August 5, 2002
Jonathan G. Katz, Esq.
U.S. Securities and Exchange Commission
450 Fifth Street
Washington, D.C. 20549-0609
Re: Proposed Rule Regarding Certification of Disclosures; File No. S7-21-02
Dear Mr. Katz:
Mayer, Brown, Rowe & Maw submits these comments to the Securities and Exchange Commission (the "Commission") regarding the proposed new rules (the "Proposed Rules") under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Proposed Rules would, if enacted, require the principal executive officer and principal financial officer (collectively, "Senior Officers") of a public reporting company to certify that they have read the company's quarterly and annual reports and that, to their knowledge, each report is true in all important respects as of the last day of the period covered by the report. See Certification of Disclosure in Companies' Quarterly and Annual Reports, SEC Release No. 34-46079 (June 14, 2002) (the "Proposing Release"). The Proposed Rules would also require such companies to adopt and maintain procedures to provide reasonable assurances that they are able to collect, process and disclose, in a timely manner, the information required to be disclosed in their periodic and current reports.
This firm represents many closed-end and exchange traded funds and their directors. We wish to bring to the attention of the Commission that the Proposed Rules, as a technical matter, may be applicable to closed-end and exchange traded funds that are registered under the Investment Company Act of 1940, as amended (the "1940 Act") and are listed on a national securities exchange (each a "Fund"). We believe, however, there is no public interest to be served by such a result and that the extension of the certification requirements to Funds was inadvertent.1 Our support for the foregoing conclusions is set forth below.
1. Although there is no basis for certification and internal controls requirements of the Act and the Proposed Rules to apply to open-end funds, they may apply as a technical matter to closed-end and exchange traded funds. Pursuant to Section 13(a) of the Exchange Act, companies that register their shares with the Commission pursuant to the Exchange Act must file periodic and current reports with the Commission in order to keep current the publicly available financial and other information about themselves. Such companies are generally referred to as "Reporting Companies," and the reports they must file pursuant to the Exchange Act include an annual report on Form 10-K (or 10-KSB for small businesses). Pursuant to Section 12(a), shares listed or traded on a national securities exchange must be registered. Accordingly, the Act and the Proposed Rules could be construed to apply to closed-end and exchange traded funds that are listed or traded on an exchange.
2. Extension of certification requirements to closed-end and exchange traded funds was inadvertent. Proposed Rule 13a-14(a) would require certifications in connection with "[e]ach annual and quarterly report filed pursuant to section 13(a) of the [Exchange] Act." Pursuant to Section 13(a) and the rules thereunder, Reporting Companies file annual reports on Form 10-K (or 10-KSB for small businesses), quarterly reports on Form 10-Q or 10-QSB, and current reports on Form 8-K. Closed-end and exchange traded funds, however, do not file any of these reports. They are exempted from filing quarterly and periodic reports pursuant to Rules 13a-13 and 13a-11 under the Exchange Act, respectively. Although closed-end and exchange traded funds are required to file annual reports, they satisfy that requirement, pursuant to Rule 30a-1 under the 1940 Act, by filing Form N-SAR with the Commission.2 While Rule 30a-1 refers to Section 13(a) of the Exchange Act, we believe that it is proper to characterize Form N-SAR as a document filed pursuant to the 1940 Act, not the Exchange Act.3
Form N-SAR is fundamentally different from Forms 10-K and 10-Q. It is designed exclusively to facilitate the SEC's oversight of investment companies. It is not disseminated to shareholders nor is it intended to assist investors in making investment decisions. Thus, unlike Forms 10-K and 10-Q, it does not have central importance to the trading market. Given the material differences between Form N-SAR and Forms 10-K and 10-Q, it is reasonable to expect that had the Commission intended that the Proposed Rules be applied to Form N-SAR, there would have been a separate discussion in the Release related thereto. Yet, the Proposing Release does not discuss Form N-SAR at all. Indeed, the Proposed Rules would revise Forms 10-K, 10-KSB, 10-Q and 10-QSB to permit the inclusion of signed certificates by Senior Officers, whereas no revision of Form N-SAR is proposed. Accordingly, as a technical matter, it would be impossible for a closed-end or exchange traded fund to file the new certificates with the Commission.4
3. Contrary to the Commission's statement in the Proposing Release (page 5) the certification requirement would create "an unacceptable risk of increased liability for a closed-end or exchange traded fund's principal executive officer and principal financial officer." The Commission's Proposing Release continues as follows (at page 5):
These senior officers already are responsible as signatories for their company's disclosure under the Exchange Act liability provisions. . . .
The 1940 Act Form N-SAR refers in its instructions to `required signatures' but does not require any particular person to act as an N-SAR signatory. There is no general practice in the industry that we are aware of as to any specific signatory requirement.
Based on the foregoing, we submit that applying these certification requirements to closed-end and exchange traded funds would create "an unacceptable risk of increased liability."
We thank you for permitting us to present our views on this matter. If you have any questions or comments, please do not hesitate to contact David M. Butowsky at (212) 506-2580, firstname.lastname@example.org, or Stuart M. Strauss at (212) 506-2695, email@example.com.
Very truly yours,
MAYER, BROWN, ROWE & MAW
David M. Butowsky
|1||Section 302 of the newly enacted Sarbanes-Oxley Act of 2002 (the "Act") requires the Commission to promulgate a rule for each company filing periodic reports under section 13(a) or 15(d) of the Exchange Act, requiring Senior Officers to provide certifications in each annual or quarterly report filed or submitted under the Exchange Act. The content of the certifications is provided in Section 302(a)(1) through 302(a)(6) and is substantially the same as the content of the Proposed Rules. Unquestionably, the Proposed Rules, when promulgated, will satisfy the requirement of the Act. Moreover, we submit that the Commission, in promulgating the rule, could exclude closed-end and exchange traded investment companies from the certification and internal controls requirements.|
|2||Funds also provide annual reports to shareholders, but the requirement to do so is set forth in Section 30(e) of the 1940 Act and Rule 30e-1 thereunder, and not in the Exchange Act; hence, the Act and the Proposed Rules would not affect the preparation of such reports.|
|3||All registered investment companies, including open-end funds, are required to file Form N-SAR.|
|4||General Instruction D.(1) of Form N-SAR prohibits the preparation of exhibits or supplemental information, except in response to the items set forth on the Form. As stated, the Form does not provide for the filing of certificates by Senior Officers.|