Immediate Action Items
The Sarbanes-Oxley Act of 2002 (the “Act”) was signed into law by President Bush on July 30, 2002, in response to the recent accounting issues at large public companies. Some of the Act’s provisions were effective immediately upon enactment or will become effective by August 29, 2002. Therefore, to assure appropriate actions are taken to comply with these provisions, we are providing this summary. We do not intend to cover all aspects of the lengthy Act with this document, but will be providing additional information regarding the Act in the near future.
Coverage of the Act
The Act generally applies to all companies that are required to file periodic reports under the Securities Exchange Act of 1934 or have filed a registration statement under the Securities Act of 1933 that has not become effective and has not been withdrawn.
CEO and CFO Certification
The Act contains two separate certification requirements.
- Section 906 Certification Requirement
Section 906 is effective immediately and applies to all public companies. The certification statement must certify that the periodic filings containing financial statements fully comply with the requirements of the Securities Exchange Act of 1934 and that information contained in the filings fairly represents, in all material respects, the financial condition and results of operations of the issuer. Public companies should start the process promptly to satisfy this obligation. A sample of this required certification is included with this announcement.
If the CEO or CFO certifies any statement under this provision knowing that the periodic filing does not comply with all the requirements under this provision, he or she will be fined up to $1 million or imprisoned up to 10 years, or both. If he or she willfully certifies any statement with knowledge of noncompliance, he or she will be fined up to $5 million, or imprisoned up to 20 years, or both.
Section 302 Certification Requirement
Section 302 requires the SEC to adopt rules requiring the CEO and CFO of all public companies to make certification in each annual or quarterly report filed under the Exchange Act. These certifications will be broader, and more onerous, than that required by Section 906. The rules have not yet been proposed but are required to be effective before August 29, 2002.
Both of these provisions are in addition to the SEC’s Order that CEOs and CFOs of 947 large public companies with revenue over $1.2 billion submit sworn statements regarding their recent periodic filings.
Prohibition on Personal Loans to Executives
Loans by an issuer to its directors or executives are prohibited. Existing loans are not subject to the prohibition as long as they are not materially modified or renewed. Certain limited exceptions are available.
Reporting Requirements and SEC Review
Accuracy of Financial Reports
Each financial statement filed with the SEC must reflect all “material correcting adjustments” that have been identified by a registered public accounting firm.
Reports of Changes of Beneficial Ownership - Amendment to Section 16
The Act amends Section 16 of the Exchange Act to require directors, officers and 10% shareholders of an issuer to file reports of changes in beneficial ownership by the end of the second business day after the day of execution of the transaction, rather than the 10th day of the calendar month following the transaction under pre-existing law. The SEC is authorized to adopt exceptions from the 2-day deadline if compliance is not feasible. The new deadline will become effective August 29, 2002.
Regular SEC Review of Public Companies
The SEC shall review each issuer’s filings “on a regular and systematic basis” and, in any event, no less than once every 3 years.
All auditing and non-audit services, other than the defined de minimus exception provided to an issuer by its auditor must be pre-approved by the issuer’s audit committee. It is not clear whether this approval requirement applies to services being performed. In addition, because the Act directs the SEC to adopt implementing rules within six months, there is some uncertainty as to whether this provision is currently effective.
The Act strengthens existing criminal penalties, expands the number of securities law-related criminal prohibitions and creates other financial penalties and consequences.
Clearly, the Act and other corporate governance proposals have significant and broad implications. We are here to help. Please contact your Fredrikson & Byron securities attorney to discuss these initiatives and their implications, as well as internal policy and procedural changes that may need to be implemented.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the ____________ Report of _____________________ (the “Company”) on Form ________ for the ________ ended _______________ as filed with the Securities and Exchange Commission (the “Report”), I, _______________, [Chief Executive Officer/Chief Financial Officer] of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Chief Executive/Financial Officer