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August 15, 2002
Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 10549-0609
Re: CEO/CFO Certifications by Registered Investment
Companies (File No. S7-21-02)
Dear Mr. Katz:
This letter responds to the Commission's Release 34-46300 (August 2, 2002) seeking comments on the CEO/CFO certification rules required by Section 302 of the Sarbanes-Oxley Act. In particular, this letter addresses the Commission's request for comments on the manner in which such certifications should apply to registered investment companies.
This letter represents the general views of this firm's Investment Management Practice Group, which counts among its clients over 800 registered investment companies or their independent trustees. It does not purport to represent the views of our clients.
Sections 302 and 906 of Sarbanes-Oxley do not apply to registered investment companies.
On June 12, 2002, the SEC published proposed rules under the Securities Exchange Act of 1934 that would require CEO/CFO certifications to be included in "each annual and quarterly report filed pursuant to" Section 13(a) or Section 15(d) of the Act. The release contains numerous references to Forms 10-K, 10-Q, 8-K etc. It contains no reference to registered investment companies or the reports they file with the Commission.
On July 30, 2002, the President signed the Sarbanes-Oxley Act. This Act contains two separate provisions addressing CEO/CFO certifications. Section 302 mandates that the SEC issue rules that require "each company filing periodic reports under Section 13(a) or 15(d)" of the Exchange Act to include CEO/CFO certifications "in each annual or quarterly report filed or submitted under either such section." Section 906 of the Act, which became effective without further SEC action, requires that "each periodic report containing financial statements filed ... pursuant to Section 13(a) or 15(d)" of the Exchange Act include a form of CEO/CFO certification.
While there may be a theoretical argument that registered investment companies are subject to the filing requirements of Section 13(a) (in the case of listed closed-end funds) or Section 15(d) (in the case of all other funds), they in fact file reports only pursuant to various provisions of the Investment Company Act. Section 30(d) of the Investment Company Act specifically directs the SEC to issue rules permitting registered investment companies to file reports under Sections 30(a) and 30(b) of the Act in lieu of any reports required under Section 13 or 15(d) of the Exchange Act. Rule 30b1-1 under the Investment Company Act requires all registered investment companies to file semi-annual reports on Form N-SAR. Rule 30a-1 under the Investment Company Act states that "a registered investment company required to file an annual report pursuant to Section 13(a) or 15(d) ... shall be deemed to have satisfied its requirement ... by the filing of semi-annual reports on Form N-SAR." Thus, there is no rational basis for concluding that registered investment companies file reports under Sections 13(a) or 15(d) of the Exchange Act.
Any attempt to argue that Form N-SAR somehow should be construed as a filing made under the Exchange Act and, thus, subject to a certification requirement falls short. This is because Sections 302 and 906 explicitly focus in large part on the certification of financial statements. Form N-SAR reports do not contain any financial statements and thus cannot reasonably be viewed as the intended object of Sections 302 and 906.
The facts that (i) Congress has specifically directed the SEC to create an alternative filing scheme for registered investment companies outside of the Exchange Act, and (ii) Congress selected the same language used in the SEC's original rule proposal -- which contained not the slightest indication that it was intended to apply to registered investment companies -- to define the jurisdictional reach of Sections 302 and 906, make it abundantly clear that Sarbanes-Oxley does not mandate any form of certification by CEO's/CFO's of registered investment companies
There is no basis for voluntary rulemaking by the Commission to require CEO/CFO certifications for registered investment companies.
In the absence of any statutory mandate, the Commission's request for comments regarding the manner in which the CEO/CFO certification requirement should be applied to registered investment companies can only be seen as an exercise of the Commission's discretionary rulemaking authority. As such, it must be founded on a rational factual basis. The Commission's release advances no facts or arguments to support its proposed rulemaking with respect to registered investment companies.
The following significant factors distinguish registered investment companies from public companies filing reports under Sections 13(a) or 15(d) of the Exchange Act:
Thus, there are numerous factual and legal distinctions which make any such certification unnecessary and inappropriate. Any such requirement will impose additional administrative burdens and expenses - costs which are ultimately borne by fund investors -- which cannot be justified by any discernible benefit. To the extent that the Commission ultimately concludes, however, that some form of certification requirement is appropriate for registered investment companies, factors 1 and 5 above would clearly justify limiting any such requirement to closed-end companies.
In the absence of any evidence of problems affecting registered investment companies, the Commission should not exercise its discretionary rule-making authority merely for the sake of political appearances. As significant institutional investors, registered investment companies are among the principal victims of the accounting and governance abuses of recent years and should not be swept up with the perpetrators in a dragnet of indiscriminate rulemaking. The Commission by its rule-making should not contribute to the myth that "everything is broken in corporate America." Instead, it can and should point with justifiable pride to registered investment companies as an example of what can be accomplished through a combination of sound regulation and good corporate governance.
In the event that the Commission determines to issue rules requiring CEO/CFO certifications by registered investment companies, it should clarify that such rules satisfy any requirement that might independently apply under Section 906 of Sarbanes-Oxley.
The Commission should provide interpretive guidance clarifying the definition of "issuer" under Sarbanes-Oxley. Although this term is not used to define the reach of the CEO/CFO certification requirements of Sections 302 and 906, it effectively defines the reach of many other provisions of Sarbanes-Oxley. As written, the definition of "issuer" clearly applies to closed-end companies listed on a stock exchange, which have securities registered under Section 12 of the Securities Exchange Act of 1934. For the reasons stated above, the Commission should clarify that the reference in that definition to "companies required to file reports under Section 15(d)" should not be interpreted to include registered investment companies.
Very truly yours,
John W. Gerstmayr