Transcript Certifying the Accuracy of SEC Filings

Certifying the Accuracy of SEC Filings
and Update on the Sarbanes-Oxley Act
of 2002, NYSE and Nasdaq Proposals
Overview
• CEO and CFO Certification
• Sarbanes-Oxley Act of 2002
• NYSE Proposals
• Nasdaq Proposals
2
SEC Proposals – 21(a) Order
CEO and CFO Certification
–
On June 27, the SEC issued an order requiring the CEOs and CFOs of the nation's
1000 largest public companies to certify the accuracy of their recent SEC filings.
–
For most companies, the certification is required to be filed by
August 14.
–
The certification covers the most recently filed 10-K and any subsequently filed
proxy statements or information statements, Forms 10-Q and 8-K.
–
The certification must state:
• that, to the best knowledge of the officer, no covered report:
 contained an untrue statement of material fact; or
 omitted to state a material fact necessary to make the statements not
misleading.
• whether the officer has reviewed the certification with the audit committee.
3
SEC Proposals – 21(a) Order
CEO and CFO Certification (continued)
–
In addition, on June 15, the SEC proposed a new rule that would require
CEOs and CFOs to similarly certify the company's future annual and
quarterly reports.
• Among other things, this certification would need to state that the
relevant report contains all information that the officer believes is
important to a reasonable investor.
• The proposal would also require a company to maintain procedures to
provide reasonable assurance that it is able to collect the information
required in its SEC reports.
–
SEC proposal will be modified as per Sarbanes-Oxley (SEC Release
No.34-46300, August 2, 2002).
4
Sarbanes-Oxley Act
Section 906 Certification of Periodic Reports
–
The Section 906 certification requires each periodic report filed under
Section 13(a) or 15(d) of the Exchange Act that contains financial
statements (e.g., any Form 10-Q, Form 10-K or Form 6-K) filed by a
domestic or foreign issuer to “be accompanied by” a written statement of
the CEO and CFO.
–
In the Section 906 certification, the CEO and CFO must certify that:
• the periodic report fully complies with the requirements of Section 13(a)
or 15(d) of the Exchange Act, and
• the information contained in the periodic report fairly presents, in all
material respects, the financial condition and results of operations of
the issuer.
5
Sarbanes-Oxley Act
Section 302 Certification of Periodic Reports
–
The Section 302 certification is required to be made “in” each annual or
quarterly report.
–
The Section 302 certification expressly applies both a materiality standard
and a knowledge standard to the CEOs and CFOs required statements
regarding the financial statements.
–
Specifically, the principal executive officer and principal financial officer
must certify that:
• the signing officer has reviewed the report.
• based on the officer's knowledge, the report does not contain any
untrue statement of 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.
6
Sarbanes-Oxley Act
Section 302 Certification of Periodic Reports (continued)
• based on such officer's knowledge, the financial statements, and other
information included in the report, fairly present in all material respects the
financial condition and results of operations of the issuer as of, and for, the
periods presented in the report.
• the signing officers:
– are responsible for establishing and maintaining internal controls;
– have designed such internal controls to ensure that material information
relating to the issuer and its consolidated subsidiaries is made known to
such officers by others within those entities, particularly during the
period in which the periodic reports are being prepared;
– have evaluated the effectiveness of the issuer’s internal controls as of a
date within 90 days prior to the report; and
– have presented in the report their conclusions about the effectiveness of
their internal controls based on their evaluation as of that date.
7
Sarbanes-Oxley Act
Section 302 Certification of Periodic Reports (continued)
• the signing officers have disclosed to the issuer’s auditors and the audit
committee of the board of directors:
– all significant deficiencies in the design or operation of internal
controls that 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.
• the signing 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.
8
Sarbanes-Oxley Act
Section 302 Certification of Periodic Reports (continued)
– Because the Section 302 certification will be effective by the end of
August, at the latest, companies should promptly begin to document their
internal reporting systems so that any deficiencies in those procedures can
be timely identified and corrected.
– The SEC has announced it will revise its officer certification rules proposed
June 17 to reflect Section 302 of the Act, but has given no guidance on
Section 906 certification obligations that affect the next periodic report with
financial statements filed on or after the July 30 effective date of the Act.
9
Sarbanes-Oxley Act:
Issues for Immediate Attention
Sarbanes-Oxley Act
Ban on Loans to Executive Officers and Directors
–
Section 402 of the Act amends Section 13 of the Exchange Act to prohibit
most loans by an issuer to its executive officers and directors that are
made, modified or renewed after enactment of the Act. The provision is
effective immediately, subject to the SEC’s general rulemaking and
exemptive authority.
–
Under Section 402, companies may not directly or indirectly (including
through a subsidiary) extend or maintain credit, arrange for the extension of
credit, or renew any extension of credit, in the form of a personal loan to or
for any executive officer or director of the company.
11
Sarbanes-Oxley Act
Section 16 Filing Deadlines
–
The Act authorizes the SEC to provide for later than 2-day reporting in any
case in which it determines that such 2-day reporting is “not feasible.” In
addition, the SEC continues to have exemptive authority under Exchange
Act Sections 12(h) and 36(a)(1) to prescribe due dates for Section 16
reports.
12
OTHER PROVISIONS OF THE ACT
Disgorgement of Certain Executive Compensation upon Financial
Statement Restatements (§ 304)
Summary: Requires that CEOs and CFOs disgorge bonuses, other
incentive- or equity-based compensation and profits on sales of issuer
securities where an accounting restatement is required due to the material
noncompliance of the issuer with any financial reporting requirement under
the securities laws as a result of misconduct. Disgorgement is required for
such compensation received or profits realized during the 12-month period
following the first public issuance or filing with the SEC (whichever occurs
first) of the document embodying the noncompliant report. The SEC may
exempt any person from the application of this provision as it deems
necessary and appropriate.
13
OTHER PROVISIONS OF THE ACT
Insider Trades During Pension Fund Blackout Periods (§ 306)
Summary: Prohibits executive officers and directors from acquiring or
transferring company equity securities during pension fund "blackout
periods." "Blackout period" is defined to include periods of more than three
business days during which trading in the security by 50% or more of the
beneficiaries or participants in a company retirement plan is suspended.
The Employee Retirement Security Act of 1974 ("ERISA") is also amended
to add provisions relating to blackout period notice requirements for plan
administrators and related matters.
14
OTHER PROVISIONS OF THE ACT
Improper Influence on Audits (§ 303)
Summary: Makes it unlawful, under rules to be issued by the SEC, for an officer
or director, or any person acting under the direction of an officer or director, to
"fraudulently influence, coerce, manipulate or mislead" an auditor for the
purpose of rendering the financial statements being audited materially
misleading. The SEC is given sole civil enforcement authority to enforce this
provision (i.e., no private cause of action is authorized).
15
OTHER PROVISIONS OF THE ACT
Professional Conduct Rules for Attorneys (§ 307)
Summary: Requires the SEC to establish minimum standards of professional
conduct for attorneys practicing before the SEC in representation of public
companies. The standards must include a requirement that attorneys report to
the chief legal counsel or CEO of the company (and, if there is no appropriate
response, the audit committee or the entire board of directors) evidence of
material violations of the securities laws, breaches of fiduciary duty, and similar
violations by public companies or their agents.
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DISCLOSURE REQUIREMENTS
Off-Balance Sheet Transactions (§ 401(a))
Summary: Requires the SEC to issue rules providing that each annual
and quarterly financial report filed with the SEC disclose all material offbalance sheet transactions and other relationships of the issuer with
unconsolidated entities or other persons that may have a material
current or future impact on the issuer's financial condition, changes in
financial condition, results of operations, liquidity, capital expenditures,
capital resources, or significant components of revenues or expenses.
17
DISCLOSURE REQUIREMENTS
Pro Forma Financial Information (§ 401(b))
Summary: Requires the SEC to issue rules providing that issuers who
disseminate “pro forma” financial information in their filings with the SEC,
press releases or other public disclosures must present such information in
a manner that does not contain an untrue statement or omit to state a
material fact necessary in order to make the information, in light of the
circumstances under which it is presented, not misleading, and must
reconcile such information with the issuer’s financial condition and the
results of operations under generally accepted accounting principles.
Codes of Ethics for Senior Financial Officers (§ 406)
Summary: Requires the SEC to issue rules requiring (1) each issuer to
disclose in periodic reports, whether or not it has adopted a code of ethics
for senior financial officers and, if not, why not, and (2) the immediate
disclosure on Form 8-K and dissemination by the Internet or other
electronic means of any change in, or waiver of, the company’s code of
ethics for senior financial officers.
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DISCLOSURE REQUIREMENTS
Audit Committee Financial Expert (§ 407)
Summary: Requires the SEC to issue rules to require issuers to disclose in
periodic reports whether its audit committee includes among its members
at least one "financial expert," and if not, why not. In defining the term
"financial expert," the SEC must consider whether a person has, through
education and experience as a public accountant or auditor or a principal
financial officer, comptroller, or principal accounting officer of an issuer, or
position involving similar functions, an understanding of generally accepted
accounting principles and financial statements, experience in preparing or
auditing financial statements, experience with internal accounting controls,
and an understanding of audit committee functions.
SEC Review of Disclosures (§ 408)
Summary: Directs the SEC to review the disclosures of public companies
on a regular and systematic basis, and in any event at least once every
three years.
19
Other SEC Proposals
1. Proposed Rules for New 8-K Disclosure Item
–
Proposed rules issued in May and June would require that several new
items be reported on Form 8-K, including:
• transactions by directors and officers in company stock and options;
• the adoption or termination by a director or officer of a contract,
instruction or plan for the purchase or sale of the company's stock;
• loans to a director or officer;
• entry into or termination of material agreements;
• creation of or events triggering a material direct or contingent financial
obligation;
• any material impairments, write-offs, or restructuring charges;
20
Other SEC Proposals
1. Proposed Rules for New 8-K Disclosure Item (continued)
• certain rating agency actions;
• the beginning and end of lock-out periods affecting the company's
retirement plans; and
• unregistered sales of securities.
–
Sarbanes-Oxley will require modification of some of these proposals.
21
Other SEC Proposals
2. Proposed Rules for MD&A Disclosure, including Critical
Accounting Policies
–
In May, the SEC proposed rules for disclosure of critical accounting policies
and estimates. The proposed rules would require disclosure of, among
other things:
•
critical accounting estimates made by the company, including the
methodology used, line items affected, and how such line items would
change if the estimates changed; and
•
accounting policies having a material impact on a company's financial
presentation.
22
The New York Stock Exchange
• Focus on Independent Board Members
• Additional Audit Committee Requirements
• Shareholder Approval of Options
• Corporate Governance
23
The New York Stock Exchange
On August 1, the NYSE approved changes in their listing standards.
These have been submitted to the SEC for approval.
1. Board Independence
–
The board must have a majority of independent directors. Companies
would have 24 months to comply with this new independence rule.
–
To be "independent," the board must affirmatively determine that the
director has no material relationship with the company (either directly or as
a partner, shareholder or officer of an organization that has a relationship
with the company) other than as a director.
–
A board may adopt and disclose categorical standards to assist it in making
determinations of independence and may make a general disclosure if a
director meets these standards. Any determination of independence for a
director who does not meet these standards must be specifically explained.
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The New York Stock Exchange
The following persons would not be considered independent until
the expiration of a five-year "cooling off" period:
–
a former employee of the listed company;
–
a present or former employee of the company's present or former outside
auditor;
–
a present or former employee of any other company whose compensation
committee includes (or included) an officer of the listed company; and
–
any immediate family member of the above.
25
The New York Stock Exchange
2. New Requirements for Audit Committee Members and Committees
–
Audit committee members must meet additional qualifications, including:
• director fees must be the only compensation an audit committee
member receives from the company;
• a committee member who owns (or is affiliated with a person who
owns) 20% or more of the company's stock cannot chair the committee
or vote; and
• if a committee member serves simultaneously on the audit committee
of more than three public companies, the board must determine that
this would not impair the ability of the member to serve effectively and
disclose such determination in the proxy statement.
26
The New York Stock Exchange
2. New Requirements for Audit Committee Members and Committees
(continued)
–
The audit committee must perform additional responsibilities (which must
be set forth in its charter). Among other things, the audit committee must:
• meet separately, at least quarterly, with management, the internal
auditors, and the outside auditor;
• have the authority to retain legal, accounting and other advisors without
seeking board approval;
• discuss the MD&A disclosure, earnings releases and earnings
guidance; (general discussion permitted)
• discuss the company's policies on risk management;
• assist board oversight of compliance with legal and regulatory
requirements; and
• set clear policies for hiring employees or former employees of the
outside auditor.
27
The New York Stock Exchange
3. Shareholder Approval of Option Plans
–
Shareholders must approve all equity compensation plans. Exceptions for
inducement options, corporate acquisitions and tax qualified and excess
benefit plans need not be approved by shareholder vote.
–
Brokers may not vote customer shares on any such plans unless the
broker has the customer's instructions to do so. (Currently, the brokers can
vote without instructions in certain circumstances.)
28
The New York Stock Exchange
4. Corporate Governance Principles and Codes of Conduct
–
Companies must adopt and disclose a set of corporate governance
principles, which should address:
• director qualification standards and responsibilities;
• director access to management and independent advisors;
• director compensation;
• director orientation and continuing education;
• management succession; and
• annual board self-evaluations.
29
The New York Stock Exchange
4. Corporate Governance Principles and Codes of Conduct
(continued)
–
Companies must also adopt and disclose a code of business conduct and
ethics and promptly disclose any waivers of the code for directors or
officers. At a minimum the code should address:
• conflicts of interest;
• corporate opportunities;
• confidentiality;
• fair dealing with the company's customers, suppliers, competitors and
employees;
• protection and proper use of company assets; and
• encouraging the reporting of illegal or unethical behavior.
–
Companies must publish on their Web site their corporate governance
principles and codes of conduct, as well as the charters of their most
important committees.
30
Nasdaq Proposals
•
Shareholder Approval of all stock option plans
•
Board Independence
•
Majority of board independent
•
Audit committee approval of related party transactions
•
Independent directors cannot earn more than $60,000 in directors’ fees
or own 20% of the voting stock, be a relative of an executive officer, be
a former audit partner, or have other specified relationships
•
Independent nominating committee (limited exception)
•
Independent Director Approval of Executive Compensation
•
Audit Committee (requirements similar to NYSE, with one exception to
independence)
•
Director Continuing Education
31