ALERT: SEC Orders CEO and CFO Certification of Public Filings

July 17, 2002

To Our Public Company Clients:

The Securities and Exchange Commission has ordered the chief executive officer and chief financial officer of public companies with revenues in excess of $1.2 billion during the last fiscal year to certify personally under oath in writing that their company’s SEC filings are materially correct (the “Order”).  See http://www.sec.gov/rules/other/4-460.htm.  Alternatively, the CEO or CFO may submit a sworn written statement “describing the facts and circumstances that would make such a statement incorrect.”  This certification must be filed with the SEC by the close of business on the first date on or after August 14, 2002, that their company’s Form 10-K or Form 10-Q is required to be filed with the SEC.

Order Issued During Comment Process of Similar Proposed New Rules

On June 14, 2002, in response to recent accounting scandals and President Bush’s public demand for increased accountability of senior management, the SEC issued a release proposing new rules that would impose, among other things, a certification requirement for Forms 10-K and 10-Q of all reporting companies (the “Release”).  See http://www.sec.gov/rules/proposed/34-46079.htm.   The proposed rules are intended to improve the quality of disclosure and investor confidence by requiring senior officers to carefully review periodic filings and participate more extensively in their preparation.  The 60-day comment period for the proposed rules does not expire until August 19, 2002.  In light of WorldCom’s unprecedented financial restatement and a perceived crisis of public confidence in the securities markets, it appears that the SEC felt it could not wait for the new rules to be adopted and issued the Order in the interim.  In fact, the Order is specifically designed to implement the certification requirement with regard to the upcoming Form 10-Q filings (which are due by August 14th for calendar year companies) that would not otherwise be covered by the proposed rules.

Sworn Certification Required by the Order

The Order requires the CEO and CFO to personally certify in writing:

  • to the best of their knowledge, that none of the company’s “covered reports” includes any misstatement or omission of material fact for the period covered by such report or as of the date filed for Forms 8-K and proxy materials; and

  • that the signing officer has reviewed the contents of the certification with the company’s audit committee or if the company has no audit committee, with the independent members of the company’s board.
  • The definition of “covered reports” makes the Order apply retroactively.  “Covered reports” are defined as a company’s most recently filed Form 10-K and all Forms 10-Q, Forms 8-K  and definitive proxy materials filed since the most recently filed Form 10-K and any amendments of these reports and materials.  If the first periodic report required to be filed on or after August 14th is the Form 10-K, then the certification can be limited to the Form 10-K.

    Attached to the Order as Exhibit A is the SEC’s proposed form of the certification, which is reproduced at the end of this Client Alert or may be obtained at http://www.sec.gov/rules/other/4-460a.htm.

    Certification of Past Filings in Addition to Current Filing

    The breadth of public filings subject to this certification represents a significant change in the number and types of filings currently required to be signed by a CEO and CFO.  Under the current rules, a Form 10-K must be signed on behalf of the company by its principal executive officer or officers, principal financial officer, controller or principal accounting officer, and by at least a majority of the board of directors.  A Form 10-Q must be signed on behalf of the company by a duly authorized officer and by the principal financial or chief accounting officer.  A Form 8-K need only be signed on behalf of the company by a duly authorized officer.

    In signing these public filings, officers sign on behalf of the company, whereas the new certification is made personally.  The certification presents some unique issues for CEOs or CFOs who assumed their positions at any time after the filing of their company’s most recent Form 10-K, or worse, following a financial restatement or during the pendency of a regulatory investigation or litigation.  Officers in such a position will have to decide what level of review or inquiry is necessary to satisfy their obligations under the Order and if it is appropriate to qualify the sworn certification to certain covered reports or, alternatively, provide a written statement under oath of the facts and circumstances that would make the required certification incorrect.

    Sworn Certification May Create Additional Liability for CEOs and CFOs

    The SEC states that the new certification requirement “is not intended to affect other existing bases of liability for principal executive officers and principal financial officers or to increase, decrease or otherwise alter the potential liability of other corporate officers and directors, whether or not signatories, who are not required to provide the proposed certification.”  The new certifications required by the Order and as proposed in the Release do not alter the existing antifraud provisions and disclosure requirements of the federal securities laws or the case law interpreting those provisions.  Corporate management, through aiding and abetting or “causing” theories of liability in the enforcement context and control person liability in private litigation, has always been subject to claims under Sections 10(b) and 13(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder concerning the accuracy and completeness of disclosure.

    The new sworn certification, however, is a personal statement by the CEO and CFO and may create additional personal liability separate and apart from the content of the public filing.  If a CEO or CFO knowingly provides a false certification, such a statement may form the basis of a fraud allegation under the Exchange Act or possibly even a criminal action for perjury or filing a false statement with the government.

    The new certifications may also assist the SEC and private litigants in meeting their burdens of proof in litigation.  The SEC states in the Release that it believes that the new certification requirement would cause signing officers to review more carefully the disclosures in periodic and current reports and participate more extensively in their preparation.  Despite the fact that the certification is limited to the knowledge of the CEO or CFO, the SEC and private litigants may seek to use the new certifications to demonstrate that CEOs or CFOs were personally on notice of the need for greater scrutiny and participation in the preparation of SEC filings and that despite such notice acted recklessly or unreasonably in certifying the SEC filings.  In certain circumstances, it may even be possible that the audit committee members or independent directors may be the subject of such claims by virtue of having reviewed the certification with the CEO and CFO, as required by the Order.  Regardless of the merits of such claims and the SEC’s stated intentions in the Release, the certification will likely result in more claims by the SEC and private litigants against the individual officers providing these certifications.

    Compliance with the Order

    While the new rules proposed in the Release have yet to be finalized, it is clear that they will be adopted in some form.  Based on the Order and the Release, it appears that the SEC is moving toward imposing liability for not only the content of a SEC filing, but also the process by which it was produced.  As discussed above, the Order and the Release do not alter existing law with respect to liability for the content of SEC filings.  The new certification requirement and internal reporting procedures proposed in the Release, however, may evolve into a supervision requirement for CEOs and CFOs with regard to the financial and non-financial disclosure processes used in preparing SEC filings and an additional basis of liability for inadequate supervision.

    Supervision requirements are already imposed on certain entities registered with the SEC, such as broker-dealers.  Section 15(b)(4)(E) of the Exchange Act provides a safe harbor for broker-dealers and their supervisory personnel who have “established procedures, and a system for applying such procedures, which would reasonably be expected to prevent and detect, insofar as practicable, any [violation of the federal securities laws]” and “such person has reasonably discharged the duties and obligations incumbent upon him by reason of such procedures and system without reasonable cause to believe that such procedures were not being complied with.”

    In complying with the Order, companies should consult their legal advisers.  Below are some potential compliance measures:

    • Controls and Procedures.  The Release proposes that companies adopt internal reporting controls and procedures for gathering, analyzing and disclosing information – not just financial information  – required to be included in periodic and current reports.  The Release further proposes that senior officers be required to certify that they have reviewed the controls and procedures to assure themselves that the company is able to collect, process and disclose information required in its periodic and current reports.  Companies and their CEOs and CFOs should consider devising, adopting and implementing these controls and procedures prior to the SEC’s adoption of the proposed rules.

    • Certifications from Subordinates.  In preparing SEC filings, CEOs and CFOs must rely on the work of countless others and should be able to demonstrate the reasonableness of their reliance.  In conjunction with the adoption of new controls and procedures relating to internal reporting, CEOs and CFOs should consider requiring certifications from their principal subordinates to the effect that they are not aware of (i) any material misstatement or omission contained in a proposed SEC filing and (ii) any failure to implement, or circumvention of, the controls and procedures with regard to the gathering, analyzing or disclosing of information required in a proposed SEC filing.

    • Written Record.  Companies should consider creating an internal record of the processes for drafting, reviewing and finalizing SEC filings.  These memoranda, reports or checklists could be reviewed by the CEO and CFO and discussed with appropriate personnel.  The CEO and CFO could then memorialize their review of these documents and discussions as well as any follow-up inquiries resulting from them.

    • “Red Flags.”  The response of a company, CEO and CFO to any “red flags” that develop from the internal reporting processes and the review of these processes by the CEO and CFO prior to certifying a SEC filing are critical.  The SEC and private litigants have the luxury of judging events by hindsight.  The response of a company, CEO and CFO should be objectively reasonable in light of the circumstances and could range from requesting additional information, engaging internal or outside auditors and/or hiring outside counsel to conduct a self-evaluative investigation.

    • The Audit Committee’s Role.  CEOs and CFOs should consider alerting their audit committee to the Order’s requirement that they review the certification with the CEO and CFO and scheduling a review far enough in advance to allow adequate consideration of, and response to, any issues that may arise.  The involvement of the audit committee in the process of developing, revising and approving new reporting controls and procedures should also be considered.

    Further Information

    If you have any questions regarding these proposed rules, please contact your Haynes and Boone attorney, Bill Hays at (214) 651-5561, Chris Kirkpatrick at (214) 651-5547 or Kari Myers (972) 680-7574.

    This Alert is a publication of Haynes and Boone, LLP and should not be construed as legal advice on any particular facts or circumstances.  This Alert is for general informational purposes only, and may not be quoted or referred to in any other documents or legal proceeding without our prior written consent.  The publication of this Alert is not intended to create an attorney-client relationship.

    SEC’s Form of Certification

    Statement Under Oath of Principal Executive Officer and Principal Financial Officer Regarding Facts and Circumstances Relating to Exchange Act Filings

    I, [Name of principal executive officer or principal financial officer], state and attest that:

  • To the best of my knowledge, based upon a review of the covered reports of [company name], and, except as corrected or supplemented in a subsequent covered report:

    • no covered report contained an untrue statement of a material fact as of the end of the period covered by such report (or in the case of a report on Form 8-K or definitive proxy materials, as of the date on which it was filed); and

    • no covered report omitted to state a material fact necessary to make the statements in the covered report, in light of the circumstances under which they were made, not misleading as of the end of the period covered by such report (or in the case of a report on Form 8-K or definitive proxy materials, as of the date on which it was filed).

  • I [have/have not] reviewed the contents of this statement with [the Company’s audit committee] [in the absence of an audit committee, the independent members of the Company’s board of directors].

  • In this statement under oath, each of the following, if filed on or before the date of this statement, is a "covered report":

    • [identify most recent Annual Report on Form 10-K filed with the Commission] of [company name];

    • all reports on Form 10-Q, all reports on Form 8-K and all definitive proxy materials of [company name] filed with the Commission subsequent to the filing of the Form 10-K identified above; and

    • any amendments to any of the foregoing.

     

    [Signature*]
    [Name]
    [Date]

                                        

    Subscribed and sworn to
    before me this ____ day of
    ___________ 2002.

    /s/_______________________
    Notary Public

    My Commission Expires:



    [* Separate statements to be signed by each of the Principal Executive Officer and the Principal Financial Officer.]

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