SEC Issues Final Rules Applying CEO/CFO Certification Requirement to Registered Investment Companies

September 4, 2002
10 minutes

On August 29, 2002, the SEC adopted final rules that:

  • Apply the CEO/CFO certification requirement contained in Section 302 of the Sarbanes-Oxley Act to virtually all registered investment companies.
  • Amend Form N-SAR to include the CEO/CFO certification and certain specific disclosures required by that certification.
  • Require that affected registered investment companies maintain and regularly evaluate “disclosure controls and procedures”.

In addition, the SEC proposed new rules that:

  • Would extend the foregoing requirements to all registered investment companies, including those not required to file reports under the Securities Exchange Act of 1934.
  • Would require all registered management investment companies to file a new Form N-CSR with the SEC containing a copy of any required shareholder report, accompanied by the CEO/CFO certification and related disclosures required under Section 302.

CEO/CFO Certification

  • Who Must File Certifications. The SEC has adopted new Rule 30a-2 under the Investment Company Act of 1940, which requires that every report filed on Form N-SAR by a registered management investment company or unit investment trust must include a certification by its principal executive officer and its principal financial officer (or persons performing similar functions).
  • Content of Certification. The form of certification prescribed by the new rules is attached as Annex A. (The forms of certification prescribed for unit investment trusts and small business investment companies are tailored to those entities and are therefore slightly different). No changes (even inconsequential changes) to the wording of the prescribed form are permitted.
  • GAAP and Beyond. In its adopting release, the SEC Staff states its view that the concept of “fairly present” in the certification statement with respect to financial statements and other financial information is broader than mere compliance with generally accepted accounting principles. A “fair presentation” encompasses not only the selection and application of appropriate accounting policies, but also disclosure of other financial information. (The Staff’s view in this regard is expressed in the context of a discussion of reports filed by industrial reporting companies; as a practical matter its application would seem to be more limited in the context of reports filed on Form N-SAR.)
  • Location of Certification and Related Disclosures. The SEC has amended Form N-SAR to require the filing of an exhibit containing (i) the required certifications and (ii) certain specific disclosures required by the form of certification (i.e., the conclusions of the certifying officers regarding their evaluation of disclosure controls and procedures and the disclosure of any significant changes in internal controls).
  • Certification Signatures. The certifications may not be signed by power of attorney. Additionally, original signature copies of manually signed certifications must be retained for five years.
  • Section 906 Certification. As a result of an apparent drafting oversight, Section 906 of the Sarbanes-Oxley Act contains a separate and independent requirement for CEO/CFO certification which is applicable to all periodic reports containing financial statements filed under Sections 13(a) or 15(d) of the Exchange Act. The form of the required certification is different in some respects from that required by Section 302 of the Act, as implemented through new Rule 30a-2 for registered investment companies, including the fact that it does not expressly allow for a “knowledge” qualification.

As acknowledged by the SEC Staff in the release adopting Rule 30a-2, Form N-SAR does not contain financial statements. Accordingly, it should not be subject to Section 906 by its terms. Financial statements of registered investment companies included in their shareholder reports are currently filed with the SEC only under the Investment Company Act. The SEC’s proposal to adopt new Form N-CSR and explicitly to bring the filing of that Form under the Exchange Act confirms this conclusion. If Form N-CSR is adopted as proposed, however, that Form would be subject to Section 906.

The SEC has thus far declined to provide any guidance regarding Section 906. As a result, most industrial reporting companies will likely be including a separate CEO/CFO certification in the form prescribed by Section 906 -- but with a “knowledge” qualification -- in addition to the certifications being made pursuant to Section 302. For reasons stated above, this should not be necessary at the present time in connection with reports filed on Form N-SAR. We recommend that organizations that nonetheless wish to add a separate Section 906 certification to those reports add the qualifying language “to the extent applicable” as well as a “knowledge” qualification to any such separate certification.

Disclosure Controls and Procedures.

  • Required Procedures. The SEC has adopted Rules 13a-15 and 15d-15 under the Exchange Act, which require registered investment companies to maintain and regularly evaluate “disclosure controls and procedures”. The rules define “disclosure controls and procedures” as controls and other procedures designed to ensure that information required to be disclosed in all periodic reports and definitive proxy materials and information statements filed under the Exchange Act is recorded, processed, summarized and reported within the required time periods. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed is accumulated and communicated to company management, including the CEO and CFO, as appropriate to permit timely decisions regarding the required disclosure. This newly defined term is distinguished from “internal controls,” which refers to controls relating to financial reporting and control of assets, and is intended to encompass non-financial as well as financial information.
  • Periodic Evaluation of Procedures. Within 90 days prior to the filing date of each Form N-SAR, an evaluation must be carried out under the supervision and with the participation of the issuer’s senior management, including the issuer’s principal executive officer and principal financial officer, of the effectiveness of the design and operation of the disclosure controls and procedures. The SEC Staff states that it expects each issuer to develop a process that is consistent with “its business and internal management and supervisory practices.” The Staff specifically recommends that issuers create a committee with responsibility for considering the materiality of information and determining disclosure obligations on a timely basis. The Staff also noted that a single evaluation conducted within the requisite time frame could suffice for multiple series of a fund or for multiple funds in a fund family.
  • Disclosure of “Disclosure Controls and Procedures” and “Internal Controls”. Consistent with the required certification statements, companies must disclose in their periodic reports:
    • the CEO/CFO conclusions as to the required evaluations of the effectiveness of the disclosure controls and procedures; and
    • whether or not there were significant changes in the internal controls or in other factors that could significantly affect internal controls subsequent to the date of the CEO/CFO evaluations, including any corrective actions with regard to significant deficiencies and material weaknesses.

Effective Date
The new rules are effective as of August 29, 2002. Certifications must be included in all reports filed after August 29, 2002, except that certification statements as to disclosure controls and procedures are only required in reports covering periods ended after August 29, 2002.

Registered investment companies should immediately develop and implement (i) procedures designed to ensure that the required certifications can be made and (ii) disclosure controls and procedures in compliance with the new rules. Each organization will need to develop a system that makes sense for its particular circumstances; however, the following steps would likely be appropriate in most circumstances:

  • Identify the persons who will be responsible for making the CEO/CFO certifications. In most cases, this will be the persons currently designated as “principal executive officer” and “principal financial officer”, i.e., the officers signing registration statements filed under the Securities Act of 1933 in those capacities. In some cases, however, organizations may wish to consider whether a reassignment of responsibilities would be appropriate in light of these new requirements.
  • Establish appropriate diligence procedures to support the CEO/CFO certifications. This could include, for example, procedures for review and certification of data by other individuals in the organization, meetings of appropriate officers to review and discuss reports, review of internal procedures surrounding preparation of the reports, etc. In developing these procedures, organizations should consider the likelihood (discussed below) that the certification requirement will be extended to include shareholder reports, as well as the Form N-SAR reports.
  • Review, update as appropriate, and put into writing the organization’s current procedures with respect to disclosure.
  • Establish a calendar and procedures for the periodic evaluation of disclosure controls and procedures.
  • Communicate with, and consider the appropriate oversight role of, independent directors and audit committees with respect to these matters.

Additional Rule Proposals
The SEC has proposed additional new rules and rule changes which would broaden the application of the certification and other requirements described above as follows:

  • Proposed Form N-CSR. Under a proposed amendment to Rule 30b2-1 under the Investment Company Act, registered management investment companies would be required to file reports on a new Form N-CSR. The form would contain (i) a copy of any required shareholder report, (ii) additional information regarding disclosure controls and procedures, and (iii) a CEO/CFO certification substantially in the form prescribed for Form N-SAR. As proposed, this certification would apply to all information contained in the shareholder report, including management’s discussion of performance.
  • Extension of Certification Requirement to All Registered Investment Companies. Currently, registered investment companies that are not listed on an exchange and that have fewer than 300 shareholders are not subject to the filing requirements of Sections 13(a) or 15(d) of the Exchange Act and, accordingly, are exempt from the new CEO/CFO certification requirements. The SEC has proposed a series of rule changes that would extend these requirements to all registered investment companies.
  • Comment Deadline; Effective Date. The deadline for comments on these additional rule proposals is October 16, 2002. The SEC has indicated its intention to require compliance with any final rules that are adopted 30 days after their publication.

Application of Other Provisions of Sarbanes-Oxley
The final rules and proposed rules announced by the SEC on August 29 are grounded on the SEC’s conclusion that Form N-SAR is filed by registered investment companies under the Exchange Act and, thus, compels compliance with Section 302 of the Sarbanes-Oxley Act. This conclusion removes, as a practical matter, any ambiguity regarding the scope of other provisions of the Sarbanes-Oxley Act and confirms that all of the provisions of that Act (with the exception of Sections 401, 402 and 404) apply both to closed-end and open-end companies.



Annex A
Form of Section 302 Certification for Form N-SAR


I, [identify the certifying individual], certify that:

1. I have reviewed this report on Form N-SAR of [identify registrant];

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial information included in this report, and the financial statements on which the financial information is based, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in rule 30a-2(c) under the Investment Company Act) for the registrant and have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this report (the "Evaluation Date"); and

c) presented in this report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in this report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: ...............