Division of Corporation Finance:
Exemptive Order on Management's Report on Internal Control over Financial Reporting and Related Auditor Report
Frequently Asked Questions
January 21, 2005
The answers to these frequently asked questions represent the views of the staff of the Division of Corporation Finance. They are not rules, regulations or statements of the Securities and Exchange Commission. Further, the Commission has neither approved nor disapproved them.
Note: Since the Commission's November 2004 publication of Release No. 34-50754, Order Under Section 36 of the Securities Exchange Act of 1934 Granting an Exemption from Specified Provisions of Exchange Act Rules 13a-1 and 15d-1 (the Order), we have received a number of questions regarding the implementation and interpretation of the Order. Our responses to some of these frequently asked questions are set forth below.
Questions should be directed to Andrew Thorpe at (202) 942-2910 in the Division of Corporation Finance
Q: The extended compliance period currently in effect pursuant to the February 2004 Release No. 33-8392 allows companies to omit a portion of the introductory language in paragraph 4 of the certification required by Exchange Act Rules 13a-14(a) and 15d-14(a) that refers to the certifying officers' responsibility for establishing and maintaining internal control over financial reporting for the company, as well as paragraph 4(b). When should companies relying on the Order provide a certification that contains the previously omitted language?
A: The contents of the certification should correspond to the contents of the applicable periodic report filed pursuant to the Order. Certifying officers may continue to omit the introductory language in paragraph 4 and all of paragraph 4(b) in the Form 10-K that does not include internal control reports as permitted by the Order. The previously omitted certification language must be provided in the certification filed with the amended Form 10-K that contains internal control reports. The certification in the amendment should contain paragraphs 1, 2, 4 (with the complete language, discussed above), and 5. Paragraph 3 of the certification is required as well if the amendment contains financial statements or other financial information.
Q: Should the amended Form 10-K only contain the previously omitted internal control reports?
A: No. Consistent with Rule 12b-15, the amended Form 10-K, in addition to including the previously omitted internal control reports, must contain at least the certifications required by Exchange Act Rules 13a-14(a) and 15d-14(a) and all of the information required by Item 9A. Controls and Procedures, which includes all of the disclosure pursuant to Items 307 and 308 of Regulation S-K.
Q: Will delaying the filing of internal control reports in accordance with the Order result in non-compliance with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934?
A: No. The Order states that an eligible company is exempt from, and will therefore be in compliance with, the specified Exchange Act Rule 13a-1 or Rule 15d-1 requirements. Therefore, a Form 10-K report may omit internal control reports, in accordance with the Order, and still fully comply with the requirements of Section 13(a) or 15(d) of the Exchange Act.
Q: The Order includes a condition that, for purposes of Form S-2 and S-3 eligibility requirements, a company relying on the exemption will not be considered to have timely filed its Form 10-K report until it has filed the Form 10-K amendment that includes internal control reports. Will a company that relies on the Order be eligible to offer and sell securities off of an effective Form S-3 shelf registration statement during the 45-day period that internal control reports are not on file?
A: Except for the transactions discussed in question 6 below, offerings pursuant to Form S-3 will not be permissible during the time period when a company has not filed internal control reports. For purposes of measuring form eligibility under Securities Act Rule 401(b), the updating of a Form S-3 registration statement through the incorporation of a Form 10-K is the equivalent of filing a post-effective amendment pursuant to Section 10(a)(3) of the Securities Act. Because the Form 10-K would not be considered timely until it is amended to include internal control reports, a company would not be eligible to use a currently effective Form S-3 during the time that internal control reports are not on file.
Q: Prior to the end of the 45-day time period when internal control reports are not on file, can a company that delays the filing of internal control reports in accordance with the Order file a new registration statement on Form S-2 or S-3, but not request effectiveness until the internal control reports have been filed?
A: Yes. A company that delays the filing of internal control reports in accordance with the Order may file new registration statement on Form S-2 or S-3 if it is otherwise eligible to use that form, but it may not request effectiveness during the time period that the internal control reports are not on file. The cover letter accompanying such registration statement must state that the reports have been excluded from the 10-K pursuant to the Order and must also include an undertaking that, if the internal control reports are not filed within the 45-day period prescribed by the Order, then the registrant will amend the Form S-2 or S-3 to the appropriate registration form for which it is then eligible to use.
Q: Will Form S-3 be available during the 45-day period that internal control reports are not on file in accordance with the Order for continuous offerings by selling security holders, or that represent dividend reinvestment plans or direct stock purchase plans, in all cases that commenced prior to the original due date for the Form 10-K?
Q: Would a company that delays filing internal control reports in accordance with the Order be eligible to use Form S-8, and would persons selling the company's securities be able to rely on Securities Act Rule 144 during the 45-day period that internal control reports are not on file?
A: Yes. Companies that delay filing internal control reports in accordance with the Order will not be disqualified from using Form S-8 and persons selling the company's securities would not be precluded from relying on Rule 144 solely because the filed Form 10-K does not include internal control reports for the 45-day period permitted by the Order. In other words, a company would still be considered to be "current" in its Exchange Act reporting obligations during the 45 days even if its Form 10-K did not include internal control reports, as permitted by the Order.
Q: Question 22 in Management's Report on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports - Frequently Asked Questions (revised October 6, 2004) states, "we encourage issuers to include both management's report on internal control over financial reporting and the auditor's report on management's assessment of internal control over financial reporting in the annual report to shareholders when their audited financial statements are included." Are companies that rely on the Order still encouraged to include both internal control reports in an annual report to shareholders that meets the requirements of Exchange Act Rules 14a-3(b) or 14c-3(a)?
A: In light of the policies underlying the Order, we believe that eligible companies relying on the Order may disregard Question 22.
Q: May a company that delays the filing of the internal control reports in accordance with the Order also delay for 45 days the date that management's internal report speaks to regarding the effectiveness of internal control over financial reporting? For example, may a company with a fiscal year ending on December 31, 2004 that delays the filing of the internal control reports in accordance with the Order include internal control reports regarding effectiveness of internal controls as of February 14, 2005?
A: No. The Order allows companies to delay the filing of the internal controls reports, but it does not change the date of the assessment of effectiveness, which still must be as of the end of the company's fiscal year (December 31, 2004 in the example above).
Q: How does the Order affect the filing of auditor consents?
A: If the auditor's report on internal control is to be incorporated by reference into a Securities Act filing, the auditor's consent to the use of the auditor's internal control report should be filed with the Form 10-K amendment. However, if the Form 10-K amendment does not include an audit report on the financial statements, the auditor is not required to provide a new consent on the use of their audit report on the financial statements incorporated by reference into a Securities Act filing.