FAQ: U.S. Securities
and Exchange Commission
Division
of Corporation Finance:Sarbanes-Oxley Act of 2002 – Frequently Asked Questions
November 8, 2002 (revised November 14, 2002)
The
answers to these frequently asked questions represent the views of
the Division of Corporation Finance. They are not rules, regulations
nor statements of the Securities and Exchange Commission. Further,
the Commission has neither approved nor disapproved them.
Section
2
Question
1:
Section
2(a)(7) of the Sarbanes-Oxley Act of 2002 (the "Act")
defines an "issuer" as an "issuer (as defined in
Section 3 of the Securities Exchange Act of 1934 (15 U.S.C. 78(c)),
the securities of which are registered under Section 12 of that
Act (15 U.S.C. 78l), or that is required to file reports under
Section 15(d)…." A company has offered and sold debt
securities pursuant to a registration statement filed under the
Securities Act of 1933, thus subjecting it to the reporting requirements
of Section 15(d). The company did not register the debt securities
under Section 12 of the Exchange Act of 1934. Subsequently, the
company's reporting obligations have been statutorily suspended
under Section 15(d) because it had fewer than 300 security holders
of record at the beginning of its fiscal year. The company has
not filed a Form 15 and has continued to file reports pursuant
to its indenture. Is the company considered an "issuer" under
the Act?
Answer:
No.
Because the issuer had fewer than 300 security holders of record
at the beginning of its fiscal year, the suspension is granted by
statute and is not contingent on filing a Form 15. The definition
of issuer applies only to issuers required to file reports. However,
see Question 9 regarding these kinds of filers under Section 302
of the Act.
Section
301
Question
2:
Will
the rules relating to Section 301 apply to issuers whose securities
are traded on the over-the-counter bulletin board market?
Answer:
No.
Securities traded on the over-the-counter bulletin board market currently
are not considered listed securities.
Section
302
Question
3:
An
issuer is filing a Form 10-K report after August 29, 2002, the
date Rules 13a-14, 13a-15, 15d-14 and 15d-15 became effective,
for a period ending prior to the effective date. Section V of Release
No. 33-8124 provides that the certification required to be included
with the report need contain only the statements set forth in paragraphs
(b)(1), (2) and (3) of Exchange Act Rules 13a-14 and 15d-14. However,
the instructions to Forms 10-Q, 10-QSB, 10-K, 10-KSB, 20-F and
40-F indicate that the required certification must be in the exact
form set forth in the report. Must a certification filed during
the transition period for a period ended before August 29th include
the statements set forth in paragraphs (b)(4), (5) and (6) of Rules
13a-14 and 15d-14?
Answer:
No.
Paragraphs (b)(4), (5) and (6) of Rules 13a-14 and 15d-14 need only
be included for quarterly and annual reports, including transition
reports, filed for periods ending after August 29, 2002.
Question
4:
Does
an amended quarterly or annual report filed after August 29, 2002,
the effective date of Rules 13a-14 and 15d-14, that amends a report
filed prior to August 29, 2002 have to be certified?
Answer:
Yes.
See note 48 of Release 33-8124. The certification need not include
paragraphs (b)(4), (5) and (6) of Rules 13a-14 and 15d-14.
Question
5:
A
company is filing a Form 10-Q/A for a period ending prior to the
effective date of Rules 13a-14 and 15d-14. The amendment will neither
contain nor amend financial statements. May the principal executive
officer and principal financial officer omit paragraph 3 from the
certifications?
Answer:
Yes.
Since there will be no financial statements in the Form 10-Q/A, paragraph
3 may be omitted.
Question
6:
If
an issuer has filed a Form 10-Q before the effective date of Rules
13a-14 and 15d-14, but needs to file an amended Form 10-Q after
August 29, does the issuer need to provide the disclosure required
by Item 307 of Regulation S-K?
Answer:
No.
Question
7:
Does
the new Item 15 of Form 20-F apply to periods ending prior to August
29, 2002?
Answer:
Issuers
must comply with Item 15(b) but not Item 15(a).
Question
8:
Does
Section 302 apply to Forms 8-K filed by asset-backed issuers?
Answer:
No.
Asset-Backed Issuers, as defined in Rules 13a-14(g) and 15d-14(g),
do not need to file a certification with each Form 8-K. However,
the certification that is filed with the Asset-Backed Issuer's Form
10-K will relate to certain Forms 8-K filed by the issuer in the
preceding year. Please refer to Statement by the Staff of the Division
of Corporation Finance of the Securities and Exchange Commission
Regarding Compliance by Asset-Backed Issuers with Exchange Act Rules
13a-14 and 15d-14, dated August 27, 2002.
Question
9:
Is
an issuer that is filing or submitting reports exclusively under
Section 15(d) of the Exchange Act on a "voluntary" basis
(for example, pursuant to a covenant in an indenture or similar
document), due to a statutory suspension of the Section 15(d) filing
obligation, subject to Rules 15d-14 and 15d-15 and the disclosure
required by Item 307 of Regulations S-B and S-K?
Answer:
Yes.
All companies filing or submitting reports under Section 13(a) or
15(d) must comply with those provisions whether or not a Form 15
has been filed pursuant to Rule 15d-6.
Question
10:
If
only one other officer is certifying to the issuer's reports, is
it permissible to revise paragraph 4 of the certification to make "other
certifying officers" singular?
Answer:
Yes.
Question
11:
If
an officer signs the certification without altering the wording
to indicate he or she is providing the certification as principal
financial officer, how will readers know whether the signatory
is the principal executive officer or the principal financial officer?
Answer:
The
officer should include his or her title under the signature.
Question
12:
If
the same individual is both the principal executive officer and
principal financial officer, must he or she sign two certifications?
Answer:
The
individual may provide one certification and provide both titles
underneath the signature.
Question
13:
A
CEO resigned after the end of the quarter but before the filing
of the upcoming Form 10-Q. The company appointed a new CEO prior
to the filing. Who signs the certification?
Answer:
The
new CEO because he or she is the principal executive officer at the
time of the filing.
Question
14:
A
company has a CEO who is resigning at the end of the year and is
no longer performing the function of CEO although he is still employed
with the company. In the interim, the company has another individual
that is performing the functions of CEO. Can that other individual
sign the certification despite the fact that the company still
has another person with the CEO title?
Answer:
The
person performing the function of CEO at the time of the filing should
provide the certification. If it is not the person with the title
of CEO, the company should disclose in the filing that the other
individual is performing that function.
Question
15:
An
issuer currently does not have a CEO/CFO. Who must execute the
certifications required by Rules 13a-14 and 15d-14?
Answer:
As
set forth in paragraph (a) of Rules 13a-14 and 15d-14, where an issuer
does not have a CEO/CFO, the person or persons performing similar
functions must execute the required certification.
Question
16:
Must
co-principal executive officers (or co-principal financial officers)
execute separate certifications or may both execute the same certification?
Answer:
Co-principal
executive officers (or co-principal financial officers) should each
execute separate certifications.
Question
17:
If
Section 302 certifications are not included in, for example, a
Form 10-K or 10-Q filing, and an amendment will be filed to include
the certifications, must the entire document be re-filed or can
the amendment include only the signature pages?
Answer:
Because
the certification relates to the entire Form 10-K or 10-Q filing,
the amendment should include the entire filing, not just the signature
pages.
Question
18:
Using
the same facts in question 17 above, if the amendment is not filed
within the time period required for the periodic report, is the
report deemed to be untimely?
Answer:
Yes.
The periodic report will not be deemed timely for purposes of form
eligibility and the issuer will not be deemed current until the amended
periodic report containing the certification is filed.
Question
19:
A
Canadian issuer is filing a Form F-10. Are certifications required
because the Form F-10 incorporates prior Exchange Act filings?
Answer:
No.
Question
20:
What
definition is the Commission currently using for internal controls
and internal controls and procedures for financial reporting?
Answer:
In
the release adopting the rules pursuant to Section 302 of the Act,
the Commission noted the pre-existing concept of "internal controls" contained
in Codification of Statements on Auditing Standards Section 319 ("AU
Section 319"). See Release 33-8124 fn. 59 and accompanying text.
In Release No. 33-8138, the Commission proposed defining "internal
controls and procedures for financial reporting" by reference
to AU Section 319, subject to any future modifications by the Public
Company Accounting Oversight Board. Pending completion of rulemaking,
the staff interprets both "internal controls and procedures
for financial reporting" and "internal controls" for
purposes of Exchange Act Rules 13a-14(b)(5) and (6) and 15d-14(b)(5)
and (6) and Item 307 of Regulations S-B and S-K by reference to existing
literature regarding generally accepted auditing standards, which
would also be by reference to AU Section 319.
Question
21:
Are
paragraphs (b)(5) and (b)(6) of Rules 13a-14 and 15d-14 currently
operative given that there is no current requirement for evaluation
of internal controls?
Answer:
Yes,
these paragraphs are currently operative as to any filing relating
to a period ending after August 29, 2002. See also Question 22.
Question
22:
New
Exchange Act Rules 13a-14(b)(5) and (6) and 15d-14(b)(5) and (6)
require an issuer's CEO and CFO to certify that:
- 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):
- 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
- Any
fraud, whether or not material, that involves management
or other employees who have a significant role in the issuer's
internal controls; and
- 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.
In
addition, paragraph (b) of Item 307 of Regulations S-B and S-K requires
an issuer to disclose whether or not there were significant changes
in the 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. Is a quarterly evaluation of
internal controls or internal controls and procedures for financial
reporting required at this time, and if so, what are the particular
standards? How should the issuer respond to Item 307(b) of Regulations
S-B and S-K? How should the issuer's CEO and CFO address this situation
in their certification statements?
Answer:
Although
proposed amendments to Exchange Act Rules 13a-15 and 15d-15 would
impose a requirement on an issuer's management to conduct an evaluation,
with the participation of the issuer's CEO and CFO, of the effectiveness
of the issuer's internal controls and procedures for financial reporting
(See Release No. 33-8138), the Commission's rules currently do not
specifically require an issuer's CEO or CFO, or the issuer itself,
to conduct periodic evaluations of the issuer's internal controls
or the issuer's internal controls and procedures for financial reporting.
Some elements of internal controls are included in the definition
of disclosure controls and procedures. There is a current evaluation
requirement involving the CEO and the CFO of that portion of internal
controls that is included within disclosure controls and procedures
as part of the required evaluation of disclosure controls and procedures.
We expect that issuers generally also would engage in an evaluation
of internal controls. We believe that issuers generally currently
evaluate internal controls, for example, in connection with reviewing
compliance with Section 13(b) of the Exchange Act or in connection
with the preparation or audit of financial statements.
In
the case of Item 307(b) of Regulations S-K and S-B, to the extent that
an issuer has conducted an evaluation of its internal controls as of
the end of the period covered by the report, including under the circumstances
described in the preceding paragraph, the issuer should disclose any
significant changes to the 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. If the issuer has made any significant
changes to internal controls or in other factors that could significantly
affect these controls, such changes would presumably follow some evaluation,
in which case the required disclosure must be made. If the issuer has
made no significant changes, then no disclosure is required. This response
is also applicable to Item 15(b) of Form 20-F and Item 6(c) of Form
40-F.
Regarding
the certifications under Exchange Act Rules 13a-14(b)(5) and (6) and
15d-14(b)(5) and (6), the disclosures under Item 307 of Regulations
S-B and S-K described above following any evaluations of internal controls,
including in the circumstances described above in which the CEO or
the CFO participates, would satisfy the requirements of paragraph (6).
Paragraph (5) would currently require that disclosure be made by the
CEO and the CFO to the issuer's auditors and the audit committee of
its board of directors of any events enumerated in paragraph (5) that
have occurred of which the CEO or CFO become aware based on the most
recent evaluation of internal controls, including in the circumstances
described above, in which the CEO or CFO participates.
Question
23:
For
purposes of Rules 13a-14(b)(5) and (6) and 15d-14(b)(5) and (6),
what do the terms "significant deficiencies" and "material
weaknesses" mean?
Answer:
For
purposes of Rules 13a-14(b)(5) and (6) and 15d-14(b)(5) and (6),
the meaning of the terms "significant deficiencies" and "material
weaknesses" should be determined by reference to generally accepted
auditing standards. See generally, AU Section 325.
Question
24:
Where
the registrant is a limited partnership that does not have an audit
committee, who should be considered the persons performing the
equivalent function as referenced in new Exchange Act Rules 13a-14(b)(5)
and 15d-14(b)(5)?
Answer:
Many
limited partnerships do not have audit committees. Many general partners
of limited partnerships are themselves limited partnerships. In this
case, look through each general partner of the limited partnerships
acting as general partner until a corporate general partner or an
individual general partner is reached. With respect to a corporate
general partner, the registrant should look to the audit committee
of the corporate general partner or to the full board of directors
as fulfilling the role of the audit committee. With respect to an
individual general partner, the registrant should look to the individual
as fulfilling the role of the audit committee.
Section
403
Question
25:
If
a company otherwise maintains a dividend reinvestment plan that
satisfies the exemptive conditions of Rule 16a-11, are automatic
dividend reinvestments under a non-qualified deferred compensation
plan also eligible for the Rule 16a-11 exemption, so that those
reinvestment transactions would not be required to be reported,
thus reducing the number of Forms 4 due?
Answer:
Non-qualified
deferred compensation plans are not Excess Benefit Plans, as defined
by Rule 16b-3(b)(2) under the Exchange Act, in which transactions
are exempted by Rule 16b-3(c). See Interpretive Letter to American
Bar Association (Feb. 10, 1999, Q. 2(c)). Under Rule 16a-3(g)(1),
as amended in Release 34-46421 (Aug. 27, 2002), each transaction
in a non-qualified deferred compensation plan must be reported on
a Form 4 not later than the end of the second business day following
the day on which the transaction was executed. However, if a company
maintains a dividend reinvestment plan that satisfies the exemptive
conditions of Rule 16a-11, automatic dividend reinvestments under
a non-qualified deferred compensation plan are also eligible for
the Rule 16a-11 exemption. See Interpretive letter to American Home
Products (Dec. 15, 1992).
Question
26:
In
order to reduce the number of Forms 4 due annually, an insider
makes the following choices: In connection with the annual year-end
election to defer some of the following year's salary into a non-qualified
deferred compensation plan, the insider elects to have payroll
deductions invested in the plan's interest-only account. The insider
also elects for the deferred salary so invested to be "swept" on
a quarterly basis into the plan's stock fund account. How should
these "sweep" transactions be reported?
Answer:
Each "sweep" transaction
would be reportable separately on Form 4. If the "sweep" election
satisfies the Rule 16b-3(f ) exemptive conditions for Discretionary
Transactions (as defined in Rule 16b-3(b)(1)), the "sweep" transactions
would be reported using Code I. Further, if the reporting person
does not select the date of execution for a "sweep" that
is a Discretionary Transaction, Rules 16a-3(g)(3) and (4) would apply
to determine the deemed execution date.
Question
27:
For
purposes of satisfying the affirmative defense conditions of Rule
10b5-1(c), an insider adopts a written plan for the purchase or
sale of issuer equity securities. In the plan, which was drafted
by a broker-dealer, the broker-dealer specified the dates on which
plan transactions will be executed. Can the insider rely on Rule
16a-3(g)(2) to compute the Form 4 due date for plan transactions
based on a deemed execution date?
Answer:
No.
By adopting a written plan that specifies the dates on which plan
transactions will be executed, the insider will have selected the
date of execution for plan transactions. Consequently, the insider
will not be able to rely on Rule 16a-3(g)(2) to compute the Form
4 due date for plan transactions based on a deemed execution date.
Question
28:
When
reporting more than one transaction on the same Form 4, what date
should be stated in Box 4?
Answer:
The
transaction date (not the deemed execution date) of the earliest
transaction reported should be stated in Box 4.
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