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U.S. Securities and Exchange Commission
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Attention: Jonathan G. Katz, Secretary
August 19, 2002
Re: File No. S7-21-02
Certification of Disclosure in Companies' Quarterly
and Annual Reports, Release No. 34-46300
Ladies and Gentlemen:
We are submitting this letter in response to the request of the Securities and Exchange Commission (the "Commission" or "SEC") for comments in respect of the Commission's proposal (the "Certification Proposal") regarding the certification of disclosure in companies' annual and quarterly reports under the Securities Exchange Act of 1934 (the "Exchange Act").1 We appreciate the opportunity to participate in this important undertaking and intend our comments to be helpful to the Commission in its efforts to implement the Sarbanes-Oxley Act of 2002 (the "Act"). Because we represent a significant number of non-U.S. companies and global financial institutions, the focus of our comments will be on those aspects of the Certification Proposal and other provisions of the Act that have created the greatest uncertainty for our non-U.S. clients.
The Act generally does not distinguish between domestic issuers and foreign issuers. While we appreciate that the intention of the Act was not to establish a dual regulatory system for U.S. and non-U.S. issuers, as drafted, the Act, and the Certification Proposal, are in certain aspects inconsistent with current reporting requirements for, and longstanding SEC practice with respect to, foreign issuers.
Section 302 of the Act requires the Commission to adopt rules implementing certain statutory certification requirements (the "302 Certification") for principal executive officers and principal financial officers. The 302 Certification requirement applies to annual and quarterly reports filed with or submitted to the SEC pursuant to Section 13(a) or 15(d) of the Exchange Act. The Certification Proposal addresses the Act's 302 Certification requirement.
In tandem with that requirement, Section 906 of the Act contains a separate provision requiring each periodic report containing financial statements filed with the SEC to be accompanied by a written statement (the "906 Certification") by the CEO and CFO of the issuer. The statement must certify that (1) the report fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act and (2) the information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the company. It is a criminal offence knowingly or wilfully to provide a false 906 Certification.
A. The Certification Requirements Should Not Apply to Form 6-K Reports
The Commission should exercise its authority to clarify that neither the 302 Certification nor the 906 Certification requirement applies to information furnished to the Commission on Form 6-K by foreign issuers. Sections 302 and 906 do not, on their face, apply to foreign issuers preparing Form 6-Ks. Further, the plain meaning of the Act (see Section 3(a) Regulatory Action) buttressed, as set forth below, by the legislative history of the Act vindicates the authority of the SEC to set limits on the scope of the applicability of the Act to foreign issuers or, alternatively, to exempt foreign issuers from specific provisions of the Act where consistent with past practice and public policy.
1. 302 Certification
The 302 Certification requirement, which applies to issuers "filing periodic reports" under the Exchange Act, requires "certif[ication] in each annual or quarterly report filed or submitted" under the Exchange Act.2 The Commission has stated that "it intends to adopt final rules that would apply the [302 Certification] requirement to foreign private issuers filing annual reports on Form 20-F."3 Since the Act is at best ambiguous concerning certification by foreign private issuers furnishing information on Form 6-K, implementation of the 302 Certification requirement in the SEC's Certification Proposal so that it applies to submissions on Form 6-K cannot be said to be required by the legislative mandate of the Act, and the Commission should not so extend the requirement.
The general instructions to Form 6-K do not prescribe quarterly reporting. Rather, the obligation to furnish information in a report on Form 6-K arises not from a passage of time but from home country and foreign securities exchange reporting requirements and the distribution, or required distribution, of information to security holders. 4 (Indeed, many foreign issuers who do report quarterly on Form 6-K do so pursuant to certain contractual undertakings to their bondholders, rather than home country reporting requirements.) Further, under current SEC practice, information provided to the Commission by issuers on Form 6-K is not deemed to be "filed" for the purposes of certain liability provisions of the Exchange Act, in part to encourage foreign issuers to make available to U.S. investors as much information as possible without the fear of the potential liability that would otherwise attach to reports "filed" with the SEC.
Unlike the Annual Report on Form 20-F, Form 6-K does not prescribe content, but rather looks to home country requirements moderated by certain materiality parameters. Thus, different issuers in different countries furnish different levels of information to the Commission on Form 6-K. Given this content variation, a uniform standard of certification with respect to material disclosure is not easily applied to the Form 6-K.5 Some Form 6-Ks may contain financial information; if such financial information is audited or reviewed by auditors it will, more likely than not, be to local Generally Accepted Accounting Principles ("GAAP") rather than a U.S. GAAP standard. However, this information may or may not be audited or reviewed. Without an audit or review, including possibly an audit or review to U.S. GAAP standards, principal executive and financial officers will be reluctant or unable to provide the 302 Certification as it applies to financial information.
As proposed by the Commission, foreign issuers could make the 302 Certification annually in connection with the filing of their Annual Reports on Form 20-F. The financial statements included in the Annual Report on Form 20-F are the only financial statements a foreign issuer is required to file on a periodic basis (i.e. annually), accompanied by a reconciliation to U.S. GAAP if the financial statements are prepared in accordance with the GAAP of another jurisdiction. Limiting the 302 Certification to Annual Reports on Form 20-F would be consistent with these longstanding financial reporting requirements for foreign issuers.
2. 906 Certification
We do not believe the 906 Certification requirements do, or should, apply to Form 6-K reports. The 906 Certification applies to periodic reports filed under the Exchange Act that contain financial statements. As discussed above, Form 6-K reports are neither "periodic", in the sense of being reports required to be filed at intervals regularly prescribed under the U.S. federal securities laws as in a Quarterly Report on Form 10-Q, nor "filed".
Even if Section 906 encompasses Form 6-K, it is unclear what types of Form 6-K reports would be subject to the 906 Certification requirement. "Financial statements" are not defined in the Act, and it is unclear whether, for example, pre-announcements of financial results or financial statements issued pursuant to non-U.S. GAAP (that may differ from U.S. GAAP) would require certification furnished to the Commission on Form 6-K. Specifying that the 906 Certification requirement is not applicable to information furnished on Form 6-K would provide clarity to global capital markets.
As discussed above, to the extent the 906 Certification requirements do apply to foreign issuers, it should be sufficient, and would be consistent with longstanding SEC practice and requirements for foreign issuers, for the 906 Certification to be limited to the filing of Annual Reports on Form 20-F. While well understanding the SEC's expressed respect for the primacy of the Department of Justice in matters affecting Title 18 U.S.C., we draw attention to the scope of Section 3 rulemaking and enforcement granted to the SEC "in furtherance of this [Sarbanes-Oxley] Act" and urge the SEC to guide the Department of Justice to the maximum extent possible.
3. Legislative History
The legislative history of the Act likewise indicates that the Act was not intended to apply wholesale to non-U.S. companies. Senator Enzi of Wyoming recognized that uniform application of the Act across jurisdictional boundaries may not always be in the best interests of the capital markets, specifically stating that "it was the intent of the [Senate] conferees to permit the [SEC] wide latitude in using their rulemaking authority to deal with technical matters such as the scope of the definitions and their applicability to foreign issuers."6 Recognising the Commission's "wide authority to enact implementing regulations that are necessary or appropriate in the public interest", Senator Enzi urged the Commission to "use its authority to make the Act as workable as possible consistent with longstanding SEC interpretations." Further, the prohibition on the use of foreign reincorporations under Section 302(b) of the Act implies that Congress envisioned different treatment of foreign issuers under the Act. This approach is consistent, historically, with the way foreign issuers have been regulated by the Commission. The Commission has developed and implemented a distinct registration and reporting system for foreign issuers, including different financial statement, disclosure and periodic reporting requirements, which recognizes that such issuers are also subject to home country regulation. The SEC and national stock exchanges have also generally exempted foreign issuers that are in compliance with home country corporate governance standards from listing standards applicable to U.S. domestic issuers.
Further, we emphasize that the remarks of Senator Enzi and other members and staff of the Senate Committee on Banking, Housing and Urban Development confirming Committee members' awareness that the sweeping scope of the Act included non-U.S. issuers do not stand alone. Committee members and staff have also informally suggested that they were relying on the capability of the Commission, both under the Act and under the Exchange Act, to tailor regulations under the Act to accommodate the special situation of foreign issuers. This is quite consistent with past legislative and administrative practice. For example, the 1964 amendments to the Exchange Act, which like the Act mandated sweeping changes to the Exchange Act and carried the potential for broad impact on foreign issuers with securities traded in the U.S. markets, specifically authorized the Commission to exempt foreign issuers from the new requirements in contemplation of a consultation period by the Commission, to result in "appropriate" findings and orders specific to foreign issuers.7
Finally, the Director of the SEC's Division of Corporation Finance recently drew a distinction between, on the one hand, "core" issues impacting home country legal practices and, on the other hand, less significant impacts justified by participation in the U.S. capital markets. The issues discussed herein (certification requirements, certification to local GAAP standards and related audit committee disclosure) are legitimately classified as core issues of home country legal practice. Exemption of non U.S. issuers, in whole or in part, as set forth in this letter, would "promote efficiency, competition and capital formation in the marketplace, consistent with the public interest and investor protection". 8
B. Local GAAP Formulations of "Fairly Presents" Should be Acceptable Certification Standards
The 302 Certification requirement mandates a statement that the information in the periodic report "fairly presents, in all material respects, the financial condition and results of operations of the issuer". The "fairly presents" language is consistent with audit opinions issued under U.S. GAAP. This standard, however, is not an international one. Rather, "fairly presents" reflects audit procedures in the United States and the practice and jurisprudence which have developed domestically.
The standard adopted in the Certification Proposal and the Act cannot be meaningfully applied by a company which prepares its accounts in accordance with accounting principles other than U.S. GAAP, including in cases where the "fairly presents" formulation is not the relevant standard used in audit opinions under such principles. In some jurisdictions, accountants opine that the accounts present a "true and fair view" of the financial results of the issuer of securities, while in other jurisdictions, the relevant standard is that the accounts "present fairly in all material respects" the financial position of the company. Even in other jurisdictions where "fairly presents" is the relevant standard, it may not have the same meaning in the context of foreign GAAP financial statements as it does under U.S. GAAP. CEOs and CFOs must inevitably rely in significant part on the work of the auditors to make the 302 Certification with respect to financial information. If foreign issuers are required to certify to the "fairly presents" standard, the certifying officer will not be sure that the auditors have reached the same conclusion with respect to the financial information that such officer is required to certify; the only way to achieve such certainty would be for the foreign issuer to present its financial information in accordance with U.S. GAAP. As to the latter, it would be contrary to clear and longstanding regulatory provisions under the Securities Act as well as the Exchange Act which allow foreign issuers to present their financial information in local GAAP with a U.S. GAAP reconciliation limited to certain specified items.9
For foreign private issuers, certification, if and to the extent required, should not be deemed to fail to comply with the statutory and regulatory requirements if there is substituted for the phrase "fairly presents" the language generally used in the issuers' respective home countries that most closely approximates the use of the phrase "fairly presents" in U.S. accounting practice, together with a confirmatory letter from the national accounting regulator or self-regulator. For financial statements which are prepared in accordance with the accounting principles of non-U.S. jurisdictions but for which "fairly presents" is the applicable standard, the rules should clarify that the meaning of "fairly presents" shall be determined by reference to the accounting principles of such non-U.S. jurisdiction and not U.S. GAAP.
C. Audit Committee Disclosure Certification Should Apply Only If and When the Audit Committee Requirement Has Come Into Force
Section 302 requires the principal executive officer and the principal financial officer to certify that:
the signing officers have disclosed to the issuer's auditors and the audit committee of the board of directors:
- all significant deficiencies in the issuer's internal controls;
- any fraud (whether or not material) by management or other employees with a significant role in the issuer's internal controls; and
- any significant changes in the issuer's internal controls or other factors that could significantly affect internal controls since the date of their evaluation.10
The Act contemplates, without specific statement, that every company filing or about to file reports with the SEC, regardless of home jurisdiction, will either establish an audit committee from within its board of directors or will cause its entire board to act as an audit committee by mandating that the SEC "direct" the New York Stock Exchange and the National Association of Securities Dealers to prohibit the listing of any security unless the company has complied with newly prescribed audit committee requirements. However, the Act also states that the SEC shall "provide for appropriate procedures for an issuer to have an opportunity to cure any defects that would be the basis for [a prohibition on listing]."11 While we do not necessarily agree that the public company audit requirements outlined in Section 301 should apply to foreign private issuers, the audit committee certification requirement under Section 302 should not, in any event, be required until the Commission has promulgated rules under Section 301 mandating compliance by foreign private issuers with the audit committee structure contemplated by that provision.
* * *
We would be pleased to respond to any enquiries regarding this letter or our views on the Release generally. Please contact Edward Fleischman, Bill Hobbs or Peter Ruhlin in New York at 212-424-9000, or Brigid Rentoul, Jason Manketo, Cecil Quillen, Jennifer Schneck, Steve Thierbach or Larry Vranka in London on +44 20 7456 2000.
Very truly yours
|1||SEC Release No. 34-46300 (August 2, 2000) (the "Release").|
|3||SEC Release No. 34-46300, August 2, 2002, pg. 4.|
|4||Form 6-K provides that issuers shall furnish on Form 6-K information such issuer "(i) makes or is required to make public pursuant to the law of the jurisdiction of its domicile or in which it is incorporated or organized, or (ii) files or is required to file with a stock exchange on which its securities are traded and which was made public by that exchange, or (iii) distributes or is required to distribute to its security holders."|
|5||Nor would it be particularly meaningful as applied to the Form 6-K. Indeed, some foreign issuers have a practice of furnishing all press releases, regardless of materiality, to the Commission. Rather than certify this type of information, issuers may revisit their reporting practices, with the perverse result that less information will be provided to the Commission and, by extension, the public in the United States.|
|6||48 Cong. Rec. S7350 (July 25, 2002).|
|7||SEC Release No. 34-7425, September 15, 1964, pg. 4. See also SEC Release No. 34-8066, April 28, 1967, adopting changes to Rule 12g3-2.|
|8||House Committee Report 104-622 Securities Amendments of 1996, explaining that in granting to the Commission the exemptive authority specified in Section 28 of the Securities Act of 1933 (the "Securities Act") and Section 36(a) of the Exchange Act, the "Committee expects that the Commission will use this authority to promote efficiency, competition and capital formation in the marketplace, consistent with the public interest and investor protection."|
|9||See, e.g., Item 17(c) of Form 20-F.|