ALERT: SEC Orders CEO and CFO Certification of Public Filings
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.
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