SEC Proposes to Require Certification of Annual and Quarterly Reports

June 20, 2002

To Our Public Company Clients:

The SEC has issued for comment a proposed rule which would require a company’s principal executive officer and principal financial officer to certify that, to their knowledge, the information contained in the company’s quarterly and annual reports is true in all important respects and that the reports contain all information about the company of which they are aware that they believe is important to a reasonable investor. The SEC also proposes to require public companies to maintain procedures to provide reasonable assurance that the company is able to collect, process and disclose information required in its reports and to review periodically the procedures in place. The SEC release proposing these rules is Securities Exchange Act Release No. 34-46079 and it is available at


The SEC has proposed the new certification and procedures rules because it believes that it is important both to the quality of disclosure and investor confidence that senior corporate officials review and evaluate the information contained in their companies’ annual and quarterly reports. The SEC notes that investors depend on the information contained in annual and quarterly reports to present a clear picture of the company’s business and financial condition.  The SEC has expressed concern that investor confidence has suffered because of a real or perceived lack of attention to the reports by senior corporate officials.

The SEC believes that requiring companies to maintain procedures for collecting and processing information to be disclosed in reports will help ensure that material information is brought to the attention of management for disclosure in company reports.

Scope of Proposed Certification Requirement

Under the proposed rules, a company’s principal executive officer and principal financial officer each would have to certify in an annual report that:

  • He or she has read the report;

  • To his or her knowledge, the information in the report is true in all important respects as of the end of the period covered by the report; and

  • The report contains all information about the company of which he or she is aware that he or she believes is important to a reasonable investor as of the end of the period covered by the report.

The proposed certification would also contain a statement stating that information would be “important to a reasonable investor” if:

  • There is a substantial likelihood that a reasonable investor would view the information as significantly altering the total mix of information in the report; and

  • The report would be misleading to a reasonable investor if the information was omitted from the report.

  • The proposed certification for quarterly reports would be similar but take into account the narrower scope of disclosure contained in quarterly reports.

Notably, the proposed certification is limited to the officer’s knowledge and belief as to whether the information would be important to a reasonable investor. While the release states that the proposed rules will not require a certifying officer to separately inquire as to information not known to him, the SEC believes that the certifying officers should be involved in the approval process for the annual and quarterly reports and that they should not approve them without first reviewing them thoroughly and thinking critically about the disclosure that they should contain. Such participation should include inquiries as appropriate.

Impact of Proposed Rules on Disclosure Standard and Liability of Certifying Officers

In proposing the certification, the SEC believes that it is not changing the underlying liability standard of materiality for corporate disclosure. The SEC intends for the proposed certification to be consistent with the current disclosure standard of materiality, as defined in TSC Industries, Inc. v. Northway, Inc. and Basic, Inc. v. Levinson. Under these cases, information is material if “there is a substantial likelihood that a reasonable shareholder would consider it important” in making an investment decision. Information would be material only if there is a substantial likelihood that a fact “would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.”

The SEC believes that the proposed certification requirement would reinforce the existing responsibility of the officers for corporate disclosure but would not create an unacceptable risk of increased liability for the certifying officers. An officer providing a false certification under the proposed rules could be subject to an SEC enforcement action for violating Section 13(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and could also be subject to both SEC and private actions for violating Section 10(b) of the Exchange Act and Rule 10b-5 promulgated under the Exchange Act. However, the certifying officers are already responsible as signatories to the reports (except that the principal executive officer is not currently required to sign a quarterly report on Form 10-Q) and can be liable for material misstatements or omissions under the SEC antifraud provisions.

Proposed Requirement to Establish and Maintain Procedures for Gathering Information for Reports

The SEC is proposing that every company subject to the reporting requirements of Section 13(a) or Section 15(d) of the Exchange Act:

  • Maintain sufficient procedures to provide reasonable assurance that the company is able to collect, process and disclose, within the required time periods, the information required to be disclosed in its annual and quarterly reports as well as its current reports on Form 8-K;

  • Before the filing of the annual report, conduct an evaluation of the effectiveness of the design and operation of these procedures under the supervision of company management and ensure that those conducting the evaluation communicate the results of the evaluation to the principal executive and financial officers as well as the board of directors.

In addition, the principal executive officer and principal accounting officer would have to certify that they have reviewed the results of the company’s evaluation of company procedures. The SEC also believes that it would be beneficial for the board of directors to participate in the review of this evaluation.

The scope of information covered by the proposed procedures would be broader than financial information and would include all information disclosable under Regulation S-K or S-B in an annual or quarterly report or a current report on Form 8-K. The procedures should also seek to gather information relevant to assess the need to disclose developments and risks that pertain to the company’s business.

The SEC is not proposing any particular procedures for conducting this evaluation. The SEC does recommend, however, that a company create a committee with responsibility for considering the materiality of information and determining disclosure obligations on a timely basis. The members of the committee would report to senior management, including the principal executive officer and the principal financial officer. Appropriate members on this committee could include:

  • The principal accounting officer or the controller;

  • The general counsel;

  • The principal risk management officer;

  • The chief investor relations officer;

  • Such other officers or employees as the company deems appropriate.

Applicability to Small Entities and Foreign Private Issuers

The SEC is requesting comment on whether small entities should be excluded from the reach of the proposed rules. The proposed rules would not apply to foreign private issuers.

Potential Issues

Although the SEC has stated that it does not intend to change the disclosure standard or the underlying liability of senior corporate officers, it will remain to be seen whether the proposed certification rules, if adopted in their current form, will not be used as a basis for arguing a higher standard of disclosure or liability for senior corporate officers. In addition, by proposing rules to require “procedures” to be put in place without providing specific guidance on what those procedures should be, we question whether the proposed procedures rules will result in additional liability for companies in suits by private parties.

Comment Period

The SEC has asked for comments on nearly every aspect of the proposed rule. Comments are due on or before August 16, 2002.

Further Information

If you have any questions regarding these proposed rules or would like to submit a comment letter to the SEC, please contact your Haynes and Boone attorney, Lanny Boeing at (972) 680-7553 or Jennifer Wisinski at (972) 680-7567.

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.

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