disclosure controls and procedures within 90 days of the
filing date of each report requiring certification under new Investment
Company Act Rule 30a-2. We expect that this evaluation would be carried
out in a manner that would form the basis for the certification
statements required by Section 302 of the Act regarding disclosure
controls and procedures required by new Investment Company Act Rule
30a-2(b)(4)(i)-(iii) in an investment company's Form N-SAR.\86\
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\85\ New Exchange Act Rule 13a-15 applies to every issuer that
has a class of securities registered pursuant to Section 12 of the
Exchange Act. New Exchange Act Rule 15d-15 applies to every issuer
that is required to file reports pursuant to Section 15(d) of the
Exchange Act.
\86\ New Investment Company Act Rule 30a-2(c) incorporates the
definition of ``disclosure controls and procedures'' contained in
new Exchange Act Rules 13a-14(c) and 15d-14(c). We recognize that,
in the case of a series fund or family of investment companies, the
disclosure controls and procedures for each fund in the series or
family may be the same. Therefore, for purposes of new Investment
Company Act Rule 30a-2(b)(4)(ii) and (iii), a single evaluation of
the effectiveness of the disclosure controls and procedures for the
series or family could be used in multiple certifications for the
funds in the series or family, as long as the evaluation has been
performed within 90 days of the date of the report on Form N-SAR.
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The certification required by new Investment Company Act Rule 30a-2
makes reference to certain disclosures regarding both disclosure
controls and procedures and internal controls that must be made in the
reports in which the certification is contained. These disclosure
requirements appear in the new instructions to Form N-SAR.\87\
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\87\ Instructions (a)(i) and (ii) to sub-item 77Q3 of Form N-
SAR.
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Unit investment trusts will be required to provide the specified
certification with respect to the items of Form N-SAR specific to them,
which include very limited financial information.\88\ We recognize that
unit investment trusts, which are unmanaged, fixed portfolios of
securities, have no corporate management structure and hence will not
have a principal executive officer or principal financial officer.
Therefore, in the case of a unit investment trust, the required
certification should be signed by personnel of the sponsor, trustee,
depositor or custodian who perform functions similar to those of a
principal executive officer and principal financial officer on behalf
of the trust.\89\
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\88\ See Items 111 to 132 of Form N-SAR.
\89\ Signing officers could include, for example, the officers
of the depositor required to sign a registration statement on Form
N-4 [17 CFR 239.17b; 17 CFR 274.11c] or N-6 [17 CFR 239.17c; 17 CFR
274.11d], or the officers of the depositor, trustee or custodian
required to sign a registration statement on Form N-8B-2 [17 CFR
274.12].
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Unit investment trusts and small business investment companies are
not required to transmit reports to their shareholders containing their
financial statements, and Form N-SAR does not require unit investment
trusts and small business investment companies to report financial
information based on their financial statements.\90\ Therefore, the
certification requirement applicable to these investment companies does
not include the requirement of new Investment Company Act Rule 30a-
2(b)(3) that the signing officers certify that the financial
information included in the periodic report and the financial
statements on which it 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 investment company.\91\
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\90\ Cf. Investment Company Act Rule 30e-2 [17 CFR 270.30e-2]
(requiring registered unit investment trusts substantially all of
the assets of which consist of securities issued by a management
investment company to transmit to their shareholders semi-annually a
report containing all of the applicable information and financial
statements or their equivalent required to be included in reports of
the management investment company for the same fiscal period).
\91\ Instruction to item 133 of Form N-SAR.
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Business development companies and face-amount certificate
companies file periodic reports on Forms 10-K and 10-Q under the
Exchange Act, and they are required to comply with the certification
requirements applicable to these forms.\92\
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\92\ Business development companies are a category of closed-end
investment company that are not required to register under the
Investment Company Act. See 15 U.S.C. 80a-2(a)(48) (defining
business development companies). A face-amount certificate company
is an investment company that engages or proposes to engage in the
business of issuing certain face amount certificates. See 15 U.S.C.
80a-4(1). See Release No. IC-14080 (Aug. 6, 1984) [49 FR 32370,
32372] (business development companies and face-amount certificate
companies are required to file reports on other forms prescribed
under the Exchange Act rather than Form N-SAR).
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We note that, in a companion release, we are proposing to require
registered management investment companies to file certified
shareholder reports with the Commission on new Form N-CSR and would
designate these certified shareholder reports as reports that are
required under Sections 13(a) and 15(d) of the Exchange Act. For
registered management investment companies, the required reports to
shareholders, rather than Form N-SAR, are the primary vehicle for
providing financial statements to investors. We believe that the
information in these reports to shareholders should be certified. In
addition, we are proposing an amendment to Form N-SAR that would
uniformly apply to all registered investment companies, and not just
those subject to Section 13(a) or 15(d) of the Exchange Act, the
requirement to include in Form N-SAR the certification required by
Section 302 of the Act. We are also proposing a new rule to apply
disclosure controls and procedures requirements, similar to those
contained
[[Page 57283]]
in Exchange Act Rules 13a-15 and 15d-15, uniformly to all registered
investment companies.
V. Transition Provisions
Paragraphs (b)(1), (2) and (3) of new Exchange Act Rules 13a-14 and
15d-14 apply to quarterly and annual reports, including transition
reports, filed after the Effective Date. Paragraphs (b)(4), (5) and (6)
of Rules 13a-14 and 15d-14 apply to quarterly and annual reports,
including transition reports, filed for periods ending after the
Effective Date. Paragraph (a) of Item 307 of Regulations S-B and S-K
and paragraph (b) of new Exchange Act Rules 13a-15 and 15d-15 apply to
quarterly and annual reports, including transition reports, filed for
periods ending after the Effective Date.
Paragraphs (b)(1), (2) and (3) of new Investment Company Act Rule
30a-2 apply to annual and semi-annual reports, including transition
reports, on Form N-SAR filed after the Effective Date. Paragraphs
(b)(4), (5) and (6) of Rule 30a-2 apply to annual and semi-annual
reports, including transition reports, filed for periods ending after
the Effective Date. Paragraph (a)(i) of the Instruction to sub-item
77Q3 of Form N-SAR and paragraph (b) of new Exchange Act Rules 13a-15
and 15d-15 apply to annual and semi-annual reports, including
transition reports, on Form N-SAR filed for periods ending after the
Effective Date.
VI. Paperwork Reduction Act
The new rules and amendments to existing rules and forms contain
``collection of information'' requirements within the meaning of the
Paperwork Reduction Act of 1995 (``PRA'').\93\ We published a notice
requesting comment on the collection of information requirements in the
June Proposals, and submitted these requirements to the Office of
Management and Budget (``OMB'') for review in accordance with the
PRA.\94\ The titles for those collections of information are ``Form 10-
K,'' ``Form 10-KSB,'' ``Form 10-Q'' and ``Form 10-QSB.'' \95\
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\93\ 44 U.S.C. 3501 et seq.
\94\ 44 U.S.C. 3507(d) and 5 CFR 1320.11.
\95\ The burden hour and cost estimates for these collections of
information are as follows: with respect to Form 10-K (OMB Control
No. 3235-0063) an increase in annual reporting and recordkeeping
burden hours and cost of 35,190 hours and $3,519,000, respectively;
with respect to Form 10-KSB (OMB Control No. 3235-0420) an increase
in annual reporting and recordkeeping burden hours and cost of
14,209 hours and $1,421,000, respectively; with respect to Form 10-Q
(OMB Control No. 3235-0070) an increase in annual reporting and
recordkeeping burden hours and cost of 100,298 hours and
$10,030,000, respectively; and respectively; with respect to Form
10-QSB (OMB Control No. 3235-0416) an increase in annual reporting
and recordkeeping burden hours and cost of 43,530 hours and
$4,353,000, respectively.
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While we received only one comment letter specifically remarking on
our PRA estimates included in the June Proposals,\96\ we revised the
proposed amendments in response to the directives in Section 302 of the
Act. The revisions made to the rules and amendments do not alter the
burden estimates for Forms 10-K (OMB Control No. 3235-0063), 10-KSB
(OMB Control No. 3235-0420), 10-Q (OMB Control No. 3235-0070) and 10-
QSB (OMB Control No. 3235-0416) previously submitted to and approved by
OMB.
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\96\ See the Letter dated August 2, 2000 of Bernard E. Klein.
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The new rules and form amendments that we are adopting cover the
more expansive reach of Section 302 of the Act and contain additional
``collection of information requirements'' within the meaning of the
PRA. Accordingly, we submitted additional materials to OMB for
emergency review in accordance with the PRA.\97\ The titles for these
collections of information are ``Form 20-F'' (OMB Control No. 3235-
0288), ``Form 40-F'' (OMB Control No. 3235-0381) and ``Form N-SAR''
(OMB Control No. 3235-0330). An agency may not conduct or sponsor, and
a person is not required to respond to, an information collection
unless it displays a currently valid OMB control number.
---------------------------------------------------------------------------
\97\ 44 U.S.C. 3507(j) and 5 CFR 1320.13.
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Form 10-K prescribes information that registrants must disclose
annually to the market about its business. Form 10-KSB prescribes
information that registrants that are ``small business issuers'' as
defined under our rules must disclose annually to the market about its
business.
Form 10-Q prescribes information that registrants must disclose
quarterly to the market about its business. Form 10-QSB prescribes
information that registrants that are ``small business issuers'' as
defined under our rules must disclose quarterly to the market about its
business.
Form 20-F is used by foreign private issuers to either register a
class of securities under the Exchange Act or provide an annual report
required under the Exchange Act. Form 40-F is used by foreign private
issuers to file reports under the Exchange Act after having registered
securities under the Securities Act and by certain Canadian
registrants. Form N-SAR is used by registered investment companies to
file annual and semi-annual reports under the Exchange Act and the
Investment Company Act.
New Exchange Act Rules 13a-14 and 15d-14\98\ require an issuer's
principal executive and financial officers to certify the information
contained in the issuer's quarterly and annual reports and that they
have taken certain actions with respect to the issuer's internal
controls for the collection and reporting of financial and other
information that is subject to disclosure in the issuer's quarterly and
annual Exchange Act reports. This certification requirement would
become part of the ``collection of information'' required in each
quarterly and annual report.
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\98\ References to new Exchange Act Rule 13a-14 in this section
also refer to new Exchange Act Rule 15d-14.
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New Exchange Act Rules 13a-15 and 15d-15\99\ require an issuer to
maintain disclosure controls and procedures to provide reasonable
assurance that the issuer is able to record, process, summarize and
report the information required in the issuer's Exchange Act reports.
These procedures would become part of the ``collection of information''
required in these reports.
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\99\ References to new Exchange Act Rule 13a-15 in this section
also refer to new Exchange Act Rule 15d-15.
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New Investment Company Act Rule 30a-2 requires an investment
company's principal executive and financial officers to certify the
information contained in the investment company's annual and semi-
annual reports on Form N-SAR and that they have taken certain actions
with respect to the investment company's internal controls for the
collection and reporting of financial and other information that is
subject to disclosure in the investment company's reports on Form N-
SAR. This certification requirement would become part of the
``collection of information'' required in each report on Form N-SAR.
The purpose of the certification and disclosure controls and
procedures requirements is to ensure that the information that is
collected and disclosed in Exchange Act reports is complete and
accurate. Consequently, the senior officer certification, as well as
the periodic evaluations of internal reporting systems, required by the
rules and amendments will become part of the process in which issuers
engage to comply with the reporting requirements of the affected forms.
The compliance burden estimates for the collections of information
are based on several assumptions.\100\ The number
[[Page 57284]]
of foreign private issuers that file annual reports on Form 20-F or 40-
F is approximately 1,300 entities.\101\ The number of registered
investment companies that file Form N-SAR is approximately 4,450
entities.\102\
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\100\ We have based our estimates of the effects that the new
rules and amendments to existing rules and forms will have on these
information collections primarily on our review of actual filings of
these forms and the forms' requirements.
\101\ This estimate is based on 1,200 foreign private issuers
that file annual reports on Form 20-F and 100 Canadian issuers that
file annual reports on Form 40-F.
\102\ This estimate is based on 3,650 registered management
investment companies and 800 registered unit investment trusts that
file reports under Section 13(a) or 15(d) of the Exchange Act.
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New Exchange Act Rule 13a-14 and new Investment Company Act Rule
30a-2 require an issuer's principal executive and financial officers to
certify the information contained in the issuer's periodic reports. The
compliance burden associated with new Exchange Act Rule 13a-14 and new
Investment Company Act Rule 30a-2 is the burden associated with reading
and thinking critically about each quarterly and annual report to be
filed by the issuer so that the certifying officers can make the
required certification. For purposes of the PRA, we estimate that the
new certification requirement will result in an increase of five burden
hours \103\ per issuer in connection with preparing each annual report
on Form 20-F or 40-F and an increase of five burden hours per issuer in
connection with preparing each report on Form N-SAR.
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\103\ This estimate is based on consultations with several law
firms and other persons who regularly assist registrants in
preparing and filing quarterly and annual reports with the
Commission.
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New Exchange Act Rule 13a-15 requires an issuer to maintain
sufficient procedures to collect, process and disclose the information
required in its Exchange Act reports. We expect that issuers already
maintain procedures, whether formal or informal, to comply with their
Exchange Act disclosure obligations and for their own internal
purposes. We do not believe that this requirement will result in any
change in either the reporting or cost burden associated with preparing
annual reports on Forms 20-F and 40-F or reports on Form N-SAR.
Based on a burden hour estimate of five hours per respondent per
year, we estimate that the total burden hours of complying with Form
20-F and Form 40-F, revised to include the burden hours expected from
the new rules, is estimated to be 586,248 hours for Form 20-F, an
increase of 4,500 hours \104\ from the current annual burden of 581,748
hours, and 525 hours for Form 40-F, an increase of 475 hours \105\ from
the current annual burden of 50 hours. The total burden hours of
complying with Form N-SAR, revised to include the burden hours expected
from the new rules, is estimated to be 154,450 hours,\106\ an increase
of 52,702 hours \107\ from the current annual burden of 101,748 hours.
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\104\ This estimate is based on the current annual burden per
filing for each foreign private issuer. The estimate of 4,500 hours
is calculated by 1,200 foreign private issuers x one filing per year
x five burden hours x .75).
\105\ This estimate is based on the current annual burden per
filing for each Canadian issuer. The estimate of 475 hours is
calculated by 100 Canadian issuers x one filing per year x five
burden hours x .75 + 100 hours to reflect an adjustment in the
distribution of burden hours and associated costs). The estimate has
then been increased by 100 hours due to an adjustment to reflect a
revised burden hour/cost allocation (75%/25%) for the report.
\106\ This estimate is based on the current annual burden per
filing for each investment company. With regard to Form N-SAR, the
current estimated average burden hours per response for registered
management investment companies and registered small business
investment companies is 14.75 hours and the current estimated
average burden hours per response for registered unit investment
trusts is six hours. The estimated average burden hours per
response, if new Investment Company Act Rule 30a-2 is adopted, for
Form N-SAR would increase the average burden hours per response by
five hours per filing that is required to be certified. We estimate
that 50 registered management investment companies are not subject
to Section 13(a) or 15(d) of the Exchange Act and hence would not be
required to include the certification. Therefore, the estimate of
154,450 hours is calculated by: (3,650 registered management
investment companies x two filings per year x 19.75 burden hours) +
(50 registered management investment companies not subject to
Section 13(a) or 15(d) of the Exchange Act x two filings per year x
14.75 burden hours) + (800 registered unit investment trusts x one
filing per year x 11 burden hours).
\107\ The increase in burden hours is attributed to an increase
of 400 registered management investment companies and 67 registered
unit investment trusts that are required to file reports pursuant to
the Exchange Act from the previous number of these issuers
calculated for the current annual burden, and the certification
requirement required by the new rule.
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The total burden hours of complying with Forms 10-Q and 10-QSB,
revised to include the burden hours expected from the new rules, is
estimated to be 3,129,283 hours for Form 10-Q, an increase of 100,298
hours \108\ from the current annual burden of 3,028,985 hours, and
1,288,488 hours for Form 10-QSB, an increase of 43,530 hours \109\ from
the current annual burden of 1,244,958 hours. The total burden hours of
complying with Forms 10-K and 10-KSB, revised to include the burden
hours expected from the new rules, is estimated to be 12,344,652 hours
for Form 10-K, an increase of 35,190 hours \110\ from the current
annual burden of 12,309,462 hours, and 3,438,518 hours for Form 10-KSB,
an increase of 14,209 hours \111\ from the current annual burden of
3,424,309 hours.
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\108\ The estimate of 100,298 hours is calculated by 26,746
quarterly reports x five burden hours x .75.
\109\ The estimate of 43,350 hours is calculated by 11,608
quarterly reports x five burden hours x .75.
\110\ The estimate of 35,190 hours is calculated by 9,384 annual
reports x five burden hours x .75.
\111\ The estimate of 14,209 hours is calculated by 3,789 annual
reports x five burden hours x .75.
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In addition to the internal hours they will expend to comply with
Forms 20-F and 40-F, we expect that respondents will retain outside
professionals to assist in compliance with the information collection
requirements. The total dollar cost of complying with Forms 20-F and
40-F, revised to include outside professional costs expected from the
new rules, is estimated to be $523,596,000 for Form 20-F, an increase
of $450,000 \112\ from the current annual burden of $523,146,000, and
$52,500 for Form 40-F, an increase of $26,500 \113\ from the current
annual burden of $26,000.
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\112\ This estimate is based on the current annual burden per
filing for each foreign private issuer. The estimate of $450,000 is
calculated by 1,200 foreign private issuers x one filing per year x
five burden hours x .25 x $300.00).
\113\ This estimate is based on the current annual burden per
filing for each foreign private issuer. The estimate of $26,500 is
calculated by 100 foreign private issuers x one filing per year x
five burden hours x .25 x $300.00). The estimate has then been
reduced by $11,000 due to an adjustment to reflect a revised burden
hour/cost allocation (75%/25%) for the report.
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The total dollar cost of complying with Forms 10-Q and 10-QSB,
revised to include outside professional costs expected from the new
rules, is estimated to be $312,929,000 for Form 10-Q, an increase of
$10,030,000 \114\ from the current annual burden of $302,899,000, and
$128,849,000 for Form 10-QSB, an increase of $4,353,000 \115\ from the
current annual burden of $124,496,000. The total dollar cost of
complying with Forms 10-K and 10-KSB, revised to include outside
professional costs expected from the new rules, is estimated to be
$1,234,465,000 for Form 10-K, an increase of $3,519,000 \116\ from the
current annual burden of $1,230,946,000, and $343,852,000 for Form 10-
KSB, an increase of $1,421,000 \117\ from the current annual burden of
$342,431,000.
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\114\ The estimate of $10,030,000 is calculated by 26,746
quarterly reports x five burden hours x .25 x $300.00.
\115\ The estimate of $4,353,000 is calculated by 11,608
quarterly reports x five burden hours x .25 x $300.00.
\116\ The estimate of $3,519,000 is calculated by 9,384 annual
reports x five burden hours x .25 x $300.00.
\117\ The estimate of $1,421,000 is calculated by 3,789 annual
reports x five burden hours x .25 x $300.00.
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Comments concerning the accuracy of these burden estimates, and any
suggestions for reducing the burden, should be directed to the
Commission.
[[Page 57285]]
Compliance with the new rules is mandatory. Under our rules for the
retention of manual signatures, issuers will be required to maintain
the certifications for five years.\118\ The information required by the
new rules will not be kept confidential.
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\118\ See the amendment to Rule 302(b) of Regulation S-T [17 CFR
232.302(b)].
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VII. Cost-Benefit Analysis
The certification requirement that we are adopting today implements
a Congressional mandate. 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 our adoption of a rule that requires issuers to maintain
disclosure controls and procedures. We discuss these costs and benefits
below.
The new certification requirement may lead to some additional costs
for issuers. The new rules require an issuer's principal executive and
financial officers to review the issuer's periodic reports and to make
the required certification. To the extent that corporate officers would
need to spend additional time thinking critically about the overall
context of their company's disclosure, issuers would incur costs
(although investors would benefit from improved disclosure). The
certification requirement creates a new legal obligation for an
issuer's principal executive and financial officers, but does not
change the standard of legal liability.
Issuers are already required to maintain reporting controls and
procedures for identifying and processing the information needed to
satisfy their disclosure obligations under the Exchange Act. The new
rules do not dictate that issuers follow any particular procedure. By
allowing issuers to determine what procedures are necessary to meet the
obligation of the rules, we are mitigating the costs associated with
compliance. Some issuers may need to institute appropriate controls and
procedures. Other issuers may need to enhance existing informal or ad
hoc controls and procedures. These incremental costs are difficult to
quantify. While we requested comment and supporting data in connection
with the June Proposals on the cost of implementing, or upgrading and
strengthening existing, reporting controls and procedures, we received
no specific comment letters in response to that request.
The required periodic evaluation of reporting controls and
procedures likely will result in costs for issuers. The new
certification requirement likely will require issuers to create or
strengthen internal controls to enable their senior executive officers
to meet their certification obligations under the new rules. Many
issuers already regularly monitor and evaluate their controls and
procedures. Because the size and scope of these internal reporting
systems is likely to vary among issuers, it is difficult to provide an
accurate cost estimate.
Conversely, the new rules are likely to provide significant
benefits by ensuring that information about an issuer's business and
financial condition is adequately reviewed by the issuer's principal
executive and financial officers and the issuer's internal systems keep
pace with the growth of the business.
We believe that investor confidence in corporate disclosure has
suffered, in part, because of a belief that corporate officers may not
devote sufficient attention to the preparation of their companies'
periodic reports and to the disclosure controls and procedures that
generate the data from which they are prepared.
The new rules should help to ensure that issuers maintain
sufficient internal reporting controls and procedures to provide
reasonable assurance that they can record, process, summarize and
report the information that is required in all Exchange Act reports. To
the extent that issuers do not maintain adequate controls and
procedures, the new rules should lead to the development, or
enhancement and modernization, of these controls and procedures. The
required periodic evaluation of these controls and procedures should
ensure that issuers devote adequate resources and attention to the
maintenance of their internal reporting systems. Additionally, the
required evaluation should help to identify potential weaknesses and
deficiencies in advance of a system breakdown, thereby ensuring the
continuous, orderly and timely flow of information within the company
and, ultimately, to investors and the marketplace.
VIII. Final Regulatory Flexibility Analysis
This Final Regulatory Flexibility Analysis, or FRFA, has been
prepared in accordance with the Regulatory Flexibility Act.\119\ The
FRFA pertains to new Exchange Act Rules 13a-15 and 15d-15 adopted for
operating companies, for which we gave notice and sought comment. The
Sarbanes-Oxley Act of 2002 directs us to adopt rules for registered
investment companies. Because we find good cause to adopt those rules
without notice and comment, we do not analyze them in the FRFA. New
Exchange Act Rules 13a-15 and 15d-15 require an issuer to maintain
disclosure controls and procedures to provide reasonable assurance that
the issuer is able to record, process, summarize and report the
information required in their Exchange Act reports.\120\
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\119\ 5 U.S.C. 603.
\120\ The Initial Regulatory Flexibility Analysis (``IRFA'')
prepared in connection with the June Proposals also involved
proposed rules under the Exchange Act that would have required an
issuer's principal executive officer and principal financial officer
to certify the information contained in their quarterly and annual
reports That proposal has been superseded by the statutory mandate
of Section 302 of the Act. The Act's directive to adopt rules for
all issuers makes no distinction based on the size of the issuer.
We, therefore, do not analyze the new rules adopted under the
Exchange Act requiring certifications by an issuer's principal
executive and financial officers.
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A. Reasons for, and Objectives of, New Rules
New Exchange Act Rules 13a-15 and 15d-15 complement existing
requirements for reporting companies to establish and maintain systems
of internal controls with respect to their financial information. They
are intended to ensure that an issuer maintains commensurate procedures
for gathering, analyzing and disclosing all information that is
required to be disclosed in its Exchange Act reports.
B. Legal Basis
We are adopting the new rules under the authority set forth in
Sections 10(b), 13, 15(d) and 23(a) of the Exchange Act and Sections
3(a) and 302 of the Act.
C. Small Entities Subject to the Final Rules
The new rules will affect small entities that are subject to the
reporting requirements of Section 13(a) or 15(d) of the Exchange Act.
For purposes of the Regulatory Flexibility Act, the Exchange Act \121\
defines the term ``small business,'' other than an investment company,
to be an issuer that, on the last day of its most recent fiscal year,
has total assets of $5 million or less.\122\ We estimate that there are
approximately 2,500 companies subject to the reporting requirements of
Section 13(a) or 15(d) of the Exchange Act that
[[Page 57286]]
are not investment companies and that have assets of $5 million or
less.\123\
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\121\ 17 CFR 240.0-10(a).
\122\ A similar definition is provided under Securities Act Rule
157 [17 CFR 230.157].
\123\ This estimate is based on filings with the Commission.
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D. Significant Issues Raised by Public Comment
The IRFA appeared in the June Proposals.\124\ We requested comment
on any aspect of the IRFA, including the number of small businesses
that would be affected by the proposals, the nature of the impact, how
to quantify the number of small entities that would be affected and how
to quantify the impact of the proposals. We received one comment letter
responding to that request.\125\ This commenter recommended that we
provide a transition period for small businesses and that we clarify
the need for small businesses to audit their internal controls
quarterly. This release contains a transition provision that delays
compliance with the certification requirement as it relates to
disclosure controls and procedures and internal controls.\126\ The
requirements for periodic audit of an issuer's internal controls will
be considered at a future date.
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\124\ See the June Proposals at Section V.
\125\ See the Letter dated August 19, 2002 of the Office of the
Chief Counsel for Advocacy of the U.S. Small Business
Administration.
\126\ See Section V above.
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E. Reporting, Recordkeeping and Other Compliance Requirements
The new rules require issuers, including ``small businesses,'' to
maintain sufficient procedures to provide reasonable assurance that the
issuer is able to record, process, summarize and report the information
required in their Exchange Act reports filed with the Commission, and
to periodically review and evaluate these procedures. We do not dictate
the specifics of these procedures. The new rules may increase the costs
associated with compliance with issuers' Exchange Act reporting
obligations.
F. Duplicative, Overlapping or Conflicting Federal Rules
Section 13(b)(2)(B) of the Exchange Act \127\ requires issuers that
are subject to the reporting requirements of Section 13(a) or 15(d) to
devise and maintain a system of internal accounting controls sufficient
to provide reasonable assurances that the transactions and information
are recorded as necessary to permit the preparation of the issuer's
financial statements. New Exchange Act Rules 13a-15 and 15d-15 are
intended to address the issuer's controls and procedures for recording,
processing summarizing and reporting the information that is required
to be disclosed in Exchange Act reports.
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\127\ 15 U.S.C. 78m(b)(2)(B).
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G. Agency Action To Minimize Effect on Small Entities
The Regulatory Flexibility Act directs us to consider significant
alternatives that would accomplish the stated objectives, while
minimizing any significant adverse impact on small entities. In that
regard, we considered the following alternatives: (a) Establishing
different compliance or reporting requirements that take into account
the resources of small entities, (b) clarifying, consolidating or
simplifying compliance and reporting requirements under the rules for
small entities and (c) exempting small entities from all or part of the
proposed rules. We solicited comment as to whether small business
issuers should be excluded from the new rules. We received no comment
letters responding to that request.
The periodic review and evaluation of information collection and
reporting procedures required by the new rules involves a performance
standard. The new rules do not mandate how issuers should conduct this
review and evaluation. This flexibility will enable small and large
entities to develop approaches for the review and evaluation that are
appropriate to their individual circumstances. Because Congress has
directed the senior officers of all issuers, regardless of size, to
certify issuers' quarterly and annual reports, we do not believe it is
consistent with that mandate to exempt small issuers from the new
rules. We are not aware of any way to further clarify or simplify
compliance for small entities.
IX. Consideration of Burden on Competition and Promotion of Efficiency,
Competition and Capital Formation
Section 23(a)(2) of the Exchange Act \128\ 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. Section 3(f) of the Exchange Act \129\ and Section
2(c) of the Investment Company Act \130\ requires 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.
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\128\ 15 U.S.C. 78w(a)(2).
\129\ 15 U.S.C. 78c(f).
\130\ 15 U.S.C. 80a-2(c).
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The new rules are intended to enhance investor confidence in the
quality of the information available to them in quarterly and annual
reports filed under the Exchange Act. We believe that by requiring an
issuer's principal executive and financial officers to provide the
required certification, investor confidence in the securities markets
will be enhanced, thereby leading to a more efficient market.
We do not believe that the new rules will impose any burden on
competition. Issuers will incur some costs in complying with the new
rules. These costs will include conducting periodic evaluations of the
issuer's internal controls and procedures to record, process, summarize
and report, on a timely basis, the information required in periodic and
current reports filed by the issuer under the Exchange Act. We
requested comment in connection on the June Proposals on whether the
proposed rules, if adopted, would impose a burden on competition. We
received no comment letters in response to that request.
X. Administrative Procedure Act
The Administrative Procedure Act, or APA, generally requires an
agency to publish notice of a proposed rulemaking in the Federal
Register.\131\ The APA's notice and comment requirement does not apply,
however, if the agency ``for good cause finds * * * that notice and
public procedure are impracticable, unnecessary, or contrary to the
public interest.''\132\ The Commission believes that it is appropriate
to waive notice and comment for the portions of the new rules that were
not included in the June Proposals and for the application of the new
rules to investment companies. Congress has directed the Commission to
implement Section 302 of the Act by rule within 30 days after the date
of enactment.\133\ It is impractical to provide notice and comment
within the statutory deadline. It would be
[[Page 57287]]
unnecessary and against the public interest to provide notice and
opportunity for comment on a directive from Congress to implement
specific rules. Accordingly, the Commission for good cause finds that
delaying adoption of these rules until after a notice and comment
period would be impractical, unnecessary and contrary to the public
interest.
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\131\ See 5 U.S.C. 553(b).
\132\ Id. The Commission previously published notice and sought
comment on a certification proposal that was somewhat similar to,
but different in several material respects, from the new rules we
are adopting today to implement Section 302 of the Sarbanes-Oxley
Act. We did not propose rules that would apply to investment
companies or foreign private issuers (although we sought comment on
the latter).
\133\ See Section 302 (a) and (c) of the Act.
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The APA also generally requires that an agency publish an adopted
rule in the Federal Register 30 days before it becomes effective.\134\
This requirement, however, does not apply if the agency finds good
cause for making the rule effective sooner.\135\ For the same reasons
as it is waiving notice and comment, the Commission finds good cause to
make the new Exchange Act Rules 13a-14 and 15d-14 and new Investment
Company Act Rule 30a-2, and the amendments to related rules and forms,
effective immediately. In addition, because new Exchange Act Rules 13a-
15 and 15d-15 effectuate the purpose of the Section 302 certification
requirement and might create a hardship if they did not become
effective simultaneously with new Exchange Act Rules 13a-14 and 15d-14,
the Commission finds good cause to make the rules effective immediately
as to all issuers filing reports under Section 13(a) or 15(d) of the
Exchange Act.\136\
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\134\ See 5 U.S.C. 553(d).
\135\ Id.
\136\ This finding also satisfies the requirements of 5 U.S.C.
808(2), allowing the rules to become immediately, effective
notwithstanding the requirements of 5 U.S.C. 801 (if agency finds
that notice and public comment procedure are ``impractical,
unnecessary, or contrary to the public interest,'' a rule ``shall
take effect at such time as the Federal agency promulgating the rule
determines'').
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XI. Statutory Authority
The rules and amendments contained in this release are being
adopted under the authority set forth in Sections 10(b), 13, 15(d) and
23(a) of the Exchange Act, Section 8, 30 and 38 of the Investment
Company Act and Sections 3(a) and 302 of the Sarbanes-Oxley Act of
2002.
List of Subjects in 17 CFR Parts 228, 229, 232, 240, 249, 270 and
274
Securities, Investment Companies, Reporting and recordkeeping
requirements.
Text of Final Rules and Amendments
In accordance with the foregoing, Title 17, Chapter II, of the Code
of Federal Regulations is amended as follows:
PART 228--INTEGRATED DISCLOSURE SYSTEM FOR SMALL BUSINESS ISSUERS
1. 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) and 302, Pub.L. No.
107-204, 116 Stat. 745.
2. By adding Sec. 228.307 to read as follows:
Sec. 228.307 (Item 307) Controls and procedures.
(a) Evaluation of disclosure controls and procedures. 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 (as defined in
Sec. Sec. 240.13a-14(c) and 240.15d-14(c) of this chapter) based on
their evaluation of these controls and procedures as of a date within
90 days of the filing date of the quarterly or annual report that
includes the disclosure required by this paragraph.
(b) Changes in internal controls. Disclose whether or not there
were significant changes in the small business issuer'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 regard to significant deficiencies and material
weaknesses.
(c) Asset-Backed Issuers. A small business issuer that is an Asset-
Backed Issuer (as defined in Rule 13a-14(g) and Rule 15d-14(g) under
the Securities Exchange Act of 1934 (17 CFR 240.13a-14(g) and 17 CFR
240.15d-14(g) of this chapter) is not required to disclose the
information required by this Item.
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
3. 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) and 302, Pub.L.No.
107-204, 116 Stat. 745.
4. By adding Sec. 229.307 to read as follows:
Sec. 229.307 (Item 307) Controls and procedures.
(a) Evaluation of disclosure controls and procedures. 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 Sec. Sec. 240.13a-
14(c) and 240.15d-14(c) of this chapter) based on their evaluation of
these controls and procedures as of a date within 90 days of the filing
date of the quarterly or annual report that includes the disclosure
required by this paragraph.
(b) Changes in internal controls. Disclose whether or not there
were significant changes in the registrant'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
regard to significant deficiencies and material weaknesses.
(c) Asset-Backed Issuers. A registrant that is an Asset-Backed
Issuer (as defined in Sec. 240.13a- 14(g) and Sec. 240.15d-14(g) of
this chapter) is not required to disclose the information required by
this Item.
PART 232--REGULATION S-T-GENERAL RULES AND REGULATIONS FOR
ELECTRONIC FILINGS
5. The authority citation for part 232 is revised to read as
follows:
Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s(a), 77sss(a),
78c(b), 78l, 78m, 78n, 78o(d), 78w(a), 78ll(d), 79t(a), 80a-8, 80a-
29, 80a-30 and 80a-37.
Section 232.302 is also issued under secs. 3(a) and 302, Pub.L. No.
107-204, 116 Stat. 745.
6. By amending Sec. 232.302 by revising paragraphs (a) and (b) to
read as follows:
Sec. 232.302 Signatures.
(a) Required signatures to, or within, any electronic submission
(including, without limitation, signatories within the certifications
required by Sec. Sec. 240.13a-14, 240.15d-14 and 270.30a-2 of this
chapter) must be in typed form rather than manual format. Signatures in
an HTML document that are not required may, but are not
[[Page 57288]]
required to, be presented in an HTML graphic or image file within the
electronic filing, in compliance with the formatting requirements of
the EDGAR Filer Manual. When used in connection with an electronic
filing, the term ``signature'' means an electronic entry in the form of
a magnetic impulse or other form of computer data compilation of any
letters or series of letters or characters comprising a name, executed,
adopted or authorized as a signature. Signatures are not required in
unofficial PDF copies submitted in accordance with Sec. 232.104.
(b) Each signatory to an electronic filing (including, without
limitation, each signatory to the certifications required by Sec. Sec.
240.13a-14, 240.15d-14 and 270.30a-2 of this chapter) shall manually
sign a signature page or other document authenticating, acknowledging
or otherwise adopting his or her signature that appears in typed form
within the electronic filing. Such document shall be executed before or
at the time the electronic filing is made and shall be retained by the
filer for a period of five years. Upon request, an electronic filer
shall furnish to the Commission or its staff a copy of any or all
documents retained pursuant to this section.
* * * * *
PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934
7. The authority citation for Part 240 is amended by revising the
sectional authority citation for Sec. 240.15d-10 and adding the
following additional citations 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 240.12b-15 is also issued under secs. 3(a) and 302,
Pub.L. No. 107-204, 116 Stat. 745.
* * * * *
Section 240.13a-10 is also issued under secs. 3(a) and 302,
Pub.L. No. 107-204, 116 Stat. 745.
Section 240.13a-14 is also issued under secs. 3(a) and 302, Pub.
L. No. 107-204, 116 Stat. 745.
Section 240.13a-15 is also issued under secs. 3(a) and 302, Pub.
L. No. 107-204, 116 Stat. 745.
* * * * *
Section 240.15d-10 is also issued under 15 U.S.C. 80a-20(a) and
80a-37(a), and secs. 3(a) and 302, Pub. L. No. 107-204, 116 Stat.
745.
Section 240.15d-14 is also issued under secs. 3(a) and 302, Pub.
L. No. 107-204, 116 Stat. 745.
Section 240.15d-15 is also issued under secs. 3(a) and 302, Pub.
L. No. 107-204, 116 Stat. 745.
* * * * *
8. By revising Sec. 240.12b-15 to read as follows:
Sec. 240.12b-15 Amendments.
All amendments must be filed under cover of the form amended,
marked with the letter ``A'' to designate the document as an amendment,
e.g., ``10-K/A,'' and in compliance with pertinent requirements
applicable to statements and reports. Amendments filed pursuant to this
section must set forth the complete text of each item as amended.
Amendments must be numbered sequentially and be filed separately for
each statement or report amended. Amendments to a statement may be
filed either before or after registration becomes effective. Amendments
must be signed on behalf of the registrant by a duly authorized
representative of the registrant. In addition, each principal executive
officer and principal financial officer of the registrant must provide
a new certification as specified in Sec. 240.13a-14 or Sec. 240.15d-
14. The requirements of the form being amended will govern the number
of copies to be filed in connection with a paper format amendment.
Electronic filers satisfy the provisions dictating the number of copies
by filing one copy of the amendment in electronic format. See Rule 309
of Regulation S-T (Sec. 232.309 of this chapter).
9. By amending Sec. 240.13a-10 to redesignate the ``Note'' at the
end of the section as ``Note 1'' and a ``Note 2'' to read as follows:
Sec. 240.13a-10 Transition reports.
* * * * *
Note 2: The report or reports to be filed pursuant to this
section must include the certification required by Sec. 240.13a-14.
10. By adding Sec. 240.13a-14 to read as follows:
Sec. 240.13a-14 Certification of disclosure in annual and quarterly
reports.
(a) 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 (Sec. Sec.
249.308a, 249.308b, 249.310, 249.310b, 249.220f and 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 paragraph (g)
of this section), must include a certification containing the
information set forth in paragraph (b) of this section in the form
specified in the report. Each principal executive officer or officers
and principal financial officer or officers of the issuer, or persons
performing similar functions, at the time of filing of the report must
sign the certification.
(b) The certification included in each report specified in
paragraph (a) of this section must be in the form specified in the
report and consist of a statement of the certifying officer that:
(1) He or she has reviewed the report being filed;
(2) 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 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;
(3) 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 issuer as of, and for, the periods presented in
the report;
(4) He or she and the other certifying officers are responsible for
establishing and maintaining disclosure controls and procedures (as
such term is defined in paragraph (c) of this section) for the issuer
and have:
(i) Designed such disclosure controls and procedures 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 the periodic reports are being
prepared;
(ii) 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 (``Evaluation Date''); and
(iii) Presented in the report their conclusions about the
effectiveness of the disclosure controls and procedures based on their
evaluation as of the Evaluation Date;
(5) He or she and the other certifying officers have disclosed,
based on their most recent evaluation, to the issuer's auditors and the
audit committee of the board of directors (or persons fulfilling the
equivalent function):
(i) All significant deficiencies in the design or operation of
internal controls which could adversely affect the issuer's ability to
record, process, summarize and report financial data and have
[[Page 57289]]
identified for the issuer's auditors any material weaknesses in
internal controls; and
(ii) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the issuer's internal
controls; and
(6) 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 most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
(c) For purposes of this section and Sec. 240.13a-15 of this
chapter, the term ``disclosure controls and procedures'' means controls
and other procedures of an issuer that are designed to ensure that
information required to be disclosed by the issuer in the reports that
it files or submits under the Act (15 U.S.C. 78a et seq.) is recorded,
processed, summarized and reported, within the time periods specified
in the Commission's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure
that information required to be disclosed by an issuer in the reports
that it files or submits under the Act is accumulated and communicated
to the issuer's management, including its principal executive officer
or officers and principal financial officer or officers, or persons
performing similar functions, as appropriate to allow timely decisions
regarding required disclosure.
(d) A person required to provide the certification specified in
paragraph (a) of this section may not have the certification signed on
his or her behalf pursuant to a power of attorney or other form of
confirming authority.
(e) Each annual report filed by an Asset-Backed Issuer (as defined
in paragraph (g) of this section) under section 13(a) of the Act (15
U.S.C. 78m(a)) must include a certification addressing the following
items:
(1) Review by the certifying officer of the annual report and other
reports containing distribution information for the period covered by
the annual report;
(2) The absence in these reports, to the best of the certifying
officer's knowledge, of any untrue statement of material fact or
omission of a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not
misleading;
(3) The inclusion in these reports, to the best of the certifying
officer's knowledge, of the financial information required to be
provided to the trustee under the governing documents of the issuer;
and
(4) Compliance by the servicer with its servicing obligations and
minimum servicing standards.
(f) With respect to Asset-Backed Issuers, the certification
required by paragraph (e) of this section must be signed by the trustee
of the trust (if the trustee signs the annual report) or the senior
officer in charge of securitization of the depositor (if the depositor
signs the annual report). Alternatively, the senior officer in charge
of the servicing function of the master servicer (or entity performing
the equivalent functions) may sign the certification.
(g) For purposes of this section, the term Asset-Backed Issuer
means any issuer whose reporting obligation results from the
registration of securities it issued that are primarily serviced by the
cash flows of a discrete pool of receivables or other financial assets,
either fixed or revolving, that by their terms convert into cash within
a finite time period plus any rights or other assets designed to assure
the servicing or timely distribution of proceeds to security holders.
11. By adding Sec. 240.13a-15 to read as follows:
Sec. 240.13a-15 Issuer's disclosure controls and procedures related
to preparation of required reports.
(a) Every issuer that has a class of securities registered pursuant
to section 12 of the Act (15 U.S.C. 78l), other than an Asset-Backed
Issuer (as defined in Sec. 240.13a-14(g) of this chapter), must
maintain disclosure controls and procedures (as defined in Sec.
240.13a-14(c) of this chapter).
(b) Within the 90-day period prior to the filing date of each
report requiring certification under Sec. 240.13a-14 and Sec.
270.30a-2 of this chapter, an evaluation must be carried out under the
supervision and with the participation of the issuer's management,
including the issuer's principal executive officer or officers and
principal financial officer or officers, or persons performing similar
functions, of the effectiveness of the design and operation of the
issuer's disclosure controls and procedures.
12. By amending Sec. 240.15d-10 to redesignate the ``Note'' at the
end of the section as ``Note 1'' and add a ``Note 2'' to read as
follows:
Sec. 240.15d-10 Transition reports.
* * * * *
Note 2: The report or reports to be filed pursuant to this
section must include the certification required by Sec. 240.15d-14.
13. By adding Sec. 240.15d-14 to read as follows:
Sec. 240.15d-14 Certification of disclosure in annual and quarterly
reports.
(a) 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 (Sec. Sec.
249.308a, 249.308b, 249.310, 249.310b, 249.220f and 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 paragraph (g)
of this section), must include a certification containing the
information set forth in paragraph (b) of this section in the form
specified in the report. Each principal executive officer or officers
and principal financial officer or officers of the issuer, or persons
performing similar functions, at the time of filing of the report must
sign the certification.
(b) The certification included in each report specified in
paragraph (a) of this section must be in the form specified in the
report and consist of a statement of the certifying officer that:
(1) He or she has reviewed the report being filed;
(2) 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 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;
(3) 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 issuer as of, and for, the periods presented in
the report;
(4) He or she and the other certifying officers are responsible for
establishing and maintaining disclosure controls and procedures (as
such term is defined in paragraph (c) of this section) for the issuer
and have:
(i) Designed such disclosure controls and procedures 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 the periodic reports are being
prepared;
(ii) 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 (the ``Evaluation Date''); and
(iii) Presented in the report their conclusions about the
effectiveness of the disclosure controls and procedures
[[Page 57290]]
based on their evaluation as of the Evaluation Date;
(5) He or she and the other certifying officers have disclosed,
based on their most recent evaluation, to the issuer's auditors and the
audit committee of the board or directors (or persons fulfilling the
equivalent function):
(i) All significant deficiencies in the design or operation of
internal controls which could adversely affect the issuer's ability to
record, process, summarize and report financial data and have
identified for the issuer's auditors any material weaknesses in
internal controls; and
(ii) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the issuer's internal
controls; and
(6) 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 most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
(c) For purposes of this section and Sec. 240.15d-15 of this
chapter, the term ``disclosure controls and procedures'' means controls
and other procedures of an issuer that are designed to ensure that
information required to be disclosed by the issuer in the reports that
it files or submits under the Act (15 U.S.C. 78a et seq.) is recorded,
processed, summarized and reported, within the time periods specified
in the Commission's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure
that information required to be disclosed by an issuer in the reports
that it files or submits under the Act is accumulated and communicated
to the issuer's management, including its principal executive officer
or officers and principal financial officer or officers, or persons
performing similar functions, as appropriate to allow timely decisions
regarding required disclosure.
(d) A person required to provide the certification specified in
paragraph (a) of this section may not have the certification signed on
his or her behalf pursuant to a power of attorney or other form of
confirming authority.
(e) Each annual report filed by an Asset-Backed Issuer (as defined
in paragraph (g) of this section) under section 13(a) of the Act (15
U.S.C. 78m(a)) must include a certification addressing the following
items:
(1) Review by the certifying officer of the annual report and other
reports containing distribution information for the period covered by
the annual report;
(2) The absence in these reports, to the best of the certifying
officer's knowledge, of any untrue statement of material fact or
omission of a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not
misleading;
(3) The inclusion in these reports, to the best of the certifying
officer's knowledge, of the financial information required to be
provided to the trustee under the governing documents of the issuer;
and
(4) Compliance by the servicer with its servicing obligations and
minimum servicing standards.
(f) With respect to Asset-Backed Issuers, the certification
required by paragraph (e) of this section must be signed by the trustee
of the trust (if the trustee signs the annual report) or the senior
officer in charge of securitization of the depositor (if the depositor
signs the annual report). Alternatively, the senior officer in charge
of the servicing function of the master servicer (or entity performing
the equivalent functions) may sign the certification.
(g) For purposes of this section, the term Asset-Backed Issuer
means any issuer whose reporting obligation results from the offering
of securities it issued that are primarily serviced by the cash flows
of a discrete pool of receivables or other financial assets, either
fixed or revolving, that by their terms convert into cash within a
finite time period plus any rights or other assets designed to assure
the servicing or timely distribution of proceeds to security holders.
14. By adding Sec. 240.15d-15 to read as follows:
Sec. 240.15d-15 Issuer's disclosure controls and procedures related
to preparation of required reports.
(a) Every issuer that files reports under section 15(d) of the Act
(15 U.S.C. 78o(d)), other than an Asset-Backed Issuer (as defined in
Sec. 240.15d-14(g) of this chapter), must maintain disclosure controls
and procedures (as defined in Sec. 240.15d-14(c) of this chapter).
(b) Within the 90-day period prior to the filing date of each
report requiring certification under Sec. 240.13a-14 and Sec.
270.30a-2 of this chapter, an evaluation must be carried out under the
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