66208 Federal Register / Vol. 67, No. 210 / Wednesday, October 30, 2002 / Proposed Rules 

1We do not edit personal information, such as 

names or electronic mail addresses, from electronic 

submissions. You should submit only information 

that you wish to make available publicly.

2 17 CFR 249.308.

3 17 CFR 249.310.

4 17 CFR 249.310b.

5 17 CFR 249.308a.

6 17 CFR 249.308b.

7 17 CFR 249.220f.

8 17 CFR 249.240f.

9 17 CFR 249.322.

10 17 CFR 240.12b–25.

11 17 CFR 240.13a–14.

12 17 CFR 240.13a–15.

13 17 CFR 140.15d–14.

14 17 CFR 240.15d–15.

15 15 U.S.C. 78a et seq.

16 17 CFR 228.10 et seq.

17 17 CFR 229.10 et seq.

18 17 CFR 210.1–01 et seq.

19 17 CFR 249.330; 17 CFR 274.101.

20 17 CFR 249.331; 17 CFR 274.128.

21 15 U.S.C. 80a–1 et seq.

22 17 CFR 270.30a–2.

23See, for example, John Waggoner and Thomas 

A. Fogarty, ‘‘Scandals Shred Investors’’ Faith: 

Because of Enron, Andersen and Rising Gas Prices, 

the Public Is More Wary Than Ever of Corporate 

America,’’ USA Today, May 5, 2002, and Louis 

Aguilar, ‘‘Scandals Jolting Faith of Investors,’’ 

Denver Post, June 27, 2002.

24Pub. L. 107–204, 116 Stat. 745 (2002).

SECURITIES AND EXCHANGE 

COMMISSION 

17 CFR Parts 210, 228, 229, 240, 249, 

270 and 274 

[Release Nos. 33–8138; 34–46701; IC–

25775; File No. S7–40–02] 

RIN 3235–AI66 

Disclosure Required by Sections 404, 

406 and 407 of the Sarbanes-Oxley Act 

of 2002

AGENCY: Securities and Exchange 

Commission.

ACTION: Proposed rule.

SUMMARY: We propose to require 

companies to include a number of new 

disclosures in their Exchange Act 

filings. First, companies would be 

required to disclose the number and 

names of persons that the board of 

directors has determined to be the 

‘‘financial experts’’ serving on the 

company’s audit committee and 

whether they are independent of 

management, and if not, an explanation 

of why they are not. Second, companies 

would be required to include an annual 

internal control report of management 

stating the following: management’s 

responsibilities for establishing and 

maintaining adequate internal controls 

and procedures for financial reporting 

for the company; management’s 

conclusions about the effectiveness of 

the company’s internal controls and 

procedures for financial reporting as of 

the end of the company’s most recent 

fiscal year; and that the company’s 

registered public accounting firm has 

attested to, and reported on, 

management’s evaluation of the 

company’s internal controls and 

procedures for financial reporting. 

Third, companies would be required to 

disclose whether they have adopted a 

code of ethics that covers their principal 

executive officers and senior financial 

officers, or if they have not, an 

explanation of why they have not, as 

well as amendments to, and waivers 

from, the code of ethics relating to any 

of those officers. These proposed rules 

would implement the requirements in 

sections 404, 406 and 407 of the 

Sarbanes-Oxley Act of 2002. We also 

propose to make revisions to our 

recently adopted rules requiring a 

company’s principal executive and 

financial officers to certify the 

company’s quarterly and annual reports 

and requiring the company to conduct 

quarterly evaluations of its disclosure 

procedures and controls. These rules 

would be amended to require quarterly 

and annual certifications and quarterly 

evaluations of internal controls and 

procedures for financial reporting. We 

also would amend the form of the 

principal officers’ certification 

contained in the quarterly and annual 

report forms.

DATES: Comments should be received on 

or before November 29, 2002.

ADDRESSES: To help us process and 

review your comments more efficiently, 

comments should be sent by hard copy 

or e-mail, but not by both methods. 

Comments sent by hard copy should 

be submitted in triplicate to Jonathan G. 

Katz, Secretary, U.S. Securities and 

Exchange Commission, 450 Fifth Street, 

NW., Washington, DC 20549–0609. 

Comments also may be submitted 

electronically at the following e-mail 

address: rule-comments@sec.gov. All 

comment letters should refer to File No. 

S7–40–02; if e-mail is used, this file 

number should be included in the 

subject line. Comment letters will be 

available for inspection and copying in 

the Commission’s Public Reference 

Room, 450 Fifth Street, NW., 

Washington, DC 20549–0102. 

Electronically submitted comment 

letters will be posted on the 

Commission’s Internet Web site (http://

www.sec.gov).1

FOR FURTHER INFORMATION CONTACT: Ray 

Be, Special Counsel, or N. Sean 

Harrison, Special Counsel, Division of 

Corporation Finance, at (202) 942–2910, 

with respect to registered investment 

companies, Katy Mobedshahi, Senior 

Counsel, Division of Investment 

Management, at (202) 942–0721, or with 

respect to accounting issues, Michael 

Thompson, Professional Accounting 

Fellow, Office of Chief Accountant, at 

(202) 942–4400, U.S. Securities and 

Exchange Commission, 450 Fifth Street, 

NW., Washington, DC 20549.

SUPPLEMENTARY INFORMATION: We are 

proposing amendments to Form 8–K,2

Form 10–K,3 Form 10–KSB,4 Form 10–

Q,5 Form 10–QSB,6 Form 20–F,7 Form 

40–F,8 Form 12b–25,9 Rule 12b–25,10

Rule 13a–14,11 Rule 13a–15,12 Rule 

15d–14,13 and Rule 15d–1514 under the 

Securities Exchange Act of 1934,15

Regulation S–B,16 Regulation S–K 17 and 

Regulation S–X.18 We are also proposing 

amendments to Form N–SAR19 and 

proposed Form N–CSR20 under the 

Securities Exchange Act of 1934 and the 

Investment Company Act of 1940,21 and 

Rule 30a–2 22 and proposed Rule 30a–3 

under the Investment Company Act of 

1940.

I. Background 

The strength of the U.S. financial 

markets depends on investor 

confidence. Recent events involving 

allegations of misdeeds by corporate 

executives, independent auditors and 

other market participants have 

undermined that confidence.23 In 

response to this threat to the U.S. 

financial markets, Congress passed, and 

the President signed into law, the 

Sarbanes-Oxley Act of 2002 (the 

‘‘Sarbanes-Oxley Act’’),24 which effects 

sweeping corporate disclosure and 

financial reporting reform.

This release is one of several that the 

Commission is required to issue to 

implement provisions of the SarbanesOxley Act. In this release we propose 

rules to implement the following three 

provisions of the Sarbanes-Oxley Act: 

• Section 407, requiring the 

Commission to adopt rules: (1) requiring 

a company to disclose whether its audit 

committee includes at least one member 

who is a financial expert; and (2) 

defining the term ‘‘financial expert’’; 

• Section 406, requiring the 

Commission to adopt rules requiring a 

company to disclose whether it has 

adopted a code of ethics for the 

company’s senior financial officers, and 

if not, the reasons therefor, as well as 

any changes to, or waiver of any 

provision of, that code of ethics; and

• Section 404, requiring the 

Commission to adopt rules requiring a 

company’s management to present an 

internal control report in the company’s 

annual report containing: (1) A 

Federal Register / Vol. 67, No. 210 / Wednesday, October 30, 2002 / Proposed Rules 66209

25The term ‘‘registered public accounting firm’’ is 

defined in section 2(a)(12) of the Sarbanes-Oxley 

Act to mean a public accounting firm registered 

with the Public Company Accounting Oversight 

Board (the ‘‘PCAOB’’) in accordance with the 

Sarbanes-Oxley Act.

26These include Exchange Act Rules 13a–14, 

13a–15, 15d–14, 15d–15, Investment Company Act 

Rules 30a–2 and 30a–3, Item 307 of Regulations S–

B and S–K and the forms of certification included 

in Forms 10–Q, 10–QSB, 10–K, 10–KSB, 20–F, 40–

F, N–SAR and N–CSR.

27Accounting Series Release (ASR) 123 (March 

23, 1972).

28See the Report of the National Commission on 

Fraudulent Financial Reporting (1987). This 

commission, also known as the Treadway 

Commission, was sponsored by the AICPA, the 

American Accounting Association, the Financial 

Executives Institute (now Financial Executives 

International), the Institute of Internal Auditor and 

the National Association of Accountants. 

Collectively, these groups were known as the 

Committee of Sponsoring Organizations, or COSO.

29 GAO, ‘‘CPA Audit Quality: Status of Actions 

Taken to Improve Auditing and Financial Reporting 

of Public Companies,’’ at 5 (GAO/AFMD–89–38, 

March 1989).

30Release No. 34–42266 (Dec. 22, 1999) [64 FR 

73389]. This release addressed numerous issues 

related to auditor independence.

31See Report and Recommendations of the Blue 

Ribbon Committee on Improving the Effectiveness 

of Corporate Audit Committees (1999).

32The NASD rules referred to herein apply to 

NASDAQ listed companies.

33NYSE Rule 303.01, NASD Rule 4350(d)(2), 

AMEX Company Guide § 121 and PCX Equities 

Rule 5.3(b). See also Release No. 34–42233 

(December 14, 1999) [64 FR 71529], Release No. 34–

42231 (December 14, 1999) [64 FR 71523], Release 

No. 34–42232 (December 14, 1999) [64 FR 71518], 

and Release No. 34–43941 (February 7, 2001) [66 FR 

10545] respectively.

34NYSE Rule 303.01 and PCX Rule 5.3(b).

35NASD Rule 4350(d)(2) and AMEX Company 

Guide § 121.

36For example, the NASD Manual states that 

audit committee members must become able to read 

and understand fundamental financial statements 

within a reasonable time after being appointed to 

the audit committee. Similarly, the NYSE listing 

standard require such appointees to become 

financially literate, as that term is interpreted by the 

board of directors, within a reasonable period of 

time after appointment. Therefore, these rules do 

not require that members be so qualified at the time 

of appointment. Also, in general, with respect to 

foreign private issuers, the self-regulatory 

organization rules accommodate differences in 

home country practices regarding, among other 

things, audit committee composition. The SarbanesOxley Act does not exempt foreign private issuers 

from the financial expert disclosure requirements. 

Our proposed rules similarly do not include an 

exemption for foreign private issuers.

37 Id.

38The NYSE has indicated that it will await the 

Commission’s interpretation of the definition of the 

Continued

statement of the responsibility of 

management for establishing and 

maintaining an adequate internal 

control structure and procedures for 

financial reporting; and (2) an 

assessment, as of the end of the 

company’s most recent fiscal year, of the 

effectiveness of the company’s internal 

control structure and procedures for 

financial reporting. Section 404 also 

requires the company’s registered public 

accounting firm 25 to attest to, and report 

on, management’s assessment.

In connection with our proposed rules 

to implement the internal control report 

requirements included in section 404 of 

the Sarbanes-Oxley Act, we also 

propose several conforming revisions to 

our recently adopted certification rules 

and related requirements.26

II. Discussion of Proposals 

A. Proposed Disclosure About Financial 

Experts Serving on a Company’s Audit 

Committee 

Many of the recent corporate scandals 

have centered on the quality of a 

company’s financial disclosure. These 

events have, among other things, 

highlighted problems that can occur as 

a result of inadequate oversight of a 

company’s management and auditors by 

the company’s board of directors or 

audit committee. The Commission 

historically has encouraged companies 

to establish independent audit 

committees to oversee the work and 

independence of auditors. For example, 

in 1972 the Commission recommended 

that companies establish audit 

committees composed of outside 

directors.27 Others have expressed their 

support for independent audit 

committees, including the National 

Commission on Fraudulent Financial 

Reporting, also known as the Treadway 

Commission,28 and the General 

Accounting Office.29 In 1999, we 

adopted rules requiring companies to 

disclose whether their audit committee 

members are independent, as defined by 

the relevant listing standards.30

In 1998, the New York Stock 

Exchange, Inc. (the ‘‘NYSE’’) and the 

National Association of Securities 

Dealers, Inc. (the ‘‘NASD’’) sponsored a 

committee to study the effectiveness of 

audit committees. This committee 

became known as the Blue Ribbon 

Committee on Improving the 

Effectiveness of Corporate Audit 

Committees (the ‘‘Blue Ribbon 

Committee’’). In its 1999 report, the 

Blue Ribbon Committee recognized the 

importance of the audit committee in 

overseeing the corporate accounting and 

financial controls and reporting of 

companies.31 The Blue Ribbon 

Committee noted that, because of this 

important role, an audit committee has 

‘‘a more recognizable need for members 

with accounting and/or related financial 

expertise.’’ Without some level of 

financial competence, members of an 

audit committee may be unable to 

adequately perform their vital corporate 

duties. In response to this report, the 

NYSE, the NASD,32 the American Stock 

Exchange, Inc. (the ‘‘AMEX’’) and the 

Pacific Exchange, Inc. (the ‘‘PCX’’) 

adopted rules regarding the composition 

of listed companies’’ audit 

committees.33

The NYSE’s and the PCX’s rules 

require at least one member of a listed 

company’s audit committee to have 

‘‘accounting or related financial 

management expertise, as the Board of 

Directors interprets such qualification in 

its business judgment.’’ 34 The NASD 

and the AMEX have similar rules that 

require each listed company to certify 

that it has, and will continue to have, at 

least one member of the audit 

committee that has past employment 

experience in finance or accounting, a 

professional certification in accounting, 

or comparable experience or 

background that demonstrates the 

individual’s financial sophistication.35

These rules provide, by way of example, 

that a person who is or has been a chief 

executive officer, chief financial officer 

or other senior corporate officer with 

financial oversight responsibilities 

satisfies this criterion. In addition, all 

four self-regulatory organizations 

require all members of the audit 

committee to be independent and to be 

(or soon become) financially literate, 

subject to limited exceptions.36 While 

the NYSE and PCX rules permit a 

company’s board of directors to 

interpret the financial literacy 

requirements, the NASD and AMEX 

rules define financial literacy as ‘‘the 

ability to read and understand 

fundamental financial statements, 

including a company’s balance sheet, 

income statement, and cash flow 

statement.’’ 37

Although the NYSE, NASD, AMEX 

and PCX already have rules regarding 

the financial expertise of audit 

committee members, not all companies 

that are required to file reports under 

Sections 13(a) and 15(d) of the Exchange 

Act are subject to these requirements. 

Furthermore, the Sarbanes-Oxley Act 

directs us to adopt rules defining the 

term ‘‘financial expert’’ and specifies 

several attributes that we must consider 

in crafting the definition. These 

attributes are more detailed and rigorous 

than those reflected in the current selfregulatory organization rules. Therefore, 

it is possible that a person who 

previously qualified as a financial 

expert under the broader guidelines 

included in the rules of the selfregulatory organizations may not have 

sufficient expertise and experience to be 

considered a financial expert under our 

proposed rules.38 In particular, our 

66210 Federal Register / Vol. 67, No. 210 / Wednesday, October 30, 2002 / Proposed Rules 

term ‘‘financial expert’’ before proposing 

amendments to its rules. See File No. SR–NYSE–

2002–33 (pending before the Commission). The 

NASD has indicated that it intends to file rule 

proposals for the Nasdaq Stock Market with the 

Commission addressing similar issues. Although we 

will continue to work with the self-regulatory 

organizations to reconcile to the extent possible the 

various definitions of expert.

39 15 U.S.C. 78j–1(m)(3). The Sarbanes-Oxley Act 

amended the Exchange Act to add this section.

40Section 3(a)(58) of the Exchange Act, as 

amended by the Sarbanes-Oxley Act, defines the 

term ‘‘audit committee’’ as ‘‘a committee (or 

equivalent body) established by and amongst the 

board of directors of an issuer for the purpose of 

overseeing the accounting and financial reporting 

processes of the issuer and audits of the financial 

statements of the issuer; and * * * if no such 

committee exists with respect to an issuer, the 

entire board of directors of the issuer.’’ 15 U.S.C. 

78c(a)(58).

41The Sarbanes-Oxley Act only directs the 

Commission to adopt rules requiring disclosure of 

whether or not the audit committee has at least one 

member who is a financial expert and, if not, why. 

See section 407 of the Sarbanes-Oxley Act.

42See Item 401(e) of Regulation S–K and Item 

401(a)(4) of Regulation S–B [17 CFR 229.401(e) and 

228.401(a)(4)].

43See Report and Recommendations of the Blue 

Ribbon Committee on Improving the Effectiveness 

of Corporate Audit Committees (1999).

44 15 U.S.C. 77k. 45See section 301 of the Sarbanes-Oxley Act.

proposed rules would require a 

financial expert to have experience 

preparing or auditing financial 

statements of a company that files 

reports with us and experience with 

internal controls and procedures for 

financial reporting (or similar expertise 

and experience in the board of directors’

judgment). The proposed disclosure 

requirements regarding audit committee 

financial experts are described below.

1. Proposed Disclosure Requirements 

We propose to add new Item 309 to 

Regulations S–K and S–B. In addition, 

we propose to add new Item 15(b) to 

Form 20–F and new Instruction B.(8) to 

Form 40–F. These proposed items 

would be identical in substance and 

entitled, ‘‘Audit Committee Financial 

Experts.’’ The proposed items would 

require companies to disclose:

• The number and names of persons 

that the board of directors has 

determined to be the financial experts 

serving on the company’s audit 

committee; and 

• Whether the financial expert or 

experts are ‘‘independent,’’ as that term 

is used in section 10A(m)(3) of the 

Exchange Act, and if not, an explanation 

of why they are not.39

If the company does not have a financial 

expert serving on its audit committee, 

the company must disclose that fact and 

explain why it has no financial expert. 

For purposes of the proposed 

disclosure, the term ‘‘audit committee’’

would be defined by section 3(a)(58) of 

the Exchange Act.40

Although the Sarbanes-Oxley Act 

does not specifically require disclosure 

of the number or names of the financial 

experts,41 we believe that it is 

appropriate to propose these 

requirements. Investors likely would be 

interested in knowing how many 

financial experts a company’s board has 

determined are serving on its audit 

committee, or whether it has 

determined that all of the audit 

committee members are financial 

experts. Furthermore, disclosure of the 

names of the company’s financial expert 

or experts would assist investors in 

evaluating the company’s annual report 

and proxy or information statement 

disclosure that describes the 

background and business experience of 

the company’s directors.42

The primary benefit of having a 

financial expert serving on a company’s 

audit committee is that the person, with 

his or her enhanced level of financial 

sophistication or expertise, can serve as 

a resource for the audit committee as a 

whole in carrying out its functions.43

The mere designation of the financial 

expert should not impose a higher 

degree of individual responsibility or 

obligation on a member of the audit 

committee. Nor do we intend for the 

financial expert designation to decrease 

the duties and obligations of other audit 

committee members or the board of 

directors. Furthermore, in order to avoid 

any confusion in the context of section 

11 of the Securities Act,44 we do not 

intend for such a person to be 

considered an expert for purposes of 

section 11 solely as a result of his or her 

designation as a financial expert on the 

audit committee. The role of the 

financial expert is to assist the audit 

committee in overseeing the audit 

process, not to audit the company. A 

conclusion that a financial expert is an 

‘‘expert’’ for purposes of section 11 

might suggest a higher level of due 

diligence than is consistent with the 

audit committee’s oversight 

responsibilities.

Section 407 of the Sarbanes-Oxley Act 

does not require disclosure of whether 

the financial expert is independent. 

However, we believe that such 

disclosure may be important to 

investors. Investors may be interested to 

know, for example, if the only financial 

expert on the audit committee is the 

company’s chief financial officer or 

another individual who is responsible 

for, or participates in, the preparation of 

the company’s financial statements. 

Therefore, we propose to require 

disclosure of whether the identified 

financial expert or experts on the audit 

committee are independent, as that term 

is used in section 10A(m)(3) of the 

Exchange Act, and if not, an explanation 

of why they are not. In addition, we 

intend to propose rules directing the 

national securities exchanges and 

national securities association to require 

a company to have a completely 

independent audit committee as a 

condition to listing.45

Some companies do not have boards 

of directors and therefore do not have 

board audit committees. For example, 

some limited liability companies and 

limited partnerships that do not have a 

corporate general partner may not have 

an oversight body that is the equivalent 

of an audit committee. It may be 

important to investors to be aware that 

such entities do not have such oversight 

bodies. Therefore, we do not propose to 

exempt these entities from the proposed 

financial expert disclosure 

requirements. If a limited liability 

company or limited partnership does 

not have a similar oversight body, it 

must explain that its organizational 

structure does not provide for such a 

body and that it therefore does not have 

an audit committee. We do, however, 

propose to exempt asset-backed issuers 

from this proposed disclosure 

requirement. Because of the nature of 

these entities, such issuers are subject to 

substantially different reporting 

requirements. Most significantly, such 

issuers are not required to file financial 

statements like other companies. 

Therefore, we do not believe disclosure 

of whether such companies have a 

financial expert on its audit committee 

would be of interest to investors. 

Request for Comment 

• Would investors benefit from 

disclosure of the number of the financial 

experts serving on the company’s audit 

committee? Or would it suffice to 

require disclosure only of whether at 

least one financial expert serves on the 

audit committee? 

• Do investors need to know the 

names of the financial experts on the 

audit committee? Would disclosure of 

the names discourage people from 

serving as financial experts on an audit 

committee? 

• Should the Commission specifically 

address the issue of the degree of 

individual responsibility, obligation or 

liability under state or federal law of a 

person designated as a financial expert 

as a result of the designation? If the 

Commission should address this issue, 

how should it do so? 

• Should we use a term other than 

‘‘financial expert’’? For example, would 

Federal Register / Vol. 67, No. 210 / Wednesday, October 30, 2002 / Proposed Rules 66211

46The Sarbanes-Oxley Act uses the term 

‘‘comptroller.’’ It is our understanding that a 

comptroller position generally is the position in a 

government agency or non-profit organization with 

oversight responsibilities for the agency’s or 

organization’s primary accounting function. We 

believe that for-profit organizations typically use 

the term ‘‘controller’’ to describe this function. 

Therefore, throughout this release, we have used 

the term ‘‘controller’’ instead of the term 

‘‘comptroller.’’

47See Instructions 1–4 to proposed Item 309 of 

Regulations S–K and S–B. In particular, we propose 

to break the four attributes into five attributes and 

several changes to clarify that the required 

attributes include experience applying generally 

accepted accounting principles in connection with 

the accounting for estimates, accruals and reserves 

that are generally comparable to those, if any, used 

in the company’s financial statements, and 

experience preparing or auditing financial 

statements that present accounting issues that are 

generally comparable to those raised by the 

company’s financial statements.

48Section 407 of the Sarbanes-Oxley Act states 

that, among other attributes, the SEC, in defining 

the term ‘‘financial expert,’’ should consider 

whether a person has experience with internal 

accounting controls. This release proposes rules 

under section 404, which would require an annual 

report by management evaluating the effectiveness 

of its internal controls and procedures for financial 

accounting (a defined term). We believe that this 

term has substantially the same meaning as 

‘‘internal accounting controls’’ in section 407. 

Therefore, we propose to use the newly defined 

term for consistency. 49See section II.A.3., Determination by the Board 

of Directors of Who Is a Financial Expert, below. 50This approach is consistent with the approach 

taken in NASD and NYSE rules. The NASD requires 

each issuer to have ‘‘at least one member of the 

audit committee that has past employment 

experience in finance and accounting, requisite 

professional certification in accounting, or any 

other comparable experience or background which 

results in the individual’s financial sophistication, 

including being or having been a chief executive 

officer, chief financial officer or other senior officer 

with financial oversight responsibilities.’’ NASD 

Rule 4350(d)(2)(A). Similarly, the NYSE requires at 

least one member who has ‘‘accounting or related 

financial management expertise.’’ NYSE Listed 

Company Manual 303.01. Both of these provisions 

focus on the level of expertise without providing 

any mechanical formula for determining whether an 

individual has the requisite expertise.

the term ‘‘audit committee financial 

expert’’ be a more appropriate title? 

• Is there other relevant information 

about the financial expert or experts that 

a company should have to disclose? For 

example, should we expand the 

disclosure required under Item 401(e) of 

Regulations S–K and S–B, as it relates 

to directors that the company has 

determined to be financial experts? If so, 

how? 

• Should we require disclosure of 

whether the financial experts are 

independent, as proposed? If so, should 

we define ‘‘independent’’ in the same 

manner as the term is used in section 

10A(m)(3) of the Exchange Act? 

• Should we incorporate an 

independence requirement into the 

definition of ‘‘financial expert’’ so that 

any designated financial expert must be 

independent to qualify under the 

definition? 

2. Proposed Definition of ‘‘Financial 

Expert’’

The Sarbanes-Oxley Act requires the 

Commission, in defining the term 

‘‘financial expert,’’ to consider whether 

a person has, through education and 

experience as a public accountant or 

auditor or a principal financial officer, 

controller,46 or principal accounting 

officer of an issuer, or from a position 

involving the performance of similar 

functions:

(1) An understanding of generally 

accepted accounting principles and 

financial statements; 

(2) Experience in: (a) The preparation 

or auditing of financial statements of 

generally comparable issuers; and (b) 

the application of such principles in 

connection with the accounting for 

estimates, accruals, and reserves; 

(3) Experience with internal 

accounting controls; and 

(4) An understanding of audit 

committee functions. 

The ‘‘financial expert’’ definition 

included in the proposed rules 

incorporates these four ‘‘attributes’’ with 

several modifications.47 We also 

propose to require the financial expert’s 

experience to be related to companies 

that were, at the time he or she held the 

position, publicly reporting companies. 

We believe this requirement is 

appropriate because a person with 

experience as a principal financial 

officer or principal accounting officer of 

a private company may not have been 

exposed to the reporting requirements of 

public companies.

Moreover, the proposed definition 

states that the board of directors can 

conclude that a person is a financial 

expert if, in lieu of having experience as 

a public accountant, auditor, principal 

financial officer, principal accounting 

officer, or controller, or experience in a 

position involving the performance of 

similar functions, the person has 

experience in a position that results, in 

the judgment of the board of directors, 

in the person having similar expertise 

and experience. If the board makes such 

a determination, it would be required to 

disclose the basis for that determination. 

To qualify as a financial expert, a person 

would, in all cases, have to possess all 

of the attributes listed in the proposed 

definition. 

The instructions to proposed Item 309 

of Regulations S–K and S–B would 

therefore define the term ‘‘financial 

expert’’ to mean a person who has, 

through education and experience as a 

public accountant or auditor or a 

principal financial officer, controller, or 

principal accounting officer of a 

company that, at the time the person 

held such position, was required to file 

reports pursuant to section 13(a) or 

15(d) of the Exchange Act, or experience 

in one or more positions that involve 

the performance of similar functions (or 

that results, in the judgment of the 

company’s board of directors, in the 

person’s having similar expertise and 

experience), the following attributes: 

a. An understanding of generally 

accepted accounting principles and 

financial statements; 

b. Experience applying such generally 

accepted accounting principles in 

connection with the accounting for 

estimates, accruals, and reserves that are 

generally comparable to the estimates, 

accruals and reserves, if any, used in the 

registrant’s financial statements; 

c. Experience preparing or auditing 

financial statements that present 

accounting issues that are generally 

comparable to those raised by the 

registrant’s financial statements; 

d. Experience with internal controls 

and procedures for financial 

reporting; 48 and

e. An understanding of audit 

committee functions. 

In determining whether a potential 

financial expert has all of the requisite 

attributes, the board of directors 49 must 

evaluate the totality of an individual’s 

education and experience.50 The 

company should consider a variety of 

factors in making that evaluation, 

including:

• The level of the person’s accounting 

or financial education, including 

whether the person has earned an 

advanced degree in finance or 

accounting; 

• Whether the person is a certified 

public accountant, or the equivalent, in 

good standing, and the length of time 

that the person actively has practiced as 

a certified public accountant, or the 

equivalent; 

• Whether the person is certified or 

otherwise identified as having 

accounting or financial experience by a 

recognized private body that establishes 

and administers standards in respect of 

such expertise, whether that person is in 

good standing with the recognized 

private body, and the length of time that 

the person has been actively certified or 

identified as having this expertise; 

• Whether the person has served as a 

principal financial officer, controller or 

principal accounting officer of a 

company that, at the time the person 

held such position, was required to file 

reports pursuant to section 13(a) or 

15(d) of the Exchange Act, and if so, for 

how long; 

66212 Federal Register / Vol. 67, No. 210 / Wednesday, October 30, 2002 / Proposed Rules 

51See 17 CFR 201.102(f).

52See 17 CFR 201.102(e).

• The person’s specific duties while 

serving as a public accountant, auditor, 

principal financial officer, controller, 

principal accounting officer or position 

involving the performance of similar 

functions; 

• The person’s level of familiarity and 

experience with all applicable laws and 

regulations regarding the preparation of 

financial statements that must be 

included in reports filed under section 

13(a) or 15(d) of the Exchange Act; 

• The level and amount of the 

person’s direct experience reviewing, 

preparing, auditing or analyzing 

financial statements that must be 

included in reports filed under section 

13(a) or 15(d) of the Exchange Act; 

• The person’s past or current 

membership on one or more audit 

committees of companies that, at the 

time the person held such membership, 

were required to file reports pursuant to 

section 13(a) or 15(d) of the Exchange 

Act; 

• The person’s level of familiarity and 

experience with the use and analysis of 

financial statements of public 

companies; and 

• Whether the person has any other 

relevant qualifications or experience 

that would assist him or her in 

understanding and evaluating the 

registrant’s financial statements and 

other financial information and to make 

knowledgeable and thorough inquiries 

whether: 

• The financial statements fairly 

present the financial condition, results 

of operations and cash flows of the 

company in accordance with generally 

accepted accounting principles; and

• The financial statements and other 

financial information, taken together, 

fairly present the financial condition, 

results of operations and cash flows of 

the company. 

In the case of a foreign private issuer, 

the board of directors also should 

consider the person’s experience with 

public companies in the foreign private 

issuer’s home country, generally 

accepted accounting principles used by 

the issuer, and the reconciliation of 

financial statements with U.S. generally 

accepted accounting principles. 

This is not intended to be an 

exhaustive list of the factors that the 

board of directors should consider in 

assessing whether a person qualifies as 

a financial expert. Moreover, the 

proposed rules do not specify the 

number of listed factors that a financial 

expert should satisfy; satisfaction of any 

specific number of factors would be 

neither necessary nor sufficient for a 

person to be considered a financial 

expert. Most of these factors require a 

qualitative assessment of a potential 

expert’s level of knowledge or 

experience. 

The fact that a person previously has 

served on an audit committee would 

not, by itself, justify the board of 

directors in ‘‘grandfathering’’ that 

person as a financial expert under our 

proposed definition. Similarly, the fact 

that a person has experience as a public 

accountant or auditor, or a principal 

financial officer, controller or principal 

accounting officer or experience in a 

similar position would not, by itself, 

justify the board of directors in deeming 

the person to be a financial expert. The 

board of directors would have to 

confirm that these persons have the 

requisite attributes and the right mix of 

education and experience. 

Some individuals who are 

particularly knowledgeable and 

experienced in accounting and financial 

issues may have the requisite attributes 

and mix of knowledge and experience to 

qualify as financial experts, even though 

they may not have served in one of the 

specifically identified positions. The 

board of directors would have to 

determine whether an individual’s 

qualifications, in the aggregate, satisfy 

the financial expert definition. 

Because of the significant role the 

audit committee plays in the filing of a 

public company’s financial statement, 

including the preparation and filing of 

their own report, we would find it hard 

to believe that an accountant serving as 

a financial expert on an audit committee 

would not be practicing before the 

Commission.51 Therefore, any 

accountant, while suspended or barred 

from practice under Rule 102(e) 52 of the 

Commission’s Rules of Practice, 

generally would not be eligible to serve 

as a financial expert.

Request for Comment 

• Should we modify the proposed 

definition of ‘‘financial expert’’ in any 

way? If so, how? 

• Should we require a financial 

expert to have direct experience 

preparing or auditing financial 

statements of reporting companies? 

Should experience reviewing or 

analyzing such financial statements 

suffice? If so, why? 

• Should a financial expert have to 

possess all of the ‘‘attributes’’ listed in 

the proposed definition? Should we 

broaden the scope of individuals who 

may qualify as such an expert? 

• Do the five attributes adequately 

describe the qualities that a financial 

expert should have? Should we add any 

attributes? 

• Although we do not intend for the 

list of factors that a company should 

consider in assessing a potential 

financial expert’s qualifications to be 

exhaustive, should we add any factors 

to the list? If so, what other factors 

should we include? Conversely, should 

we delete any proposed factors from the 

list? If so, which factors should we 

delete?

• Should the proposed rules provide 

for a different standard or methodology 

for assessing a financial expert’s 

qualifications? If so, describe the 

preferred standard or methodology. 

3. Determination by the Board of 

Directors of Who Is a Financial Expert 

The Sarbanes-Oxley Act does not 

explicitly state who at the company 

should determine whether any of the 

audit committee members is a financial 

expert. Management is responsible for 

preparing the financial statements. 

Therefore, it seems inappropriate for 

management to assess the qualifications 

of audit committee members. Similarly, 

it does not seem appropriate for the 

members of the audit committee, alone, 

to assess their own qualifications. We 

believe that the board of directors in its 

entirety, as the most broad-based body 

within the company, is best-equipped to 

make the decision. Therefore, we 

propose to require the company to 

disclose the number and names of the 

persons that the board of directors has 

determined to be the financial expert or 

experts serving on the company’s audit 

committee. 

Certain foreign private issuers have a 

two-tier board, with one tier designated 

as the management board and the other 

tier designated as the supervisory or 

non-management board. In this 

circumstance, we believe that the 

supervisory or non-management board 

would be the body within the company 

that is best-equipped to make the 

decision. 

Request for Comment 

• Will investors find this information 

useful? Is there more useful information 

on how financial experts are 

determined? 

• Should our rules require the 

company to disclose the persons who 

are responsible for making the financial 

expert determination on behalf of the 

company? Is the board of directors the 

appropriate body to make such 

determination? 

4. Impracticability of a ‘‘Bright-Line’’

Test 

We considered, but do not propose, a 

‘‘bright-line’’ test for making the 

financial expert determination that 

Federal Register / Vol. 67, No. 210 / Wednesday, October 30, 2002 / Proposed Rules 66213

53See Report and Recommendations of the Blue 

Ribbon Committee on Improving the Effectiveness 

of Corporate Audit Committees, at 7 (1999).

54Referenced in 17 CFR 249.310.

55Referenced in 17 CFR 249.310b.

56Therefore if, for example, a director who is the 

audit committee financial expert resigned or was 

removed from the board one month after the 

company filed its annual report, the company 

would have to disclose this event on a Form 8–K 

filed within two business days after the director’s 

departure. See Release No. 33–8106 (June 17, 2002) 

[67 FR 42914]. The proposals in that release have 

not yet been adopted. The proposals do not require 

disclosure of whether the departing director is a 

financial expert. We are seeking comment on 

whether we should require such disclosure.

57See General Instruction E(3) to Form 10–KSB 

[17 CFR 249.310b] and General Instruction G(3) to 

Form 10–K [17 CFR 249.310].

58Referenced in 17 CFR 249.220f.

59Referenced in 17 CFR 249.240f.

60Referenced in 17 CFR 249.331 and 274.128. A 

management investment company is an investment 

company other than a unit investment trust or faceamount certificate company. See section 4 of the 

Investment Company Act [15 U.S.C. 80a–4]. A unit 

investment trust (‘‘UIT’’) is ‘‘an investment 

company which (A) is organized under a trust 

indenture, contract of custodianship or agency, or 

similar instrument, (B) does not have a board of 

directors, and (C) issues only redeemable securities, 

each of which represents an undivided interest in 

a unit of specified securities; but does not include 

a voting trust.’’ Section 4(2) of the Investment 

Company Act [15 U.S.C. 80a–4(2)]. A face-amount 

certificate company is an investment company that 

engages or proposes to engage in the business of 

issuing certain face-amount certificates. Section 4(1) 

of the Investment Company Act [15 U.S.C. 80a–

4(1)].

61The proposed amendments would add similar 

disclosure requirements applicable to small 

business investment companies (‘‘SBICs’’) to Item 

102P3 of Form N–SAR. Proposed Instruction (b) to 

Item 102P3 of Form N–SAR (referenced in 17 CFR 

249.330 and 274.101). SBICs are investment 

companies that are licensed as SBICs under the 

Small Business Investment Act of 1958. We are 

proposing to add financial expert disclosure 

requirements for SBICs to Form N–SAR because 

SBICs would not be required to file reports on 

proposed Form N–CSR.

eliminates all elements of subjectivity. 

We do not believe that such a test would 

best further the purposes of the statute. 

Our proposed ‘‘financial expert’’

definition requires a qualifying 

individual to possess all of the specified 

attributes, and in that respect, does 

provide somewhat of a ‘‘bright-line’’ by 

setting forth several fairly specific and 

objective standards to limit the pool of 

potential financial expert candidates. 

The ‘‘factors’’ also provide guidance to 

assist the board of directors in making 

the financial expert determination. 

Clearly, certain factors such as level of 

education and years spent in a financial 

position are important indicia of 

whether an individual has such 

knowledge and experience. 

However, we are not convinced that 

any bright-line rule or fixed formula that 

requires a financial expert to have 

specific academic credentials or a 

specific number of years of service in a 

financial or accounting position can 

ensure that an individual has the level 

of understanding and experience 

required by the statute. As the Blue 

Ribbon Committee stated regarding 

corporate governance and audit 

committees, ‘‘one size doesn’t fit all.’’ 53

Indeed, the more complicated the 

business, the greater the need for a 

higher threshold of financial expertise. 

Therefore, we believe that a bright-line 

test would be inappropriate for such 

determinations.

Request for Comment 

• Should we create a bright-line test 

for the definition of ‘‘financial expert’? 

If so, what should the test be? 

5. Location of Disclosure

The Sarbanes-Oxley Act expressly 

states that companies must include the 

financial expert disclosure in their 

periodic reports required pursuant to 

section 13(a) or 15(d) of the Exchange 

Act. We propose to require companies 

to include the new disclosure in their 

annual reports on Forms 10–K 54 and 

10–KSB.55 We do not propose to require 

companies to also include this 

disclosure in their quarterly reports 

because we think that annual disclosure 

would adequately fulfill investors’

informational needs. In this regard, we 

note that our pending Form 8–K 

proposals would require a company to 

disclose the arrival or departure of a 

director.56 This information would be 

included in part III of those forms. 

Consequently, the company could 

incorporate this information by 

reference from its definitive proxy or 

information statement that involves an 

election of directors, if the company 

voluntarily chooses to include this 

information in its proxy or information 

statement and then files such statement 

with the Commission no later than 120 

days after the end of the fiscal year 

covered by the Form 10–K or 10–KSB.57

We also propose to require this 

disclosure in annual reports filed by a 

foreign private issuer on Form 20–F 58

and by a Canadian issuer on Form 40–

F.59

Request for Comment 

• Should we also require the 

proposed financial expert disclosure to 

appear in the company’s proxy or 

information statement? Is this 

information relevant to a security 

holder’s decision to vote for a particular 

director or to elect, approve or ratify the 

choice of an independent public 

accountant? 

• Should we require the company to 

also disclose this information in its 

quarterly reports? 

• Should we also require such 

disclosure in registration statements 

filed under the Securities Act? 

• Should the company have to 

disclose specifically the arrival or 

departure of a financial expert promptly 

after the occurrence of the event? If so, 

should we modify our Form 8–K 

proposed item regarding the arrival and 

departure of a director to also require a 

company to disclose whether the 

departing director was, or arriving 

director will be, a financial expert 

serving on the company’s audit 

committee? Should a company make 

appropriate disclosures if: a financial 

expert leaves the audit committee, but 

remains on the board of directors; or an 

existing director joins the audit 

committee as a financial expert? Should 

a company only have to file a Form 8–

K if it previously disclosed in its annual 

report that it had a financial expert and 

now has none? 

• A company currently may not have 

an audit committee member who 

qualifies as a financial expert under the 

proposed definition but may intend to 

seek one. In such a case, the proposed 

rules would require a company to 

disclose that it does not have a financial 

expert on its audit committee. However, 

the company could explain that it is 

searching for a qualified individual to 

serve on its audit committee. Should we 

provide companies with a transition 

period to find such a person? If so, what 

would be an appropriate transition 

period?

6. Registered Investment Companies 

We are proposing to implement 

section 407 of the Sarbanes-Oxley Act 

with respect to registered management 

investment companies by adding 

disclosure requirements similar to those 

in proposed Item 309 of Regulation S–

K to proposed Form N–CSR.60 Proposed 

Item 4 of Form N–CSR would require a 

registered management investment 

company to disclose annually: (i) The 

number and names of persons that the 

board of directors has determined to be 

the financial experts serving on the 

investment company’s audit committee; 

(ii) whether the financial expert or 

experts are independent, and if not, an 

explanation of why they are not; and 

(iii) if the investment company does not 

have a financial expert serving on its 

audit committee, the fact that there is no 

financial expert and an explanation of 

why it has no financial expert.61 In 

addition, the investment company 

would be required to disclose the basis 

for a determination by its board of 

directors that a person is a financial 

66214 Federal Register / Vol. 67, No. 210 / Wednesday, October 30, 2002 / Proposed Rules 

62Proposed Instruction 3 to Item 4 of proposed 

Form N–CSR; proposed Instruction (b)(3) to Item 

102P3 of Form N–SAR.

63Proposed Instructions 2 and 4 to Item 4 of 

proposed Form N–CSR.

64Proposed Item 4 of proposed Form N–CSR.

65We expect that many companies already have 

a code of ethics that applies to these officers, as 

well as additional officers, directors and employees. 

We encourage companies to apply the code of 

ethics to as broad a spectrum of personnel and 

affiliates as practicable.

66The Sarbanes-Oxley Act section 406(c) 

definition of the term ‘‘code of ethics’’ does not 

include the phrase ‘‘to deter wrongdoing’’ that we 

have incorporated into proposed Item 406 of 

Regulations S–K and S–B, but we think that it is 

appropriate to expand the definition in this manner. 

Although codes of ethics typically are designed to 

promote high standards of ethical conduct, they 

also generally seek to instruct those to whom they 

apply as to improper or illegal conduct or activity 

and to prohibit such conduct or activity.

expert if, in lieu of having experience as 

a public accountant, auditor, principal 

financial officer, principal accounting 

officer, or controller, or experience in a 

position involving the performance of 

similar functions, the person has 

experience in a position that results, in 

the judgment of the board, in the person 

having similar experience and 

expertise.62 We are proposing the same 

definition of ‘‘financial expert’’ for 

investment companies as for operating 

companies, except that we are not 

including the factor relevant to foreign 

private issuers.63

A financial expert would be 

considered to be ‘‘independent’’ if he or 

she: (i) meets the criteria set forth in 

section 10A(m)(3)(B)(i) of the Exchange 

Act; and (ii) is not an ‘‘interested 

person’’ of the investment company as 

defined in section 2(a)(19) of the 

Investment Company Act of 1940.64 We 

have substituted the section 2(a)(19) test 

for the criteria set forth in section 

10A(m)(3)(B)(ii) of the Exchange Act, 

which would apply to operating 

companies and require that the audit 

committee member not be an affiliated 

person of the issuer or any subsidiary in 

order to be considered ‘‘independent.’’

The section 2(a)(19) test is more 

appropriate for registered investment 

companies because it is tailored to 

capture the broad range of affiliations 

with investment advisers, principal 

underwriters, and others that are 

relevant to ‘‘independence’’ in the case 

of investment companies.

The proposed disclosure requirements 

would apply to all registered 

management investment companies, 

regardless of whether they are required 

to file reports under section 13(a) or 

15(d) of the Exchange Act. They would 

not apply to unit investment trusts, 

which are unmanaged investment 

companies that hold specified securities 

and, unlike managed investment 

companies, are not required to provide 

shareholder reports containing audited 

financial statements. 

Request for Comment

• Should the definition of ‘‘financial 

expert’’ be modified for investment 

companies? Are the factors that are 

relevant in determining whether 

someone is a ‘‘financial expert’’

different for investment companies? 

• What definition of ‘‘independence’’

should the disclosure requirements 

apply with respect to financial experts? 

Should the definition incorporate the 

criteria set forth in section 

10A(m)(3)(B)(i) of the Exchange Act and 

section 2(a)(19) of the Investment 

Company Act, as proposed, or a 

different test, for example, the test used 

for operating companies? 

• Should disclosure with respect to 

financial experts on an investment 

company’s audit committee be required 

annually, as proposed? Should this 

disclosure be required on each report on 

Form N–CSR or N–SAR, i.e., semiannually? 

• For investment companies that 

would be required to file reports on 

proposed Form N–CSR, should the 

financial experts disclosure be required 

on Form N–CSR or Form N–SAR? 

Should small business investment 

companies, which otherwise would not 

be required to file proposed Form N–

CSR, be required to use Form N–CSR for 

this purpose? 

B. Proposed Code of Ethics Disclosure 

1. Proposed Rules Compared to Section 

406 of the Sarbanes-Oxley Act 

Section 406(a) of the Sarbanes-Oxley 

Act directs the Commission to issue 

rules requiring a company that is subject 

to the reporting requirements of section 

13(a) or 15(d) of the Exchange Act to 

disclose whether or not the company 

has adopted a code of ethics for its 

senior financial officers that applies to 

the company’s principal financial 

officer and controller or principal 

accounting officer, or persons 

performing similar functions. The 

Sarbanes-Oxley Act states that the rules 

also must require companies that have 

not adopted such a code of ethics to 

explain why they have not done so. 

The Act defines the term ‘‘code of 

ethics,’’ as used in section 406, to mean 

such standards as are reasonably 

necessary to promote: 

• Honest and ethical conduct, 

including the ethical handling of actual 

or apparent conflicts of interest between 

personal and professional relationships; 

• Full, fair, accurate, timely and 

understandable disclosure in the 

periodic reports required to be filed by 

the issuer; and 

• Compliance with applicable 

governmental rules and regulations. 

Section 406(b) of the Sarbanes-Oxley 

Act further directs the Commission to 

require a company subject to the 

Exchange Act reporting requirements to 

immediately disclose on Form 8–K, or 

by Internet or other electronic means of 

dissemination, any change in, or waiver 

of, a provision of its code of ethics for 

its senior financial officers. 

Although section 406 of the SarbanesOxley Act focuses on whether or not a 

company has adopted a code of ethics 

applicable to its senior financial 

officers, we believe that it is appropriate 

to propose rules that also apply to a 

company’s principal executive officer. 

Investors not only have an interest in 

knowing whether a public company 

holds its senior financial officers to 

certain ethical standards, but also 

whether a public company holds its 

principal executive officer to ethical 

standards as well. Therefore, we believe 

that it is consistent with the purposes of 

the Sarbanes-Oxley Act to extend the 

scope of section 406 to also include a 

company’s principal executive officer. 

Specifically, we propose to require a 

company to disclose whether it has 

adopted a written code of ethics that 

applies to its principal executive officer, 

principal financial officer, principal 

accounting officer or controller, or 

persons performing similar functions. 

We also propose to broaden the 

definition of the term ‘‘code of ethics’’

used in section 406 of the SarbanesOxley Act to include three additional 

factors described in more detail below. 

2. Description of the Proposed Code of 

Ethics Disclosure Requirements 

We propose to add new Item 406 to 

Regulations S–B and S–K, new Item 

15(c) to Form 20–F and new Instruction 

B.(9) to Form 40–F to require a company 

subject to the Exchange Act reporting 

requirements to disclose: 

• Whether the company has adopted 

a written code of ethics that applies to 

the company’s principal executive 

officer, principal financial officer, 

principal accounting officer or 

controller, or persons performing 

similar functions; 65 and

• If the company has not adopted 

such a code of ethics, the reasons it has 

not done so. 

For purposes of this new disclosure 

item, we would define the term ‘‘code 

of ethics’’ to mean a codification of 

standards that is reasonably designed to 

deter wrongdoing and to promote: 66

(1) Honest and ethical conduct, 

including the ethical handling of actual 

Federal Register / Vol. 67, No. 210 / Wednesday, October 30, 2002 / Proposed Rules 66215

67Under our proposal, although the company 

would retain discretion to determine the identity of 

the appropriate person or persons, such person 

should not be involved in the matter giving rise to 

the conflict of interest. Furthermore, we believe the 

person identified in the code should have sufficient 

status within the company to engender respect for 

the code and the authority to adequately deal with 

the persons subject to the code regardless of their 

stature in the company.

68We propose to add ‘‘laws’’ to this prong of the 

proposed definition. The Sarbanes-Oxley Act 

section 406(c) definition refers only to compliance 

with applicable governmental rules and regulations. 

This language also is intended to ensure 

compliance with other provisions of the SarbanesOxley Act, including ‘‘up-the-ladder’’ reporting by 

lawyers, ‘‘whistleblower’’ protection and the 

enhanced conflict of interest provisions.

69The concerns regarding the identification of 

appropriate persons for the reporting of potential 

conflicts of interest discussed above would 

similarly apply to the reporting of violations of the 

code.

70There are a number of provisions in the 

Sarbanes-Oxley Act that require internal reporting 

of events. We believe that it is incumbent upon 

public companies to coordinate these requirements.

71See proposed Item 601(b)(14) of Regulations S–

K and S–B. Section 406 of the Sarbanes-Oxley Act 

does not state that our rules must require a 

company to file a copy of the code of ethics as an 

exhibit to its annual report, but we think investors 

may be interested in examining the actual code 

itself, given that codes are likely to vary 

significantly from one company to another.

72Exchange Act Rule 3b–7 [17 CFR 240.3b–7] 

defines the term ‘‘executive officer’’ as a registrant’s 

president, any vice president of the registrant in 

charge of a principal business unit, division or 

function (such as sales, administration or finance), 

any other officer who performs a policy-making 

function or any other person who performs similar 

policy-making functions for the registrant. 

Executive officers of subsidiaries may be deemed 

executive officers of the registrant if they perform 

such policy-making functions for the registrant.

73On August 16, 2002, NYSE submitted proposed 

new listing standards that would, among other 

things, require all NYSE listed companies to adopt 

a code of business conduct and ethics consistent 

with the principles enumerated in the listing 

standards. See File No. SR–NYSE–2002–33. The 

NASD has indicated that it intends to propose new 

listing standards that would require a code of 

conduct for NASDAQ listed companies.

74This disclosure would be required by Item 10 

of Form 10–K and Item 9 of Form 10–KSB.

or apparent conflicts of interest between 

personal and professional relationships; 

(2) Avoidance of conflicts of interest, 

including disclosure to an appropriate 

person or persons identified in the 

code 67 of any material transaction or 

relationship that reasonably could be 

expected to give rise to such a conflict;

(3) Full, fair, accurate, timely, and 

understandable disclosure in reports 

and documents that a company files 

with, or submits to, the Commission and 

in other public communications made 

by the company; 

(4) Compliance with applicable 

governmental laws, rules and 

regulations; 68

(5) The prompt internal reporting to 

an appropriate person or persons 

identified in the code of violations of 

the code; 69 and

(6) Accountability for adherence to 

the code. 

The second, fifth and sixth prongs of 

this proposed definition supplement the 

requirements specified by section 406 of 

the Sarbanes-Oxley Act. We believe that 

these items are consistent with the 

objectives of that section. A 

comprehensive code of ethics should set 

forth guidelines requiring avoidance of 

conflicts of interests and material 

transactions or relationships involving 

potential conflicts of interests without 

proper approval. Moreover, an effective 

code of ethics should describe the 

company’s system for the internal 

reporting of code violations.70 The code 

also should state clearly the 

consequences for non-adherence to code 

provisions.

In addition to providing the required 

disclosure, a company also would have 

to file a copy of its ethics code as an 

exhibit to its annual report.71 We 

believe investors would find such 

disclosure useful.

Request for Comment 

• Should the rules address whether a 

company has a code of ethics that 

applies to its principal executive officer, 

as proposed, or should the rules track 

the language of section 406 of the 

Sarbanes-Oxley Act and require a 

company only to disclose whether it has 

a code of ethics that applies to its senior 

financial officers? 

• Should we expand the definition of 

‘‘code of ethics,’’ as proposed, or should 

the definition adhere to the language in 

section 406(c) of the Sarbanes-Oxley 

Act? Are there other ethical principles 

that should be included in the 

definition? 

• Should the rules cover a broader 

group of officers? If so, which group of 

officers should they cover? Should the 

general counsel be covered? Should all 

executive officers be covered? 72

• Should the proposed rules require a 

company to disclose whether it has a 

code of ethics that applies to its 

directors? Do most companies have a 

code of ethics that applies to the board 

of directors? Does the same code of 

ethics generally apply to the company’s 

executive officers and its directors?

• Should we require the company to 

describe its procedures to ensure 

compliance with the code of ethics? 

• Should we require the company to 

describe its procedures for granting a 

waiver from a provision of its code of 

ethics? 

• Should we require the company to 

disclose the date of adoption of its code 

of ethics and the date of the most recent 

update or the company’s frequency of 

review of the code? 

• Should the company have to file the 

code of ethics as an exhibit to its annual 

report as proposed? If not, should we 

also require the company to describe the 

principal topics that the code addresses? 

• Should we require disclosure 

regarding the existence of a code of 

ethics in our other reports and 

registration statements, including our 

Securities Act and Exchange Act 

registration statements? 

3. Content of the Code of Ethics 

The proposed rules do not specify 

every detail that the company must 

address in its code of ethics, or 

prescribe any specific language that the 

code of ethics must include. They 

further do not specify the procedures 

that the company should develop, or the 

types of sanctions that the company 

should impose, to ensure compliance 

with its code of ethics. We believe that 

ethics codes do, and should, vary from 

company to company and that decisions 

as to the specific provisions of the code, 

compliance procedures and disciplinary 

measures for ethical breaches are best 

left to the company. In addition, such an 

approach is consistent with our 

disclosure-based regulatory scheme. 

Many companies already maintain 

codes of ethics or conduct.73 These 

codes often contain specific policies and 

restrictions addressing, among other 

things, such issues as insider trading 

and conflicts of interest. The proposed 

rules would not require a company to 

adopt a code of ethics if it has not 

already done so, or to amend its existing 

code of ethics, but they would require 

a company that does not have a code of 

ethics that meets the definition in the 

rule for the specified officers to explain 

why it does not have such a code. A preexisting ethics code may satisfy the 

requirements of proposed Item 406, but 

a company should review its code upon 

our adoption of final rules to determine 

whether the code meets all of the 

standards included in the rules’

definition of a ‘‘code of ethics.’’ If a 

company has a code, but it does not 

satisfy all parts of the definition, the 

company would not be able to affirm 

that it has the type of code 

contemplated by the rules.

4. Types of Companies That Would Be 

Subject to the Proposed Code of Ethics 

Disclosure Requirements and Location 

of the Disclosure 

All companies that file Form 10–K or 

10–KSB reports would be subject to the 

proposed disclosure requirement.74 We 

66216 Federal Register / Vol. 67, No. 210 / Wednesday, October 30, 2002 / Proposed Rules 

75Under the proposed rules this would also 

include an implicit waiver due to inaction on the 

part of the company with respect to a reported or 

known violation of a code provision.

76See Release No. 33–8106 (June 17, 2002) [67 FR 

42914].

77See proposed Item 5.05 to Form 8–K. In Release 

No. 33–8106, we proposed to reorganize and 

renumber the Form 8–K items as part of our Form 

8–K proposals. The proposed Item 5.05 designation 

is consistent with the renumbering scheme 

proposed in that release.

78A two business day filing period is consistent 

with the accelerated filing deadline that we 

proposed in Release No. 33–8106.

79Section 406(b) of the Sarbanes-Oxley Act states 

that our rules should require a company to report 

this disclosure on Form 8–K or by ‘‘dissemination 

by the Internet or by other electronic means.’’ Our 

proposed rules would permit optional 

dissemination of the required disclosure through 

the company’s website; it is not clear whether there 

are ‘‘other electronic means’’ that would result in 

widespread dissemination of the disclosure that 

would be accessible by a company’s investors and 

potential investors. This release seeks comment on 

that issue.

80We are allowing website disclosure in these 

limited circumstances consistent with the terms of 

section 406 of the Sarbanes-Oxley Act. The present 

proposal does not indicate that the Commission 

deems website postings as sufficient to broadly and 

simultaneously disseminate information to the 

public in other contexts.

81A company choosing to post proposed 

disclosure about a change to its code of ethics on 

its website also would have to post a copy of the 

amended provision on its website.

82See proposed Item 406(b) of Regulations S–K 

and S–B. Because investors may not expect these 

disclosures to be made on the company’s website 

in lieu of a Form 8–K filing, we are proposing to 

require a company to provide investors with 

advance notice that it may choose to use this 

option. Otherwise, investors may be confused 

regarding the location of this disclosure.

83Proposed Item 406 of Regulations S–B and S–

K.

also propose to require this disclosure 

in annual reports filed by a foreign 

private issuer on Form 20–F and by a 

Canadian issuer on Form 40–F.

Request for Comment 

• Should we require a company to 

also provide the proposed code of ethics 

disclosure in its quarterly reports? 

Should such disclosure be made in a 

company’s proxy and information 

statements? Should it be disclosed in 

Securities Act registration statements?

• Should the requirement apply to 

foreign private issuers, as proposed? If 

not, why? 

5. Proposed Form 8–K or Internet 

Disclosure Regarding Changes to, or 

Waivers From, the Code of Ethics 

Section 406(b) of the Sarbanes-Oxley 

Act directs us to require ‘‘immediate 

disclosure’’ by a company of any change 

to, or waiver from, the company’s code 

of ethics for its senior financial 

officers.75 As discussed above, we 

propose to require the basic ethics code 

disclosure with respect to a company’s 

principal executive officer as well as to 

its senior financial officers. We therefore 

also propose to require current 

disclosure regarding changes to, or the 

company’s grant of a waiver from, a 

provision of the code of ethics that 

applies to these same persons.

On June 17, 2002, we proposed 

amendments to Form 8–K that would 

expand significantly the number of 

disclosure items triggering a Form 8–K 

filing requirement and accelerate the 

Form 8–K filing deadline.76 In those 

proposals, we stated that we were 

reviewing possible changes by selfregulatory organizations to their 

corporate governance provisions, 

including changes that would require a 

company to promptly disclose any 

revision that it makes to its code of 

ethics, or ethics waiver that it grants.

In light of the directive in section 

406(b), we propose to add an item to the 

list of Form 8–K triggering events to 

require disclosure of the following: 

• A change to a company’s code of 

ethics that applies to the specified 

officers; or 

• A grant of a waiver of an ethics 

code provision to a specified officer.77

If choosing to provide the required 

disclosure on Form 8–K, the company 

would have to file the report within two 

business days after it made the change 

or granted the waiver.78 As an 

alternative to reporting this information 

on Form 8–K, section 406(b) of the 

Sarbanes-Oxley Act contemplates a 

company’s use of the Internet as a 

method of disseminating this 

disclosure.79 Many companies maintain 

websites to provide information about 

themselves to the public. A company’s 

website is often an obvious place for 

investors to find information about a 

company.80 We therefore propose to 

allow a company to use its own Internet 

website, if it has a website, as an 

alternative means of disseminating the 

proposed required disclosure about 

changes in, or waivers from, its code of 

ethics.81 Under the proposed rules, a 

company would be able to take 

advantage of the Internet dissemination 

option only if it had disclosed in its 

most recently filed annual report on 

Form 10–K or 10–KSB: 82

• That it intends to disclose these 

events on its Internet website, and 

• Its Internet website address. 

If a company elects to disclose this 

information on its website, it would 

have to do so within the same twobusiness day time period that we 

propose to require for Form 8–K filings. 

In addition, we propose that a company 

electing to provide disclosure in this 

manner would have to make the 

disclosure available on its website for a 

period of at least 12 months after it 

initially posts the disclosure. Although 

the proposed rules would permit a 

company to remove information from its 

website after the 12-month posting 

period, we propose to require the 

company to retain this disclosure for a 

period of not less than five years and to 

make it available to the Commission or 

its staff upon request.83 We propose a 

12-month period because we believe 

that it would be inappropriate to allow 

a company to comply with this 

provision by only briefly posting the 

disclosure on its website. Reports on 

Form 8–K are available to the public 

indefinitely after filing with the 

Commission.

Request for Comment 

• Are there any privacy concerns that 

we should consider that would warrant 

narrowing the disclosure requirements 

regarding a grant of a waiver from the 

code? 

• Is a ‘‘waiver’’ a sufficiently distinct 

and formal event that the obligation to 

disclose will not present any difficulties 

of interpretation? Should we modify the 

requirement to ensure that ‘‘de facto, 

post hoc’’ waivers of codes’granted or 

acceded to after the occurrence of the 

‘‘violation’’ are reported? 

• Should companies that use the 

Internet for these disclosures also be 

required to have technology that allows 

investors to be notified by e-mail when 

new information is posted to the 

website? 

• Should we require the filing of a 

Form 8–K regardless of whether a 

company provides the proposed 

disclosure on its website? Do investors 

need access to this information for 

longer than 12 months? How can we 

permit Internet disclosure and maintain 

a lasting public record of the 

information?

• Should we specify where and how 

this disclosure should appear on a 

company’s website if the company opts 

for the website method of 

dissemination? 

• Are there other means of electronic 

dissemination that our proposed rules 

should permit? 

• Should we require a company 

choosing to disclose information about 

ethics code changes or waivers through 

its Internet website to provide advance 

notice in the company’s annual report of 

its intent to satisfy the disclosure 

requirements in this manner, as 

proposed? 

• Should we require all Exchange Act 

reporting companies to disclose their 

website addresses? If so, should we 

Federal Register / Vol. 67, No. 210 / Wednesday, October 30, 2002 / Proposed Rules 66217

84See Exchange Act Rules 13a–11 and 15d–11 [17 

CFR 240.13a–11 and 15d–11].

85Referenced in 17 CFR 249.306.

86See Exchange Act Rule 13a–16 [17 CFR 

240.13a–16].

87See proposed Instructions (a)(1) and (a)(7) to 

Item 102P3 of Form N–SAR; proposed Item 3(a) and 

proposed instruction to Item 3(a) of proposed Form 

N–CSR. In the case of a UIT, the code of ethics 

disclosure requirements would apply with respect 

to the UIT’s sponsor, depositor, trustee, and 

principal underwriter. Proposed Item 133(a) of 

Form N–SAR.

88Proposed Item 133(a) and Instruction (a)(1) to 

Item 102P3 of Form N–SAR; proposed Item 3(a) of 

Form N–CSR.

89Proposed Item 133(b) and (c), proposed 

Instructions (a)(2) and (a)(3) to Item 102P3 and 

proposed Instruction (c) to Item 133 of Form N–

SAR; proposed Item 3(b) and 3(c) and proposed 

Instruction 3 to Item 3 of proposed Form N–CSR.

90 Item 134(b) and proposed Instruction (a)(4) to 

Item 102P3 of Form N–SAR; proposed Item 6(b) of 

proposed Form N–CSR.

91See proposed Item 3 of proposed Form N–CSR 

(management investment companies, other than 

SBICs); proposed Instruction (a) to Item 102P3 of 

Form N–SAR (SBICs); proposed Items 133 and 

134(b) of Form N–SAR (UITs).

92Proposed Instruction (a)(6) to Item 102P3 and 

proposed Instruction (b) to Item 133 of Form N–

SAR; proposed Instruction 2 to Item 3 of proposed 

Form N–CSR. See Section II.B.2. above, 

‘‘Description of the Proposed Code of Ethics 

Disclosure Requirements.’’

93 17 CFR 270.17j–1.

94Proposed General Instruction D to Form N–CSR 

would permit a registered management investment 

company to incorporate its code of ethics by 

reference from another document, such as the 

fund’s registration statement. See Item 23(p) of 

Form N–1A; Item 24.2.r of Form N–2; Item 28(b)(17) 

of Form N–3 (requiring codes of ethics required by 

Rule 17j–1 to be filed as exhibits to registration 

statements).

specify the location of this disclosure? 

For example, should it have to appear 

on the front cover of all periodic and 

current reports, along with the 

company’s street address? Should a 

company have to disclose its website 

address in, or on the front cover of, all 

of its Exchange reports? Proxy and 

information statements? Exchange Act 

registration statements? Securities Act 

registration statements? 

Foreign Private Issuers 

Foreign private issuers are not 

required to file current reports on Form 

8–K.84 Instead, they are required to file 

under the cover of Form 6–K 85 copies 

of all information that the foreign 

private issuer: makes, or is required to 

make, public under the laws of its 

jurisdiction of incorporation; files, or is 

required to file, under the rules of any 

stock exchange; or otherwise distributes 

to its security holders.86 We do not 

propose to change these reporting 

requirements. We are proposing changes 

to Form 20–F and 40–F that would 

require a foreign private issuer to 

disclose any change to its code of ethics 

made during the foreign private issuer’s 

past fiscal year that applies to the 

foreign private issuer’s senior officers. 

The foreign private issuer additionally 

would have to file the change as an 

exhibit to Form 20–F or 40–F. Under the 

proposals, a foreign private issuer also 

would have to disclose any grant of a 

waiver from the code by the company to 

one of these officers, that occurred 

during the foreign private issuer’s last 

fiscal year. A foreign private issuer 

could also make the disclosure under 

cover of a Form 6–K or on its Internet 

website. We plan to strongly encourage 

foreign private issuers to make these 

disclosures promptly.

Request for Comment 

• Should we require foreign private 

issuers to file disclosure about ethics 

code changes and waivers within two 

days under cover of Form 6–K? Should 

we otherwise require a foreign private 

issuer to promptly disclose ethics code 

changes and waivers? 

6. Registered Investment Companies 

We are proposing to amend Forms N–

SAR and N–CSR to require a registered 

investment company to: 

• Disclose annually whether each of 

the investment company, its investment 

adviser, and its principal underwriter 

has adopted a written code of ethics that 

applies to the principal executive 

officer, principal financial officer, 

principal accounting officer or 

controller, or persons performing 

similar functions of, respectively, the 

investment company, its investment 

adviser, and its principal underwriter;87

• If the investment company, its 

investment adviser, or its principal 

underwriter has not adopted a code of 

ethics, explain why it has not done so;88

• If the investment company, its 

investment adviser, or its principal 

underwriter has, during the period 

covered by the report, amended or 

granted a waiver from any code of ethics 

applicable to the investment company’s, 

investment adviser’s, or principal 

underwriter’s principal executive 

officer, principal financial officer, 

principal accounting officer or 

controller, or persons performing 

similar functions, provide a brief 

description of the amendment or waiver 

in the investment company’s report on 

proposed Form N–CSR or Form N–SAR, 

as applicable. In the alternative, the 

investment company may disclose this 

information on its Internet website 

within two business days after the 

occurrence of the amendment or waiver, 

if the investment company has 

disclosed in its most recently filed 

report on Form N–SAR or N–CSR its 

intention to provide disclosure in this 

manner and its Internet address, it 

makes the information available on its 

website for a 12-month period, and it 

retains the information for a period of 

not less than six years following the end 

of the fiscal year in which the 

amendment or waiver occurred; 89 and

• Include any written code of ethics 

and amendment to that code of ethics as 

an exhibit to the investment company’s 

reports on Form N–CSR or N–SAR.90

The proposed disclosure requirements 

would apply to all registered investment 

companies, regardless of whether they 

are required to file reports under section 

13(a) or 15(d) of the Exchange Act. 

Management investment companies 

generally would provide the required 

disclosure on proposed Form N–CSR, 

and small business investment 

companies and unit investment trusts 

would provide the required disclosure 

on Form N–SAR.91 The proposed 

amendments would apply the same 

definition of a code of ethics that we are 

proposing for operating companies.92

We recognize that Investment 

Company Act Rule 17j–1 currently 

requires investment companies, and 

their investment advisers and principal 

underwriters, to adopt codes of ethics 

designed to prevent fraud resulting from 

personal trading in securities by 

portfolio managers and other 

employees.93 The amendments we are 

proposing today would address a 

broader range of conduct, including 

disclosure provided in filings with the 

Commission; compliance with 

governmental laws, rules and 

regulations; and ethical conduct 

generally, including the handling of 

actual or apparent conflicts of interest. 

As a result, we believe that the 

proposals should apply with equal force 

to investment companies and operating 

companies. However, to the extent that 

an investment company, or its 

investment adviser or principal 

underwriter, is considering 

implementing new or changed code of 

ethics provisions as a result of today’s 

proposals, it may wish to incorporate 

these provisions, together with its 

existing code of ethics under Rule 17j–

1, into a single comprehensive code of 

ethics.94

The proposed disclosure requirements 

would generally cover the same entities 

covered by Rule 17j–1 (investment 

companies, investment advisers, 

principal underwriters) because these 

are the entities with respect to which 

conflicts of interest and other ethical 

issues are most likely to arise. Like Rule 

17j–1, the proposed amendments would 

cover the code of ethics of an 

66218 Federal Register / Vol. 67, No. 210 / Wednesday, October 30, 2002 / Proposed Rules 

95Proposed Instruction 1 to Item 3 of proposed 

Form N–CSR; proposed Instruction (a)(5) to Item 

102P3 of Form N–SAR. See also Investment 

Company Act Rule 17j–1(c)(3) [17 CFR 270.17j1(c)(3)].

96Proposed Items 133 and 134(b) of Form N–SAR.

97Proposed Instruction (a) to Item 133 of Form N–

SAR.

98See Investment Company Act Rule 31a–2 [17 

CFR 270.31a–2] (requiring retention by registered 

investment companies of various types of records 

for not less than six years).

99Section 404 of the Sarbanes-Oxley Act, and any 

rules of the Commission under section 404, do not 

apply to any registered investment company. 

Section 405 of the Sarbanes-Oxley Act. See section 

II.C.4 below ‘‘Registered Investment Companies.’’

100Section 404 also requires every registered 

public accounting firm that prepares or issues an 

audit report for a company to attest to, and report 

on, the assessment made by the management of a 

company.

101Title I of Pub. L. 95–213 (1977). Partially 

codified in 15 U.S.C. 78m(b)(2), these provisions 

require issuers, with securities registered under 

section 12 of the Exchange Act, to make and keep 

books, records, and accounts, which, in reasonable 

detail, accurately and fairly reflect the transactions 

and dispositions of the assets of the issuer; and to 

devise and maintain a system of internal accounting 

control sufficient to provide reasonable assurances 

that: (i) transactions are executed in accordance 

with management’s general or specific 

authorization; (ii) transactions are recorded as 

necessary (a) to permit preparation of financial 

statements in conformity with generally accepted 

accounting principles or any other criteria 

applicable to such statements, and (b) to maintain 

accountability for assets; (iii) access to assets is 

permitted only in accordance with management’s 

general or specific authorization; and (iv) the 

recorded accountability for assets is compared with 

the existing assets at reasonable intervals and 

appropriate action is taken with respect to any 

differences.

102Release No. 34–15772 (April 30, 1979) [44 FR 

26702].

103Release No. 34–16877 (June 6, 1980) [45 FR 

40134].

investment company’s principal 

underwriter only if: (i) The principal 

underwriter is an affiliated person of the 

investment company or the investment 

company’s investment adviser; or (ii) an 

officer, director, or general partner of 

the principal underwriter serves as an 

officer, director, or general partner of 

the investment company or of its 

investment adviser.95 Unit investment 

trusts do not have a corporate-type 

management structure, but rather are 

created by a sponsor or depositor that 

accumulates a portfolio of securities and 

deposits them with a trustee under the 

terms of a trust indenture. Therefore, a 

unit investment trust would not be 

required to disclose whether it has a 

code of ethics because it has no officers. 

Rather, for unit investment trusts, we 

are proposing to require disclosure with 

respect to codes of ethics of the trust’s 

sponsor, depositor, trustee or principal 

underwriter.96 For unit investment 

trusts, the proposed amendments would 

cover the code of ethics of a principal 

underwriter only if: (i) The principal 

underwriter is an affiliated person of the 

trust or the trust’s sponsor, depositor, or 

trustee; or (ii) an officer, director, or 

general partner of the principal 

underwriter serves as an officer, 

director, or general partner of the trust’s 

sponsor, depositor, or trustee.97

Request for Comment 

• Is the proposed definition of a code 

of ethics appropriate? Are there any 

modifications that should be made to 

this definition in the case of investment 

companies? 

• Do the proposed code of ethics 

disclosure requirements cover the 

appropriate entities, in addition to the 

registered investment company itself? 

Should any entities be removed, or 

should other entities (e.g., the 

administrator) be added? 

• Do the code of ethics disclosure 

requirements cover the appropriate 

individuals at those entities? Should 

any of these individuals be removed, or 

should other individuals be added? 

• Should we require registered 

investment companies, like domestic 

operating companies, to use Form 8–K 

to disclose amendments to, or waivers 

of, a code of ethics within two business 

days? Or is our proposed approach of 

requiring periodic reporting of this 

information on Form N–CSR or Form 

N–SAR appropriate? Should we propose 

a separate form for prompt reporting of 

this information? If we require periodic 

reporting of amendments and waivers 

on Forms N–CSR and N–SAR, is the 

proposed alternative option for 

disclosure of amendments and waivers 

on the investment company’s Internet 

website within two business days 

necessary or appropriate? 

• For what period of time should we 

require an investment company to retain 

information about amendments to, or 

waivers from, codes of ethics, if it elects 

to post this information on its website? 

Should the retention period be not less 

than six years from the end of the fiscal 

year in which the amendment or waiver 

occurred, which would be consistent 

with the standard retention period for 

investment company records, or should 

it be some other period?98

C. Management’s Internal Controls and 

Procedures for Financial Reporting 

1. Management’s Internal Control Report 

Section 404 of the Sarbanes-Oxley Act 

directs the Commission to prescribe 

rules that would require each annual 

report that a company, other than a 

registered investment company,99 files 

pursuant to Section 13(a) or 15(d) of the 

Exchange Act to contain an internal 

control report: (1) Stating management’s 

responsibilities for establishing and 

maintaining adequate internal control 

structure and procedures for financial 

reporting; and (2) containing an 

assessment, as of the end of the 

company’s most recent fiscal year, of the 

effectiveness of the company’s internal 

controls and procedures for financial 

reporting.100

Twice in the past, the Commission 

has proposed an internal control report 

requirement. First, in 1979, following 

enactment of the Foreign Corrupt 

Practices Act (‘‘FCPA’’),101 we proposed 

rules that would have required a 

company to annually disclose certain 

information about its internal 

accounting controls.102 The proposed 

rules would have required a company’s 

management to state its opinion as to 

whether the company’s systems of 

internal accounting control provided 

reasonable assurance that:

• Transactions were executed in 

accordance with management’s general 

and specific authorization; 

• Transactions were recorded as 

necessary: (a) To permit preparation of 

financial statements in conformity with 

generally accepted accounting 

principles (or other applicable criteria); 

and (b) to maintain accountability for 

assets; 

• Access to assets was permitted in 

accordance with management’s general 

or specific authorization; and 

• The recorded accountability for 

assets was compared with the existing 

assets at reasonable intervals and 

appropriate action was taken with 

respect to any differences.

The proposed rules also would have 

required an independent public 

accountant to examine and report on 

management’s statement. 

Commenters criticized the 1979 

proposal for the scope and content of 

the proposed management statement, 

and its close correlation to the FCPA 

requirements. Many commenters 

viewed the proposal as requiring a 

report on compliance with the law. 

Others pointed to the significant 

voluntary and private-sector initiatives 

that had been undertaken in this area 

and urged us not to preempt such efforts 

by promulgating formal legal 

requirements. While we did not agree 

with all of the commenters’ concerns, 

the Commission at that time decided not 

to proceed with the rulemaking to allow 

existing voluntary and private-sector 

initiatives for public reporting on 

internal accounting control to continue 

to develop. In 1980, the Commission 

formally withdrew the proposal.103

Federal Register / Vol. 67, No. 210 / Wednesday, October 30, 2002 / Proposed Rules 66219

104Release No. 34–25925 (July 19, 1988) [53 FR 

28009].

105Committee of Sponsoring Organizations of the 

Treadway Commission, Internal Control—

Integrated Framework, (August 1992) (the ‘‘COSO 

Report’’).

106A proposed instruction to Item 307 of 

Regulations S–K and S–B, Item 15(a) of Form 20–

F and Instruction B.(7) of Form 40–F states that if 

the conclusions of the company’s principal 

executive and financial officers are reflected in 

management’s conclusions disclosed in the internal 

control report, the company does not have to 

include any separate disclosure required by Item 

307(a) (or relevant provision in the foreign forms) 

regarding the conclusions of those officers about the 

effectiveness of the company’s internal controls and 

procedures for financial reporting in its report for 

its fourth fiscal quarter. Another proposed 

instruction to those provisions states that the 

company is encouraged, but not required, to 

include the disclosure required by Item 307(b) (or 

relevant provision in the foreign forms) for the 

company’s fourth fiscal quarter in the annual 

internal control report, rather than disclose this 

information separately.

107See American Institute of Certified Public 

Accountants (AICPA), Codification of Statements 

on Auditing Standards (AU) 319.53, ‘‘Internal 

Control in a Financial Statement Audit.’’

108 In this release we use the term ‘‘internal 

controls’’ and ‘‘internal control structure’’

synonymously.

109See Release No. 33–8124 (August 29, 2002) [67 

FR 57276].

110See Committee on Auditing Procedure, 

AICPA, Statement on Auditing Procedure No. 29, 

‘‘Scope of the Independent Auditor’s Review of 

Internal Control’’ (1958).

111See Committee on Auditing Procedure, 

AICPA, Statement on Auditing Procedure No. 54. 

The FCPA codified the accounting control 

provisions of SAP No. 54, see note 58.

Following the recommendations of 

the Treadway Commission, the 

Commission again proposed rules in 

1988 that would have required 

companies to include in their annual 

reports a report of management’s 

responsibilities with respect to financial 

reporting, including its responsibilities 

for the company’s internal control 

system, and an assessment of the 

effectiveness of that system.104 Our 1988 

proposal differed from the 1979 

proposal in several respects. Under the 

1988 proposal, management’s report 

would have been signed on behalf of the 

company’s principal executive, 

financial, and accounting officers, and 

would have contained:

• A description of management’s 

responsibilities for the preparation of 

the company’s financial statements and 

other financial information included in 

a document containing the financial 

statements; 

• A description of management’s 

responsibilities for establishing and 

maintaining a system of internal control 

directly related to, and designed to 

provide reasonable assurance as to the 

integrity and reliability of, financial 

reporting; 

• An assessment of the effectiveness 

of the company’s system of internal 

control that encompassed material 

matters; and 

• A statement of how management 

responded to any significant 

recommendations concerning its system 

of internal controls made by its internal 

auditors and its independent 

accountants.

Our 1988 proposal attempted to avoid 

a direct correlation with the FCPA by 

including a materiality threshold and 

focusing on the company’s entire system 

of internal controls, rather than just its 

internal accounting controls. We 

received more than 180 comment letters 

in response to the 1988 proposal, with 

a majority of commenters supporting it. 

Many commenters, however, expressed 

concern over being required to disclose 

management’s response to significant 

auditor recommendations on the 

management report. Furthermore, 

several commenters noted that private 

sector organizations were working to 

develop standards for reporting on the 

effectiveness of a company’s internal 

controls.105 The Commission did not act 

on the proposals.

In light of the mandates of the 

Sarbanes-Oxley Act, we again are 

proposing to require companies to 

include a report on their internal 

controls and procedures for financial 

reporting in their annual reports. 

a. Proposed Disclosure 

We propose to amend Item 307 of 

Regulations S–K and S–B, as well as 

Forms 20–F and 40–F, to require a 

company’s annual report to include an 

internal control report of management 

that includes: 

• A statement of management’s 

responsibilities for establishing and 

maintaining adequate internal controls 

and procedures for financial reporting; 

• Conclusions about the effectiveness 

of the company’s internal controls and 

procedures for financial reporting based 

on management’s evaluation of those 

controls and procedures in accordance 

with Exchange Act Rule 13a–15 or 15d–

15, as of the end of the company’s most 

recent fiscal year; 106 and

• A statement that the registered 

public accounting firm that prepared or 

issued the company’s audit report 

relating to the financial statements 

included in the company’s annual 

report has attested to, and reported on, 

management’s evaluation of the 

company’s internal controls and 

procedures for financial reporting.

The proposed amendments do not 

specify the exact content of the 

proposed management report, as this 

likely would result in boilerplate 

responses of little value. We believe that 

management should tailor the report to 

the company’s circumstances. 

b. Internal Controls and Procedures for 

Financial Reporting 

A key aspect of management’s 

responsibility for the preparation of 

financial information is its 

responsibility to establish and maintain 

an internal control system.107 On 

August 29, 2002, we issued a release 

adopting new Exchange Act Rules 13a–

14 and 15d–14 to implement section 

302 of the Sarbanes-Oxley Act. In that 

release we stated that the term ‘‘internal 

controls’’ 108 as used in section 302 of 

the Sarbanes-Oxley Act is a pre-existing 

concept that pertains to a company’s 

financial reporting and control of its 

assets.109 However, because there are a 

variety of different definitions of the 

term ‘‘internal controls’’ and its 

meaning has changed over time, there 

continues to be confusion regarding the 

meaning and scope of the term.

One of the first attempts to define 

internal controls was reflected in 1958 

in the Statement on Auditing Procedure 

No. 29, in which the Committee on 

Auditing Procedure of the AICPA 

subdivided the definition of internal 

control into the following two 

components: ‘‘administrative control’’

and ‘‘accounting control.’’ 110 This 

statement explained that the term 

‘‘accounting control’’ related directly to 

the safeguarding of assets and the 

reliability of financial records. Examples 

included systems of transaction 

authorization and approval, physical 

controls over assets, and the plan of 

organization for separating duties 

concerned with record-keeping from 

duties concerned with operations or 

asset custody. ‘‘Administrative control’’

was defined as mainly concerning 

operational efficiency or adherence to 

managerial policies. Examples included 

statistical analyses, performance reports, 

training programs, and quality-control 

procedures.

In 1972, the Statement on Auditing 

Procedure No. 54 redefined the 

administrative control and accounting 

control concepts.111 SAP No. 54 defined 

administrative control as the plan of 

organization, procedures, and records 

concerned with the decision processes 

leading to management’s authorization 

of transactions. Accounting control was 

defined as a plan of organization and 

the procedures and records that are 

concerned with the safeguarding of 

assets and the reliability of financial 

records and consequently are designed 

to provide reasonable assurance that:

66220 Federal Register / Vol. 67, No. 210 / Wednesday, October 30, 2002 / Proposed Rules 

112Auditing Standards Board, AICPA, Statement 

on Auditing Standards No. 78, ‘‘Consideration of 

Internal Control in a Financial Statement Audit: An 

Amendment to SAS No. 55’’ (1995).

113Among other things, section 103 of the Act 

[Pub. L. 107–204 103] directs the Public Company 

Accounting Oversight Board to adopt auditing 

standards that would require all registered public 

accounting firms to present in each audit report or 

in a separate report: (1) The scope of the auditor’s 

testing of the internal control structure and 

procedures of the issuer; (2) the findings of the 

auditor from such testing; (3) the auditor’s 

evaluation of whether such internal control 

structure and procedures include maintenance of 

records that in reasonable detail accurately and 

fairly reflect the transactions and dispositions of the 

assets of the issuer, provide reasonable assurance 

that transactions are recorded as necessary to 

permit preparation of financial statements in 

accordance with generally accepted accounting 

principles, and that receipts and expenditures of 

the issuer are being made only in accordance with 

authorizations of management and directors of the 

issuer; and (4) a description, at a minimum, of 

material weaknesses in such internal controls, and 

of any material noncompliance found on the basis 

of such testing.

114We believe that this definition integrates the 

various concepts of internal control into a unified 

concept that is widely understood by the 

accounting profession and issuers.

115See section 405 of the Sarbanes-Oxley Act, 

which states that rules under section 404 of the Act 

shall not apply to registered investment companies.

116See proposed Items 210.1–02(b) and 210.2–

02(d) of Regulation S–X.

• Transactions are executed in 

accordance with management’s general 

or specific authorization; 

• Transactions are recorded as 

necessary (1) to permit preparation of 

financial statements in conformity with 

generally accepted accounting 

principles; and (2) to maintain 

accountability for assets; 

• Access to assets is permitted only 

by management’s authorization; and 

• The recorded accountability for 

assets is compared with the existing 

assets at reasonable intervals and 

appropriate action is taken with respect 

to any differences. 

In 1992, the Committee of Sponsoring 

Organizations of the Treadway 

Commission (‘‘COSO’’) undertook an 

extensive study of internal control. 

COSO defined internal control as ‘‘a 

process, effected by an entity’s board of 

directors, management and other 

personnel, designed to provide 

reasonable assurance regarding the 

achievement of objectives’ in three 

categories—effectiveness and efficiency 

of operations, reliability of financial 

reporting, and compliance with 

applicable laws and regulations. COSO 

further stated that internal control over 

each of these objectives consisted of the 

control environment, risk assessment, 

control activities, information and 

communication, and monitoring. In 

1995, the AICPA’s Auditing Standards 

Board in Statement on Auditing 

Standards No. 78 codified this 

definition of internal controls.112

We believe that the purpose of 

internal controls and procedures for 

financial reporting is to ensure that 

companies have processes designed to 

provide reasonable assurance that: 

• The company’s transactions are 

properly authorized; 

• The company’s assets are 

safeguarded against unauthorized or 

improper use; and 

• The company’s transactions are 

properly recorded and reported to 

permit the preparation of the registrant’s 

financial statements in conformity with 

generally accepted accounting 

principles. We believe that these 

objectives are embodied in the 

definition of the term ‘‘internal 

controls’’ as the term is defined in 

AICPA’s Codification of Statements on 

Auditing Standards (AU) section 319 

and is consistent with section 103 of the 

Sarbanes-Oxley Act.113 Accordingly, we 

propose to refer to AU section 319 to 

define currently internal controls and 

procedures for financial reporting, 

pending action by the Public Company 

Accounting Oversight Board.114 The 

proposed definition would state that the 

term ‘‘internal controls and procedures 

for financial reporting’’ means controls 

that pertain to the preparation of 

financial statements for external 

purposes that are fairly presented in 

conformity with generally accepted 

accounting principles as addressed by 

the Codification of Statements on 

Auditing Standards 319 or any 

superseding definition or other 

literature that is issued or adopted by 

the Public Company Accounting 

Oversight Board.

Request for Comment 

• Should we propose a definition of 

internal controls and procedures for 

financial reporting? If so, is the 

proposed definition appropriate?

• Should we define the term using 

AICPA’s Codification of Statements on 

Auditing Standards Section 319 

definition? If not, are there any other 

definitions we should use? 

• Should we propose specific 

disclosure criteria and standards for the 

management report? If so, what 

disclosure criteria and standards should 

we consider? 

2. Attestation to, and Report on, 

Management’s Internal Control Report 

by the Company’s Auditor 

Section 404(b) of the Sarbanes-Oxley 

Act requires every registered public 

accounting firm that prepares or issues 

an audit report for an issuer other than 

a registered investment company 115 to 

attest to, and report on, management’s 

assessment of the issuer’s internal 

controls and procedures for financial 

reporting. The attestation and report 

required by section 404(b) must be made 

in accordance with standards for 

attestation engagements ‘‘issued or 

adopted’’ by the Public Company 

Accounting Oversight Board (the 

‘‘PCAOB’’).

We are proposing amendments to 

Regulation S–X to reference the 

attestation report that will be prepared 

by registered public accounting firms 

and to require a company to file the 

attestation in annual reports on Forms 

10–K, 10–KSB, 20–F and 40–F.116

Section 404(b) of the Sarbanes-Oxley 

Act does not require filing of the 

attestation report, but we believe that it 

is essential in satisfying the purposes of 

this provision of the Sarbanes-Oxley Act 

to require a company to file both the 

internal control report and auditor’s 

attestation report in its annual report.

Request for Comment 

• If we adopt the proposed 

amendments before the PCAOB is 

operational, should we delay 

effectiveness of the rules until such time 

as attestation engagements standards are 

issued or adopted by the PCAOB? 

• Should the company have to file the 

attestation report as part of the annual 

report? If so, should the report have to 

appear in a particular part of the annual 

report? Where? 

3. Quarterly Evaluation of Internal 

Controls and Procedures for Financial 

Reporting 

On August 29, 2002, we adopted new 

Exchange Act Rules 13a–14 and 15d–14 

to implement section 302 of the 

Sarbanes-Oxley Act. These rules require 

the principal executive and financial 

officers of reporting companies to certify 

the information in their companies’

quarterly and annual reports. 

Specifically, new Rules 13a–14 and 

15d–14 require each of these officers to 

disclose that: 

• He or she has reviewed the report; 

• Based on his or her knowledge, the 

report does not contain any untrue 

statement of a material fact or omit to 

state a material fact necessary in order 

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 

the report; 

• Based on his or her knowledge, the 

financial statements, and other financial 

information included in the report, 

fairly present in all material respects the 

Federal Register / Vol. 67, No. 210 / Wednesday, October 30, 2002 / Proposed Rules 66221

117These reports include quarterly reports on 

Form 10–Q or 10–QSB, annual reports on Form 10–

K, 10–KSB, 20–F or 40–F, current reports, definitive 

proxy materials filed under section 14(a) of the 

Exchange Act [15 U.S.C. 78n(a)], definitive 

information statements filed under section 14(c) of 

the Exchange Act [15 U.S.C. 78n(c)] and 

amendments to any of these reports or documents.

118See Exchange Act Rules 13a–14(c) and 15d–

14(c).

119 In addition, we adopted corresponding 

amendments to Forms 20–F and 40–F for private 

foreign issuers. See 17 CFR 249.220f and 17 CFR 

249.240f.

120Rules 13a–15(b) and 15d–15(b). As originally 

adopted, Rules 13a–15 and 15d–15 required the 

company to carry out this evaluation under the 

supervision of, and with the participation of the 

company’s management, including the company’s 

principal executive and financial officers. To better 

reconcile this requirement with the proposed rules 

under section 404 of the Sarbanes-Oxley Act, we 

propose to revise these rules to state more directly 

that company’s management, rather than the 

company itself, must undertake the required 

evaluations with the participation of the principal 

executive and financial officers.

121Rules 13a–15(b) and 15d–15(b).

122We have also made several clarifying 

amendments. In particular, the current certification 

would require management to disclose significant 

deficiencies to the auditors and audit committee, 

and identify material weaknesses to the auditors. 

The accounting literature states that a ‘‘reportable 

condition’’ is one that represents significant 

deficiencies in the design or operation of internal 

control. AICPA Codification of Statements on 

Auditing Standards, section 325. A material 

weakness is a reportable condition of a magnitude 

discussed in the literature. Id. Therefore, material 

weaknesses are a subset of significant deficiencies. 

To clarify, and amplify, that significant weaknesses, 

including material weaknesses must be disclosed to 

the auditor and audit committee, we have proposed 

clarifying language. We have also added language 

to clarify that the certifying officers need not 

personally design the company’s controls and 

procedures, and may have such controls and 

procedures designed under their supervision. In so 

doing, we recognize that the certifying officers may 

not have appropriate expertise to do so, and in such 

case should obtain assistance from third parties. We 

have also clarified that the reports conclusions must 

be based on the certifying officers’ evaluation as of 

the end of the period covered by the report.

financial condition, results of operations 

and cash flows of the issuer as of, and 

for, the periods presented in the report; 

• He or she and the other certifying 

officers: 

(1) Are responsible for establishing 

and maintaining ‘‘disclosure controls 

and procedures’’ (a newly-defined term 

reflecting the concept of controls and 

procedures related to disclosure 

embodied in section 302(a)(4) of the 

Sarbanes-Oxley Act) for the issuer; 

(2) Have designed such disclosure 

controls and procedures to ensure that 

material information is made known to 

them, particularly during the period in 

which the periodic report is being 

prepared; 

(3) Have evaluated the effectiveness of 

the issuer’s disclosure controls and 

procedures as of a date within 90 days 

prior to the filing date of the report; and 

(4) Have presented in the report their 

conclusions about the effectiveness of 

the disclosure controls and procedures 

based on the required evaluation as of 

that date; 

• He or she and the other certifying 

officers have disclosed to the issuer’s 

auditors and to the audit committee of 

the board of directors (or persons 

fulfilling the equivalent function): 

(1) All significant deficiencies and 

material weaknesses in the design or 

operation of internal controls (a preexisting term relating to internal 

controls regarding financial reporting) 

which could adversely affect the issuer’s 

ability to record, process, summarize 

and report financial data and have 

identified for the issuer’s auditors any 

material weaknesses in internal 

controls; and 

(2) Any fraud, whether or not 

material, that involves management or 

other employees who have a significant 

role in the issuer’s internal controls; and 

• He or she and the other certifying 

officers have indicated in the 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 their evaluation, including any 

corrective actions with regard to 

significant deficiencies and material 

weaknesses.

For purposes of the Exchange Act 

Rules 13a–14 and 15d–14, ‘‘disclosure 

controls and procedures’’ are defined as 

controls and other procedures of an 

issuer that are designed to ensure that 

information required to be disclosed by 

the issuer in the reports filed or 

submitted by it under the Exchange 

Act 117 is recorded, processed, 

summarized and reported, within the 

time periods specified in the 

Commission’s rules and forms.118

‘‘Disclosure controls and procedures’’

include, without limitation, controls 

and procedures designed to ensure that 

information required to be disclosed by 

an issuer in its Exchange Act reports is 

accumulated and communicated to the 

issuer’s management, including its 

principal executive and financial 

officers, as appropriate to allow timely 

decisions regarding required disclosure.

We also adopted new Item 307 of 

Regulations S–K and S–B119 to require 

disclosure in the company’s annual and 

quarterly reports about the principal 

officers’ evaluation of the company’s 

disclosure controls and procedures and 

whether or not there have been 

significant changes to the company’s 

internal controls—disclosure that the 

principal officers must certify that they 

have made.

Regarding internal controls and 

procedures for financial reporting, our 

recently adopted rules require the 

company’s principal executive and 

financial officers to disclose ‘‘any 

significant changes in the company’s 

internal controls or in other factors that 

could significantly affect these controls 

subsequent to the date of their 

evaluation, including any corrective 

actions with respect to significant 

deficiencies and material weaknesses.’’

Despite the reference to an evaluation in 

this disclosure requirement, our rules 

currently do not require the company’s 

principal executive and financial 

officers, or the company itself, to 

conduct periodic evaluations of the 

company’s internal controls. New 

Exchange Act Rules 13a–15 and 15d–15 

do, however, require a company to 

conduct a quarterly evaluation of the 

company’s disclosure controls and 

procedures. 

As explained above, section 404 of the 

Sarbanes-Oxley Act directs us to 

propose and adopt rules that would 

require management to annually assess 

the company’s internal control structure 

and procedures for financial reporting. 

Section 404 contemplates only an 

annual evaluation of the company’s 

internal controls. A company’s officers 

already must certify to significant 

changes to internal controls as required 

by section 302 of the Sarbanes-Oxley 

Act. 

To provide a basis for this quarterly 

disclosure about changes to the 

company’s internal controls and 

procedures for financial reporting, and 

to create symmetry between our 

requirements for periodic evaluations of 

both the company’s disclosure controls 

and procedures and its internal controls 

and procedures for financial reporting, 

we propose to require the company’s 

management to evaluate the 

effectiveness of the design and 

operation of the company’s internal 

controls and procedures for financial 

reporting, as well as its disclosure 

controls and procedures, with respect to 

each annual and quarterly report that it 

is required to file under the Exchange 

Act.120 In addition, we propose to 

modify the requirement in Exchange Act 

Rules 13a–15 and 15d–15 that the 

evaluation be conducted within the 90-

day period prior to the filing date of the 

quarterly or annual report, to require 

that the evaluation be made as of the 

end of the period covered by the 

report.121 We are also proposing 

conforming changes 122 to Exchange Act 

Rules 13a–14, 13a–15, 15d–14 and 15d–

15 and the form of certification in Forms 

66222 Federal Register / Vol. 67, No. 210 / Wednesday, October 30, 2002 / Proposed Rules 

123 12 U.S.C. 1831m.

124The designated laws and regulations are 

federal laws and regulations concerning loans to 

insiders and federal and state laws and regulations 

concerning dividend restrictions. See 12 CFR part 

363, appendix A, guideline 12.

125See 12 CFR 363.2, adopted in 58 FR 31332.

126 12 CFR 363.3.

127This rating is more commonly known as the 

CAMELS rating, which addresses Capital adequacy, 

Asset quality, Management, Earnings, Liquidity, 

and Sensitivity to market risk. See 12 CFR 

363.1(b)(2).

128Most notably, proposed Item 307(b) and (c) of 

Regulations S–K and S–B would not require a 

statement of compliance with laws and regulations 

as is required by FDIC Rule 363.2 [12 CFR 363.2].

129See section 405 of the Sarbanes-Oxley Act 

(‘‘Nothing in section 401, 402, or 404, the 

amendments made by those sections, or the rules 

of the Commission under those sections shall apply 

to any investment company registered under 

section 8 of the Investment Company Act of 1940 

(15 U.S.C. 80a–8).’’). The provisions that would not 

extend to registered investment companies include 

proposed amendments to Item 307(a) of Regulation 

S–K, Exchange Act rules 13a–14(b)(4)(iii) and (iv), 

13a–15(b), 15a–14(b)(4)(iii) and (iv), and 15d–15(b) 

(disclosure of effectiveness of internal controls and 

procedures for financial reporting); proposed Item 

307(c) of Regulation S–K (management report on 

internal controls); and proposed Item 210.2–02(d) of 

Regulation S–X (attestation to, and report on, 

management’s internal control report).

130The proposed amendments would delete Item 

1 of proposed Form N–CSR.

10–Q, 10–QSB, 10–K, 10–KSB, 20–F 

and 40–F.

Request for Comment 

• Should we propose changes to 

Exchange Act Rules 13a–14, 13a–15, 

15d–14 and 15d–15 to require periodic 

evaluations of both the company’s 

disclosure controls and procedures and 

its internal controls and procedures for 

financial reporting? 

4. Federal Deposit Insurance Act 

Internal Control Reports 

In 1993, the Federal Deposit 

Insurance Corporation (FDIC) adopted 

rules implementing section 36 of the 

Federal Deposit Insurance Act 123 that 

requires, among other things, an insured 

depository institution with total assets 

of $500 million or more to prepare an 

annual management report that 

contains:

• A statement of management’s 

responsibilities for preparing the 

institution’s annual financial 

statements, for establishing and 

maintaining an adequate internal 

control structure and procedures for 

financial reporting, and for complying 

with designated laws and regulations 

relating to safety and soundness;124 and

• Management’s assessment of the 

effectiveness of the institution’s internal 

control structure and procedures for 

financial reporting as of the end of the 

fiscal year and the institution’s 

compliance with the designated laws 

and regulations during the fiscal year.125

The FDIC’s rules additionally require 

the institution’s independent public 

accountant to examine, and attest to, 

management’s assertions concerning the 

effectiveness of the institution’s internal 

controls over financial reporting.126

Furthermore, the FDIC’s rules permit 

an insured depository institution that is 

the subsidiary of a holding company to 

satisfy its internal control report 

requirement with an internal control 

report of the consolidated holding 

company’s management if: 

• Services and functions comparable 

to those required of the subsidiary by 

section 36 of the Federal Deposit 

Insurance Act are provided at the 

holding company level; and 

• The subsidiary has, as of the 

beginning of its fiscal year, total assets 

of less than $5 billion, or total assets of 

$5 billion or more and a composite 

rating of 1 or 2 under the Uniform 

Financial Institutions Rating System.127

Bank and thrift holding companies 

that are required to file reports under 

section 13(a) or 15(d) of the Exchange 

Act would be subject to the internal 

control reporting requirements that we 

are proposing today. Although our 

proposed amendments are similar to the 

FDIC’s internal control report 

requirements, our proposed rules differ 

in a few respects.128

We are coordinating with the FDIC 

and other federal banking regulators to 

eliminate, to the extent possible, any 

unnecessary duplication between our 

proposed internal control report and the 

FDIC’s internal control report 

requirements. We expect to provide 

further guidance on this subject in our 

release adopting final rules under 

section 404 of the Sarbanes-Oxley Act. 

5. Registered Investment Companies 

Section 404 of the Sarbanes-Oxley Act 

does not apply to registered investment 

companies, and we are not proposing to 

extend any of the requirements that 

would implement section 404 to 

registered investment companies.129 We 

are, however, proposing to make the 

following technical changes to our rules 

and forms implementing section 302 of 

the Sarbanes-Oxley Act for registered 

investment companies in order to 

conform to the rule changes that we are 

proposing for operating companies and 

for other reasons.

• Exchange Act Rules 13a–15(c) and 

15d–15(c), Paragraph (b)(4)(iii) of 

Investment Company Act Rule 30a–2, 

and proposed Investment Company Act 

Rule 30a–3(b). The proposed 

amendments would specify that an 

investment company’s management 

must evaluate the effectiveness of its 

disclosure controls and procedures, 

with the participation of the principal 

executive and financial officers, as of 

the end of the period covered by each 

report filed on Form N–SAR or Form N–

CSR. 

• Paragraph (d) of Investment 

Company Act Rule 30a–2. The proposed 

amendments would include the same 

definition of ‘‘internal controls and 

procedures for financial reporting’’ that 

we are proposing in Exchange Act Rules 

13a–14(d) and 15d–14(d). 

• Instruction (a)(i) to Item 77Q3 of 

Form N–SAR and Item 5(a) of proposed 

Form N–CSR. The proposed 

amendments would require the 

disclosure about the evaluation of the 

investment company’s disclosure 

controls and procedures by the 

investment company’s management to 

be as of the end of the period covered 

by the report being filed. 

• Paragraph (b)(4)(vi) of Investment 

Company Act Rule 30a–2, Instruction 

(a)(ii) of Item 77Q3 of Form N–SAR, and 

Item 5(b) of proposed Form N–CSR. The 

proposed amendments would require 

disclosure of any significant changes to 

the registrant’s internal controls and 

procedures for financial reporting made 

during the period covered by the report. 

• Item 6(a) of proposed Form N–CSR; 

paragraphs 1, 2, and 3 of the 

certification in instruction (a)(iii) to Item 

77Q3 of Form N–SAR; and paragraphs 

1, 2, and 3 of the certification section of 

proposed Form N–CSR. The proposed 

amendments would expressly require 

the shareholder reports to be filed as an 

exhibit to proposed Form N–CSR rather 

than as an Item response,130 and would 

also revise the form of certification in 

Forms N–SAR and N–CSR to make clear 

that the report being certified includes 

any exhibits.

• Paragraph (b)(4) of Investment 

Company Act Rule 30a–2, paragraph 4 

of the certification in Instruction (a)(iii) 

to item 77Q3 of Form N–SAR, and 

paragraph 4 of the certification section 

of proposed Form N–CSR. The proposed 

amendments would require the signing 

officers to state that they are responsible 

for establishing and maintaining 

internal controls and procedures for 

financial reporting, and that they have 

disclosed to the investment company’s 

auditors and audit committee all 

significant deficiencies in the design 

and operation of internal controls and 

procedures for financial reporting which 

could adversely affect the investment 

company’s ability to record, process, 

summarize and report financial 

information required to be disclosed in 

the reports that it files or submits under 

Federal Register / Vol. 67, No. 210 / Wednesday, October 30, 2002 / Proposed Rules 66223

131Referenced in 17 CFR 249.322.

132See Release No. 33–8124 (Aug. 28, 2002) [67 

FR 57276, 57282 n. 86].

133Such standards would be subject to approval 

by the Commission.

134See Release No. 33–8124 (August 29, 2002) [67 

FR 57276].

135 Id.

136See, for example, Release No. 34–16520 

(January 23, 1980) (order granting application 

pursuant to section 12(h) of the Exchange Act [15 

U.S.C. 78l(h)] of Home Savings and Loan 

Association); Release No. 34–14446 (February 6, 

1978) (order granting application pursuant to 

section 12(h) of Bank of America National Trust and 

Savings Association); Bay View Securitization 

Corporation (January 15, 1998); and Key Bank USA, 

National Association (May 9, 1997).

both the Securities Exchange Act and 

the Investment Company Act. 

• Exchange Act Rule 12b–25(a) and 

(b)(2)(ii) and Form 12b–25.131 The 

proposed amendments would require an 

investment company to file a Form 12b–

25 if it will not be able to file a report 

on proposed Form N–CSR in a timely 

manner. Filing of a Form 12b–25 would 

provide the investment company with 

an automatic extension of time to file 

proposed Form N–CSR of up to 15 

calendar days following the prescribed 

due date.

• General Instruction E of proposed 

Form N–CSR. A proposed technical 

amendment would clarify that terms 

used in Form N–CSR have meanings as 

defined in the Investment Company Act 

of 1940 and the rules and regulations 

thereunder. 

Request for Comment 

• Should any rules regarding internal 

controls and procedures for financial 

reporting be applied to registered 

investment companies? If so, which 

specific rules and procedures should 

apply? 

• When we adopted the certification 

rules implementing section 302 of the 

Sarbanes-Oxley Act, we stated that a 

single evaluation of the effectiveness of 

the disclosure controls and procedures 

for a series fund or family of investment 

companies could be used in multiple 

certifications for the funds in the series 

or family, as long as the evaluation had 

been performed within 90 days of the 

date of the certified report.132 What is 

the effect of today’s proposed changes 

requiring that the evaluation be as of the 

end of the period covered by the report 

on the ability to use a single evaluation 

for a series fund or family of investment 

companies where the funds have 

different fiscal years? Should we adopt 

the approach of today’s proposal, retain 

the approach that we previously 

adopted, or adopt a different approach?

6. Transition Period for Compliance 

With Rules Regarding Evaluations of, 

and Reports and Attestations on, 

Internal Controls and Procedures for 

Financial Reporting 

The annual internal controls report by 

management, as well as the related 

attestation and report on management’s 

evaluation by auditors are proposed 

new requirements. Although we believe 

that management and auditors currently 

review such controls and procedures in 

conjunction with a company’s annual 

audit, we understand that in many cases 

such reviews may not be as thorough or 

as detailed as the proposed rules would 

require. We expect that companies and 

their auditors will require substantial 

time to develop processes under 

relevant standards and to train 

appropriate personnel to ensure 

compliance with these requirements 

imposed by the Sarbanes-Oxley Act. 

Similarly, companies and accounting 

firms likely will need additional time to 

actually perform these activities. 

The Sarbanes-Oxley Act does not 

impose a deadline for compliance with 

section 404. Rather, the wording of this 

section contemplates action by both the 

PCAOB as well as registered public 

accounting firms. Specifically, the 

statute requires that auditor attestations 

conform with standards for attestation 

engagements adopted by the PCAOB. 

We therefore believe that Congress did 

not intend for the provisions of this 

section to take effect until the PCAOB 

has established the relevant attestation 

standards.133 Accordingly, we propose 

to delay the effectiveness of our rules 

under section 404 to enable the PCAOB 

to act and other relevant parties to 

prepare for compliance.

Specifically, we propose that the rules 

under section 404, if adopted, would 

apply to companies whose fiscal years 

end on or after September 15, 2003. This 

should provide the PCAOB sufficient 

time to adopt standards for attestation 

engagements, as well as for companies 

and auditors to prepare for the expected 

increase in workload. 

We would not require companies to 

provide such reports or attestations 

before the proposed date of 

effectiveness. However, to the extent 

that a company desires to provide 

voluntarily an annual report on the 

effectiveness of its internal controls and 

procedures for financial reporting, we 

believe that existing accounting 

literature should be followed. Similarly, 

although we do not require attestations 

by auditors before the proposed rules 

become effective, we believe that to the 

extent such attestations are made, 

accountants would perform such 

attestations in conformity with existing 

accounting literature regarding 

attestation engagements, including 

section 501 of the AICPA’s Statement on 

Standards for Attestation Engagements. 

Similarly, we believe that the 

effectiveness of changes to certifications 

by management in a company’s annual 

and quarterly reports also should be 

delayed until the company has had the 

opportunity to perform the 

comprehensive evaluation of internal 

controls and procedures for financial 

reporting contemplated by section 404. 

Therefore, we propose that management 

need not provide the proposed amended 

certifications until the first annual 

report in which the company includes 

the internal control report required 

under section 404. Accordingly, until a 

company is required to provide such 

report, it need only provide 

certifications as adopted on August 29, 

2002.134

Request for Comment 

• What transition period do 

companies and registered public 

accounting firms need to prepare to 

perform these undertakings? Is the 

compliance date we propose adequate? 

If not, what date should we adopt? 

D. Asset-Backed Securities Issuers 

In the release adopting the 

certification requirements,135 we noted 

that issuers of asset-backed securities 

have a reporting obligation under either 

sections 13(a) or 15(d) of the Exchange 

Act, at least for a period of time. 

Because of the nature of asset-backed 

issuers, the staff of the Division of 

Corporation Finance has granted 

requests allowing asset-backed issuers 

to file modified reports under the 

Exchange Act.136 The modified 

reporting structure for asset-backed 

issuers allows issuers or depositors to 

file modified annual reports on Form 

10–K and to file reports on Form 8–K 

tied to payments on the underlying 

assets in the trust. These reports include 

a copy of the servicing or distribution 

report required by the issuer’s governing 

documents and information on the 

performance of the assets, payments on 

the asset-backed securities and any 

other material developments that affect 

the issuer. Because the information 

included in these reports for assetbacked issuers differs significantly from 

that provided by other issuers, as well 

as the structure of asset-backed issuers 

we are proposing to exclude them from 

the disclosure requirements under 

proposed Items 307, 309 and 406 of 

Regulation S–K and S–B.

66224 Federal Register / Vol. 67, No. 210 / Wednesday, October 30, 2002 / Proposed Rules 

137 44 U.S.C. 3501 et seq.

E. General Request for Comment 

We request and encourage any 

interested person to submit comments 

regarding: 

(1) The proposed changes that are the 

subject of this release, 

(2) Additional or different changes, or 

(3) Other matters that may have an 

effect on the proposals contained in this 

release. 

We request comment from the point of 

view of registrants, investors and other 

users of information about the 

proposals. With regard to any 

comments, we note that such comments 

are of greatest assistance to our 

rulemaking initiative if accompanied by 

supporting data and analysis of the 

issues addressed in those comments.

III. Paperwork Reduction Act 

Form 10–K, Form 10–KSB, Form 20–

F, Form 40–F, Form 10–Q, Form 10–

QSB, Form 8–K, and Form 12b–25 

under the Exchange Act, Regulation S–

K, Regulation S–B, and Forms N–SAR 

and N–CSR under the Exchange Act and 

the Investment Company Act contain 

‘‘collection of information’’

requirements within the meaning of the 

Paperwork Reduction Act of 1995.137

We are submitting a request for approval 

of the proposed revisions to these 

requirements to the Office of 

Management and Budget (‘‘OMB’’) for 

review in accordance with 44 U.S.C. 

3507(d) and 5 CFR 1320.11. An agency 

may not conduct or sponsor, and a 

person is not required to respond to, a 

collection of information unless it 

displays a currently valid control 

number.

Periodic Reporting Requirements 

Form 10–K (OMB Control No. 3235–

0063) prescribes information that a 

registrant must disclose annually to the 

market about its business. Form 10–KSB 

(OMB Control No. 3235–0420) 

prescribes information that a registrant 

that is a ‘‘small business issuer’’ as 

defined under our rules must disclose 

annually to the market about its 

business. Form 20–F (OMB Control No. 

3235–0288) prescribes information that 

a registrant that is a foreign private 

issuer must disclose annually to the 

market about its business. Form 40–F 

(OMB Control No. 3235–0381) 

prescribes information that a registrant 

that is eligible to use that form must 

disclose annually to the market about its 

business. 

Form 10–Q (OMB Control No. 3235–

0070) prescribes information that a 

registrant must disclose quarterly to the 

market about its business. Form 10–QSB 

(OMB Control No. 3235–0416) 

prescribes information that a registrant 

that is a ‘‘small business issuer’’ as 

defined under our rules must disclose 

quarterly to the market about its 

business. 

We are proposing to add several 

disclosure requirements to these forms 

relating to: (1) Whether a financial 

expert serves on a company’s audit 

committee; (2) the existence of a 

company code of ethics for specified 

officers, and (3) management’s 

assessment of the effectiveness of a 

company’s internal controls and 

procedures for financial reporting. 

These proposals would increase the 

amount of information that a registrant 

must compile and disclose in these 

forms. With respect to the first two 

items, the information in these required 

disclosures should be readily available 

to the management of a registrant. 

Therefore, we expect the burden to 

compile and report this information to 

be minimal. The third item requires 

management to evaluate the 

effectiveness of the company’s internal 

controls and procedures for financial 

reporting. We expect that performing 

these acts will impose a substantially 

greater burden than the other two 

disclosure requirements. 

Financial Expert. This proposed 

disclosure requirement would increase 

the disclosure burden by requiring a 

registrant to report the number and 

names of persons that the board of 

directors has determined to be financial 

experts on its audit committee as well 

as whether the expert is independent, 

and if not, an explanation of why they 

are not. It would not require a registrant 

to have a financial expert on its audit 

committee. Item 401 of Regulations S–

K and S–B already requires registrants 

to ascertain and disclose the business 

experience of all of its directors. The 

inquiry that registrants should make to 

satisfy this disclosure requirement 

should assist the registrant in 

determining whether a particular 

director is a financial expert under the 

rules. If the registrant does not have a 

financial expert, the rule only requires 

that the registrant explain why it does 

not have such a person on its audit 

committee. Therefore, we believe the 

added burden of the proposed rule 

would be minimal. For purposes of the 

PRA, we estimate that the proposed 

disclosure requirements regarding 

financial experts will result in a 

minimal incremental increase of 0.5 

burden hours per issuer in connection 

with preparing each annual report.

Code of Ethics. The proposed rule 

would require a registrant to disclose 

whether it has adopted a written code 

of ethics for its principal executive 

officer, principal financial officer, 

principal accounting officer or 

controller, or persons serving similar 

functions. If it has not, it must explain 

why. The proposed rule would not 

require any company to adopt such a 

code of ethics. Management should be 

readily able to determine whether or not 

its company has adopted a code of 

ethics. In certain cases, the required 

disclosure would require minimal 

analysis regarding why the company 

does not have a code. In addition, in the 

first year, registrants must file a copy of 

the code with the Commission. In the 

case of large manuals that must be filed, 

we expect a small added cost to file 

such a document on EDGAR. In 

addition, we estimate that the disclosure 

requirements regarding codes of ethics 

will also cause a minimal increase of 0.5 

burden hours per issuer in connection 

with each annual report. 

Management Assessment of Internal 

Controls and Procedures for Financial 

Reporting. The proposed rules would 

require management to assess its 

internal controls and procedures for 

financial reporting every quarter. In 

addition, registrants must provide an 

internal control report in its annual 

report as well as obtain an attestation on 

that evaluation from the independent 

accountant that audited its financial 

statements. The performance of, and 

report on, the assessment will impose 

costs on registrants. This requirement 

would not apply to registered 

investment companies. 

Although we expect such evaluation 

to impose a burden on companies, they 

are already required to evaluate on a 

quarterly basis the company’s disclosure 

controls and procedures. We believe 

that a significant portion of internal 

controls and procedures for financial 

reporting are included in disclosure 

controls and procedures. We already 

received OMB approval for the added 

burden of evaluating disclosure controls 

and procedures. Therefore, for purposes 

of this release, we need only consider 

the added incremental burden imposed 

on companies by the evaluation of that 

portion of internal controls and 

procedures for financial reporting that is 

not subsumed by the disclosure controls 

and procedures evaluation. In that 

submission, we estimated that the 

evaluation of disclosure controls and 

procedures would add a burden on each 

issuer of 5 hours per quarterly and 

annual report. We estimate that the 

proposed rules would impose and 

additional 5 burden hours per issuer in 

connection with each quarterly and 

annual report. We do not have any data 

to support this estimate. However, 

Federal Register / Vol. 67, No. 210 / Wednesday, October 30, 2002 / Proposed Rules 66225

138 17 CFR 243.100–103.

139This number assumes adoption of the 

proposals in Release No. 33–8090 (April 12, 2002) 

[67 FR 19914] If adopted, those proposals would 

cause companies to file estimated additional 

215,500 Form 8–K reports each year.

because much of the burden is 

subsumed in the previous estimate, we 

believe an estimate of 5 burden hours 

per quarter is conservative. In addition, 

in conjunction with annual reports, a 

company must provide an internal 

control report. Although the burden of 

the evaluation has already been 

considered, the company must compile 

its conclusions into a publicly disclosed 

report. We expect that preparation of 

this report would add an additional 5 

hours in conjunction with the annual 

report. 

For PRA purposes, we do not need to 

consider the added burden to the 

company of obtaining an attestation on 

that internal control report by the 

company’s auditor. The Sarbanes-Oxley 

Act currently requires companies to 

obtain such an attestation. Our proposed 

rules do not establish standards for the 

contents or format of such attestation. In 

addition, the proposed rules requiring 

attestation would not be effective until 

the PCAOB has had the opportunity to 

establish such standards. The proposed 

rules would establish no requirements 

beyond those required by the SarbanesOxley Act except the requirement that 

the attestation be filed. We do consider 

the incremental increase in burden 

caused by this proposed requirement. 

We estimate that the costs of filing such 

an attestation report would be minimal. 

Similar to our estimates regarding 

disclosure of readily known 

information, such as the existence of a 

code of ethics, we estimate that such 

filing would create an added burden of 

0.5 hours.

The burden hours for complying with 

these proposed requirements are set 

forth below in the following table. 

Estimates regarding burden within the 

company, for third party services, and 

for professional costs were obtained by 

contacting a number of law firms and 

other persons regularly involved in 

completing the forms.

Annual responses Total hours/

form Total burden 1 75% company 2 25% professional 

$300 professional cost 

10–K ................................................... 9,384 11.5 107,916 80,937 26,979 8,093,700 

10–KSB .............................................. 3,789 11.5 43,574 32,680.5 10,893.5 3,268,050 

20–F ................................................... 1,096 11.5 12,604 3,151 9,453 2,835,900 

40–F ................................................... 127 11.5 1,461 365.25 1,095.75 328,725 

10–Q .................................................. 26,746 5 133,730 100,297.5 33,432.5 10,029,750 

10–QSB .............................................. 11,608 5 58,040 43,530 14,510 4,353,000 

1Annual Responses × Total Hours per Form. 2The staff estimated the average number of hours each entity spends completing the form, and the average hourly rate for outside securities 

counsel, by contacting a number of law firms and other persons regularly involved in completing the forms. For Forms 20–F and 40–F, we estimate that 25% of the burden is imposed on the company and 75% of the burden is attributed to costs of third parties. 

Our current OMB inventories and requested burden estimates are presented in the following table.

Current hour 

burden 

Expected hour 

increase 

Total expected 

burden 

Current cost 

burden 

Expected cost 

increase 

Total expected 

cost 

10–K ......................................................... 12,337,614 80,937 12,418,551 1,233,761 8,093,700 1,241,854,700 

10–KSB .................................................... 3,435,676 32,680.5 3,468,356.5 343,568,000 3,268,050 346,836,050 

20–F ......................................................... 583,248 3,151 586,399 524,496,000 2,835,900 527,331,900 

40–F ......................................................... 175 365.25 440.25 440.5138,500 328,725 467,225 

10–Q ........................................................ 3,109,223 100,297.5 3,209,520.5 310,922,000 10,029,750 320,951,750 

10–QSB .................................................... 1,279,782 43,530 1,323.312 127,978,000 4,353,000 132,331,000 

Form 8–K 

Form 8–K (OMB Control No. 3235–

0060) prescribes information about 

significant events that a registrant must 

disclose on a current basis. Form 8–K 

also may be used, at a registrant’s 

option, to report any events that the 

registrant deems to be of importance to 

shareholders. Companies also may use 

the form to disclose the nonpublic 

information required to be disclosed by 

Regulation FD.138 We are proposing to 

require disclosure in the Form 8–K of 

any change in, or waiver of any 

provision of, a company code of ethics 

for senior executive officers. 

Alternatively, companies may disclose 

the required information on their 

websites.

We currently estimate that Form 8–K 

results in a total annual compliance 

burden of 627,300 hours and an annual 

cost of $81,377,000. We estimate the 

number of Form 8–K filers to be 13,200, 

based on the actual number of Form 10–

K and 10–KSB filers during the 2001 

fiscal year. For purposes of this analysis, 

we estimate that the number of reports 

on Form 8–K filed is 276,800.139 We 

estimate that each entity spends, on 

average, approximately 5 hours 

completing the form. We note that a 

company need not file a Form 8–K to 

report these events if it discloses the 

information on its Internet website. If a 

company elects to disclose such 

information only on its website, the 

proposed rules would require the 

company to keep such information on 

its website for 12 months and to keep 

such disclosure for five years. We 

estimate that the cost of disclosing and 

maintaining the information on a 

company’s website would be no more 

than the cost to file a Form 8–K. 

Therefore, for a particular reporting 

event, whether disclosed on Form 8–K 

or through a company’s website, we 

estimate the burden would be 5 hours. 

We estimate that 75% of the burden is 

prepared by the company and that 25% 

of the burden is prepared by outside 

counsel retained by the company at an 

average cost of $300 per hour. The staff 

estimated the average number of hours 

each entity spends completing the form, 

and the average hourly rate for outside 

securities counsel, by contacting a 

number of law firms and other persons 

regularly involved in completing the 

forms.

Under the proposals, we estimate that, 

on average, completing and filing a 

Form 8–K if the proposed new 

disclosure items are adopted would 

require the same amount of time 

currently spent by entities completing 

the form—approximately 5 hours. We 

believe that changes to a company’s 

code of ethics and waivers from a code 

66226 Federal Register / Vol. 67, No. 210 / Wednesday, October 30, 2002 / Proposed Rules 

will be relatively rare events. Therefore, 

we expect that on average, a company 

will file a Form 8–K to report such an 

event once every three years, resulting 

in a total increase of 4,400 filings on 

Form 8–K per year. The additional 

filings would result in an added annual 

burden of 16,500 hours (4,400 × 5 × .75 

= 16,500) and a total annual burden of 

643,800 (627,300 + 16,500). We estimate 

that, if the proposals are adopted, the 

additional filings would result in an 

added annual cost of $1,650,000 (4,400 

× 5 × .25 × $300 = $1,650,000) and a 

total annual cost to issuers of 

$83,027,000 ($81,377,000 + $1,650,000 

= $83,027,000). 

Regulation S–K and Regulation S–B 

Regulation S–K (OMB Control No. 

3235–0071) includes the requirements 

that a registrant must provide in filings 

under both the Securities Act and the 

Exchange Act. Regulation S–B (OMB 

Control No. 3235–0417) includes the 

requirements that a small business 

issuer must provide in filings under the 

Securities Act and the Exchange Act. 

The proposed changes to these items 

would create new items under 

Regulation S–K and Regulation S–B. 

However, the filing requirements 

themselves are included in Form 10–K, 

Form 10–KSB, Form 10–Q, Form 10–

QSB, Form 20–F, Form 40–F, and Form 

8–K. We have reflected the burden for 

these new requirements in the burden 

estimate for those forms. These items in 

Regulation S–K and Regulation S–B do 

not impose any separate burden. We 

assign one burden hour each to 

Regulations S–B and S–K for 

administrative convenience to reflect 

the fact that these regulations do not 

impose any direct burden on 

companies. 

Investment Company Forms 

Form N–SAR (OMB Control No. 

3235–0330) under the Exchange Act and 

the Investment Company Act is used by 

registered investment companies to file 

periodic reports with the Commission. 

We estimate that 4500 investment 

companies, including 798 unit 

investment trusts and 2 small business 

investment companies, currently file 

reports on Form N–SAR. The current 

estimated total compliance burden of 

Form N–SAR is 154,450 hours. Unit 

investment trusts would be required to 

make the proposed disclosure regarding 

codes of ethics on Form N–SAR, and 

small business investment companies 

would be required to make the proposed 

disclosure regarding codes of ethics and 

financial experts on Form N–SAR. We 

estimate that the proposed disclosure 

requirements will increase the annual 

burden of filing Form N–SAR by 0.5 

hours per unit investment trust, and by 

1.0 hour per small business investment 

company. Therefore, the new estimated 

total compliance burden of filing Form 

N–SAR would be 154,851 hours. 

We issued a release proposing Form 

N–CSR on August 30, 2002, pursuant to 

section 8(a) of the Investment Company 

Act [15 U.S.C. 80a–8] and section 13 of 

the Securities Exchange Act [15 U.S.C. 

78m]. Proposed Form N–CSR would be 

used by registered management 

investment companies to file certified 

shareholder reports with the 

Commission. We estimate that 3700 

registered management investment 

companies would be required to file 

reports on Form N–CSR, and the total 

compliance burden for Form N–CSR 

would be 111,000 hours, excluding the 

amendments proposed in this release. 

We estimate that the proposed 

disclosure requirements would increase 

the annual burden of filing Form N–CSR 

by 1.0 hours per management 

investment company. Therefore, the 

new estimated total compliance burden 

of filing Form N–CSR would be 114,700 

hours. 

Form 12b–25 (OMB Control No. 

3235–0058) was adopted pursuant to 

sections 13, 15, and 23 of the Exchange 

Act. Form 12b–25 provides notice to the 

Commission and the marketplace that a 

public company will be unable to file a 

required report in a timely manner. If 

certain conditions are met, the company 

will be granted an automatic filing 

extension. The proposed amendments 

would permit investment companies to 

use Form 12b–25 for the purpose of 

obtaining extensions with respect to 

filing Form N–CSR. We estimate that 

Form 12b–25 results in a total annual 

compliance burden currently of 31,750 

hours, and that each entity using Form 

12b–25 spends, on average, 

approximately 2.5 hours completing the 

form. Currently, 168 investment 

companies use Form 12b–25 to obtain 

extensions of time for filing Form N–

SAR. We estimate that the same number 

of investment companies annually 

would use Form 12b–25 to obtain 

extensions of filing Form N–CSR, 

resulting in a new total compliance 

burden of 32,170 hours. 

Compliance with the revised 

disclosure requirements would be 

mandatory. Responses to the disclosure 

requirements would not be kept 

confidential.

Pursuant to 44 U.S.C. 3506(c)(2)(B), 

we solicit comments to: (i) Evaluate 

whether the proposed collection of 

information is necessary for the proper 

performance of the functions of the 

agency, including whether the 

information will have practical utility; 

(ii) evaluate the accuracy of our estimate 

of the burden of the proposed collection 

of information; (iii) determine whether 

there are ways to enhance the quality, 

utility, and clarity of the information to 

be collected; and (iv) evaluate whether 

there are ways to minimize the burden 

of the collection of information on those 

who are to respond, including through 

the use of automated collection 

techniques or other forms of information 

technology. In addition, we solicit any 

comments on this analysis. 

Persons submitting comments on the 

collection of information requirements 

should direct the comments to the 

Office of Management and Budget, 

Attention: Desk Officer for the 

Securities and Exchange Commission, 

Office of Information and Regulatory 

Affairs, Washington, DC 20503, and 

should send a copy to Jonathan G. Katz, 

Secretary, Securities and Exchange 

Commission, 450 Fifth Street, NW., 

Washington, DC 20549–0609, with 

reference to File No. S7–40–02. 

Requests for materials submitted to 

OMB by the Commission with regard to 

these collections of information should 

be in writing, refer to File No. S7–40–

02, and be submitted to the Securities 

and Exchange Commission, Records 

Management, Office of Filings and 

Information Services. OMB is required 

to make a decision concerning the 

collection of information between 30 

and 60 days after publication of this 

release. Consequently, a comment to 

OMB is assured of having its full effect 

if OMB receives it within 30 days of 

publication. 

IV. Costs and Benefits 

The Sarbanes-Oxley Act requires us to 

propose most of the requirements 

discussed in this release. These changes 

will affect all companies reporting 

under section 13(a) and 15(d) of the 

Exchange Act, including foreign private 

issuers and small business issuers, and 

certain of the proposed changes will 

affect registered investment companies. 

We recognize that any implementation 

of the Sarbanes-Oxley Act will likely 

result in costs as well as benefits and 

have an effect on the economy. We are 

sensitive to the costs and benefits of the 

proposed rules, if adopted. We discuss 

these costs and benefits below. 

A. Benefits 

One of the main goals of the SarbanesOxley Act is to improve investor 

confidence in the financial markets. 

These proposals are among many 

required by the Sarbanes-Oxley Act. 

They seek to achieve the SarbanesOxley Act’s goals by providing greater 

Federal Register / Vol. 67, No. 210 / Wednesday, October 30, 2002 / Proposed Rules 66227

140 15 U.S.C. 78w(a)(2).

transparency regarding issues such as 

the competency of audit committee 

members, compliance of senior financial 

officers with ethics codes of conduct, 

and the adequacy of a company’s 

internal controls and procedures for 

financial reporting. By increasing 

transparency regarding key aspects of 

corporate activities and conduct, the 

proposals are designed to improve the 

quality of information available to 

investors. Greater transparency should 

assist the market in properly valuing 

securities, which leads to more efficient 

allocation of capital resources. 

In addition to the requirements under 

the Sarbanes-Oxley Act, we are 

proposing additional requirements. 

First, the proposal regarding disclosure 

of whether a company has a financial 

expert on its audit committee would 

require disclosure of the names and 

number of the financial experts on an 

audit committee and whether those 

persons are independent of 

management. We think that investors 

would benefit from this disclosure by 

being able to consider it when reviewing 

the disclosure currently required about 

all directors’ past business experience. 

The proposal to require companies to 

file copies of their codes of ethics would 

allow investors to better understand the 

ethical principles that guide executives 

of companies in which they invest. With 

respect to registered investment 

companies, these code of ethics 

disclosure requirements would apply to 

a registrant’s investment adviser and 

principal underwriter also, and, in the 

case of a unit investment trust, would 

apply to the trust’s sponsor, depositor 

and trustee. The proposals also would 

require companies, other than 

investment companies, to make 

quarterly evaluations of their internal 

controls and procedures for financial 

reporting. In addition to the above 

stated benefits of greater transparency, 

to the extent companies currently do not 

perform such evaluations, we believe 

that the proposed requirements would 

increase the effectiveness of such 

controls, which would increase the 

overall quality of financial disclosures 

in publicly filed reports, as well as 

companies’ internal operations. 

B. Costs 

The proposals would require 

companies to disclose additional 

information about financial experts on a 

company’s audit committee and the 

existence of a code of conduct for 

financial executives. This information is 

readily available to management and the 

board of directors of a company. 

Therefore, we expect that the cost of 

compiling and reporting this 

information should be minimal. The 

proposals would also require 

management to assess its system of 

controls and the independent public 

accountant to attest to, and report on, 

that assessment. 

As stated above, in limited instances, 

we propose to require more disclosure 

than mandated by the Sarbanes-Oxley 

Act. For example, if adopted, we expect 

that companies will incur added costs to 

disclose the names of financial experts, 

file codes of ethics in the first year of 

the rules’ effectiveness, and disclose in 

their periodic reports that they intend to 

disclose changes in, and waivers from, 

their codes of ethics via their websites 

in lieu of publicly filing such disclosure 

on Form 8–K, or in the case of registered 

investment companies, Form NSAR or 

Form N–CSR.

With respect to the additional 

disclosures related to financial experts, 

we believe the added burden would be 

minimal. We do not expect that the 

disclosure of the names of the financial 

experts itself would increase the legal 

obligations or potential liability of such 

individuals. In addition, for companies 

other than investment companies, the 

proposed rules would require a 

quarterly evaluation of a company’s 

internal controls and procedures for 

financial reporting. We believe the costs 

of such evaluations would be mitigated 

by the fact that companies are already 

required to perform such evaluations of 

their disclosure controls and 

procedures. In several aspects, these 

disclosure controls and procedures 

would overlap with internal controls 

and procedures. To the extent that 

companies would already be evaluating 

particular controls and procedures, 

there would be no added cost. 

We also note that we are proposing to 

require registered investment companies 

to provide disclosure of any codes of 

ethics of certain of their principal 

service providers. This additional 

disclosure may impose certain costs. We 

note, however, that investment 

companies, pursuant to Investment 

Company Act Rule 17j–1, must already 

provide disclosure regarding the codes 

of ethics of their investment advisers 

and principal underwriters that are 

required under the rule with respect to 

the personal trading of their employees. 

We estimate the additional costs to 

investment companies in complying 

with these provisions would be limited. 

Furthermore, although investment 

companies are not subject to section 404 

of the Sarbanes-Oxley Act, we are 

proposing certain technical 

amendments to our rules and forms 

implementing section 302 of the 

Sarbanes-Oxley Act. We estimate that 

these technical amendments will not 

result in any additional costs to 

investment companies. 

We believe that these additional 

requirements are necessary to 

implement the purposes of the 

Sarbanes-Oxley Act and pose minimal 

additional burden on companies. Such 

costs do not include the costs imposed 

on companies by the Sarbanes-Oxley 

Act itself. Rather, they reflect the costs 

of our proposed requirements beyond 

the requirements of the Sarbanes-Oxley 

Act. For purposes of the Paperwork 

Reduction Act, we have estimated that 

these required activities and reporting 

will result in an approximate cost of 

$65,000,000. 

We request comment on issues related 

to this cost-benefit analysis. In 

particular, are there additional benefits 

and costs associated with the proposed 

rules? We are especially interested in 

obtaining data regarding the estimated 

cost of the proposed internal control 

evaluation and auditor attestation 

requirements, as we expect that these 

costs could be significant. Please 

provide any quantitative data on which 

you rely in formulating your comments. 

V. Effect on Efficiency, Competition and 

Capital Formation 

Section 23(a)(2) 140 of the Exchange 

Act requires us, when adopting rules 

under the Exchange Act, to consider the 

impact that any new rule would have on 

competition. In addition, section 

23(a)(2) prohibits us from adopting any 

rule that would impose a burden on 

competition not necessary or 

appropriate in furtherance of the 

purposes of the Exchange Act.

The proposed amendments are 

intended to increase transparency 

regarding the competence of the audit 

committee, the application of ethics 

codes of conduct to certain of a 

company’s executive officers, and the 

adequacy of a company’s internal 

controls and procedures for financial 

reporting. We anticipate that these 

proposals would enhance the proper 

functioning of the capital markets by 

giving investors greater insight into the 

inner workings of public companies. 

This increases the competitiveness of 

companies participating in the U.S. 

capital markets. However, because only 

companies subject to the reporting 

requirements of sections 13 and 15 of 

the Exchange Act (and all registered 

investment companies with respect to 

the financial expert and code of ethics 

disclosure requirements) would be 

required to make the disclosures in this 

proposal, competitors not subject to 

66228 Federal Register / Vol. 67, No. 210 / Wednesday, October 30, 2002 / Proposed Rules 

141 15 U.S.C. 77b(b).

142 15 U.S.C. 78c(f). 143 17 CFR 240.0–10(a).

those reporting requirements potentially 

could gain an informational advantage. 

We request comment on whether the 

proposed amendments, if adopted, 

would impose a burden on competition. 

Commenters are requested to provide 

empirical data and other factual support 

for their views if possible. 

Section 2(b) 141 of the Securities Act 

and section 3(f) 142 of the Exchange Act 

require us, when engaging in 

rulemaking where we are required to 

consider or determine whether an action 

is necessary or appropriate in the public 

interest, to consider, in addition to the 

protection of investors, whether the 

action will promote efficiency, 

competition, and capital formation. The 

proposed amendments would enhance 

our reporting requirements. The 

purpose of the amendments is to 

increase transparency of the inner 

workings of public companies. This 

should improve investors’ ability to 

make informed investment and voting 

decisions. Informed investor decisions 

generally promote market efficiency and 

capital formation. As noted above, 

however, the proposals could have 

certain indirect consequences, which 

could adversely impact their ability to 

raise capital. The possibility of these 

effects and their magnitude if they were 

to occur are difficult to quantify.

We request comment on whether the 

proposed amendments, if adopted, 

would promote efficiency, competition, 

and capital formation. Commenters are 

requested to provide empirical data and 

other factual support for their views if 

possible. 

VI. Initial Regulatory Flexibility 

Analysis

This Initial Regulatory Flexibility 

Analysis has been prepared in 

accordance with 5 U.S.C. 603. It relates 

to proposed revisions to Exchange Act 

Form 10–K, Form 10–KSB, Form 10–Q, 

Form 10–QSB, Form 20–F, Form 40–F, 

Form 8–K, Form 12b–25, Rule 12b–25, 

Rule 13a–14, Rule 13a–15, Rule 15d–14 

and Rule 15d–15 under the Exchange 

Act and Regulation S–K and Regulation 

S–B and Exchange Act and Investment 

Company Act Form N–SAR and Form 

N–CSR, Rule 30a–2 and Rule 30a–3 

under the Investment Company Act. 

A. Reasons for the Proposed Action 

We are proposing these disclosure 

requirements to comply with the 

mandate of, and fulfill the purposes 

underlying the provisions of, the 

Sarbanes-Oxley Act of 2002. 

B. Objectives 

The proposals are intended to 

enhance investor confidence in the 

fairness and integrity of the securities 

markets by increasing transparency 

regarding the expertise of the audit 

committee, the ethics codes of that 

apply to companies’ principal executive 

officer and senior financial officers, and 

the adequacy of a company’s internal 

controls and procedures for financial 

reporting. We believe that these 

proposals would help investors to 

understand and assess the innerworkings of public companies. 

C. Legal Basis 

We are proposing the amendments to 

Form 10–K, Form 10–KSB, Form 10–Q, 

Form 10–QSB, Form 20–F, Form 40–F, 

Form 8–K, Form N–SAR, Form N–CSR, 

Form 12b–25, Rule 12b–25, Rule 13a–

14, Rule 13a–15, Rule 15d–14, Rule 

15d–15, Rule 30a–2, Rule 30a–3, 

Regulation S–K and Regulation S–B 

under the authority set forth in sections 

5, 6, 7, 10, 17 and 19 of the Securities 

Act, sections 12, 13, 15, 23 and 36 of the 

Exchange Act, sections 8, 30, 31 and 38 

of the Investment Company Act, and 

sections 3(a), 404, 406 and 407 of the 

Sarbanes-Oxley Act of 2002. 

D. Small Entities Subject to the 

Proposed Revisions 

The proposed changes would affect 

issuers that are small entities. Exchange 

Act Rule 0–10(a) 143 defines an issuer, 

other than an investment company, to 

be a ‘‘small business’’ or ‘‘small 

organization’’ if it had total assets of $5 

million or less on the last day of its most 

recent fiscal year. As of February 20, 

2002, we estimated that there were 

approximately 2,500 issuers, other than 

investment companies, that may be 

considered small entities. We estimate 

that there are 225 registered investment 

companies that may be considered small 

entities. The proposed revisions would 

apply to any small entity that is subject 

to Exchange Act reporting requirements.

E. Reporting, Recordkeeping, and Other 

Compliance Requirements 

The proposals would require 

companies to disclose information 

regarding whether a financial expert 

serves on the audit committee, the 

ethics codes companies have created 

that apply to certain senior officers, and 

the adequacy of a company’s internal 

controls and procedures for financial 

reporting. All small entities that are 

subject to the reporting requirements of 

section 13(a) or 15(d) of the Exchange 

Act (and all small entities that are 

registered investment companies, with 

respect to the code of ethics and 

financial expert disclosure 

requirements) would be subject to these 

amendments. Because reporting 

companies already file the forms 

proposed to be amended, no additional 

professional skills beyond those 

currently possessed by these filers 

would be necessary to prepare the 

proposed new disclosure. We expect 

that reporting information in response 

to these new disclosure items would 

increase costs incurred by small entities 

because they would require these 

entities to compile and report more 

information. In addition, to the extent 

that some small entities may have 

difficulty attracting qualified financial 

experts onto their boards, such negative 

disclosure may have an impact on the 

market price of their securities. We 

expect that the added cost of the 

quarterly evaluations of internal 

controls and procedures for financial 

reporting would be mitigated by the fact 

that such entities currently are required 

to evaluate their disclosure controls and 

procedures. In large part, we believe 

there is significant overlap between 

these two types of controls and 

procedures. We have calculated for 

purposes of the Paperwork Reduction 

Act that each company, including a 

small entity, would be subject to an 

added annual reporting burden of up to 

26 hours and an estimated annual 

average cost of up to $2,650 for 

disclosure assistance from outside 

counsel as a result of the amendments. 

F. Duplicative, Overlapping, or 

Conflicting Federal Rules 

The proposed disclosure would not 

duplicate, overlap, or conflict with other 

federal rules. The Federal Deposit 

Insurance Corporation has in place rules 

that, among other things, require 

insured depository institutions with 

total assets of $500 million or more to 

prepare an annual internal control 

report of management containing 

information similar to information that 

would be required under the proposed 

rules. Insured depository institutions 

would not be subject to the proposed 

disclosure requirements; however, the 

FDIC’s rules permit an insured 

depository institution that is the 

subsidiary of a holding company to 

satisfy its internal control report 

requirement with an internal control 

report of the consolidated holding 

company. Bank and thrift holding 

companies that are required to file 

reports under section 13(a) or 15(d) of 

the Exchange Act would be subject to 

the disclosure requirements under the 

proposed rules. We are coordinating 

Federal Register / Vol. 67, No. 210 / Wednesday, October 30, 2002 / Proposed Rules 66229

144 Item 10 of Regulation S–B (17 CFR 228.10) 

defines a small business issuer as a company that 

has revenues of less than $25 million, is a U.S. or 

Canadian issuer, is not an investment company, and 

has a public float of less than $25 million. Also, if 

it is a majority owned subsidiary, the parent 

corporation also must be a small business issuer. 

Rule 0–10 of the Exchange Act (17 CFR 240.10) 

defines a small entity for purposes of the Regulatory 

Flexibility Act as a company that, on the last day 

of its most recent fiscal year, had total assets of $5 

million or less. 145Pub. L. 104–121, Title II, 110 Stat. 857 (1996).

with the FDIC and other federal banking 

regulators to eliminate, to the extent 

possible, any unnecessary duplication 

between our proposed disclosure and 

the FDIC’s annual internal control 

report requirements. There are no other 

requirements that companies file or 

provide similar information. 

G. Significant Alternatives 

The Regulatory Flexibility Act directs 

the Commission to consider significant 

alternatives that would accomplish the 

stated objective, while minimizing any 

significant adverse impact on small 

entity issuers. In connection with the 

proposed revisions, we considered the 

following alternatives: (a) The 

establishment of differing compliance or 

reporting requirements or timetables 

that take into account the resources 

available to small entities; (b) the 

clarification, consolidation, or 

simplification of the reporting 

requirements for small entities; (c) the 

use of performance rather than design 

standards; and (d) an exemption from 

coverage of the requirements, or any 

part thereof, for small entities. 

We believe that different compliance 

or reporting requirements or timetables 

for small entities would interfere with 

achieving the primary goal of increasing 

transparency of corporate activities and 

internal procedures. We do, however, 

solicit comment on whether small 

business issuers, which is a broader 

category of issuers than small 

entities,144 should be subject to fewer 

disclosure requirements than other 

issuers. Although we generally believe 

that an exemption for small entities 

from coverage of the proposed revisions 

is not appropriate and inconsistent with 

the policies underlying the SarbanesOxley Act, we solicit comment on the 

propriety of a complete or partial 

exemption from the requirements for 

small business issuers. We also think 

that the current and proposed disclosure 

requirements are clear and 

straightforward. The proposed new 

financial expert and code of ethics 

disclosure requirements would require 

brief disclosure. The proposed annual 

internal control requirement would 

require more. Therefore, it does not 

seem necessary to develop separate 

requirements for small entities. We have 

used design rather than performance 

standards in connection with the 

proposed revisions because we want 

this disclosure to appear in a specific 

type of disclosure filing so that investors 

will know where to find the 

information. We also want the 

information to be filed electronically 

with us using the EDGAR filing system. 

We do not believe that performance 

standards for small entities would be 

consistent with the purpose of the 

proposed revisions.

H. Solicitation of Comments 

We encourage the submission of 

comments with respect to any aspect of 

this Initial Regulatory Flexibility 

Analysis. In particular, we request 

comments regarding: (i) The number of 

small entity issuers that may be affected 

by the proposed revisions; (ii) the 

existence or nature of the potential 

impact of the proposed revisions on 

small entity issuers discussed in the 

analysis; and (iii) how to quantify the 

impact of the proposed revisions. 

Commenters are asked to describe the 

nature of any impact and provide 

empirical data supporting the extent of 

the impact. Such comments will be 

considered in the preparation of the 

Final Regulatory Flexibility Analysis, if 

the proposed revisions are adopted, and 

will be placed in the same public file as 

comments on the proposed amendments 

themselves. 

VII. Small Business Regulatory 

Enforcement Fairness Act

For purposes of the Small Business 

Regulatory Enforcement Fairness Act of 

1996 (‘‘SBREFA’’),145 a rule is ‘‘major’’

if it has resulted, or is likely to result in:

• An annual effect on the economy of 

$100 million or more; 

• A major increase in costs or prices 

for consumers or individual industries; 

or 

• Significant adverse effects on 

competition, investment or innovation. 

Commenters should provide 

empirical data on (a) the annual effect 

on the economy; (b) any increase in 

costs or prices for consumers or 

individual industries; and (c) any effect 

on competition, investment or 

innovation. We request your comments 

on the reasonableness of this estimate. 

VIII. Statutory Basis 

We are proposing the amendments to 

Securities Exchange Act Form 10–K, 

Form 10–KSB, Form 10–Q, Form 10–

QSB, Form 20–F, Form 40–F, Form 8–

K, Form 12b–25, Securities Exchange 

Act and Investment Company Act Form 

N–SAR and Form N–CSR, Securities 

Exchange Act Rule 12b–25, Rule 13a–

14, Rule 13a–15, Rule 15d–14 and Rule 

15d–15, Investment Company Act Rule 

30a–2 and Rule 30a–3, and Regulations 

S–B, S–K and S–X pursuant to sections 

5, 6, 7, 10, 17 and 19 of the Securities 

Act, as amended, sections 12, 13, 15, 23 

and 36 of the Securities Exchange Act, 

as amended, sections 8, 30, 31 and 38 

of the Investment Company Act, as 

amended, and sections 3(a), 404, 406 

and 407 of the Sarbanes-Oxley Act of 

2002. 

Text of the Proposed Amendments

List of Subjects 

17 CFR Part 210 

Accountants, Accounting, Reporting 

and recordkeeping requirements, 

Securities. 

17 CFR Part 228 

Reporting and recordkeeping 

requirements, Securities, Small 

businesses. 

17 CFR Parts 229, 240 and 249 

Reporting and recordkeeping 

requirements, Securities. 

17 CFR Parts 270 and 274 

Investment companies, Reporting and 

recordkeeping requirements, Securities.

For the reasons set out above, we 

propose to amend title 17, chapter II of 

the Code of Federal Regulations as 

follows:

PART 210—FORM AND CONTENT OF 

AND REQUIREMENTS FOR FINANCIAL 

STATEMENTS, SECURITIES ACT OF 

1933, SECURITIES EXCHANGE ACT 

OF 1934, PUBLIC UTILITY HOLDING 

COMPANY ACT OF 1935, INVESTMENT 

COMPANY ACT OF 1940, INVESTMENT 

ADVISERS ACT OF 1940, AND 

ENERGY POLICY AND 

CONSERVATION ACT OF 1975 

1. The authority citation for Part 210 

is amended by adding the following 

citations:

Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 

77z–2, 77z–3, 77aa(25), 77aa(26), 78c, 78j–1, 

78l, 78m, 78n, 78o(d), 78q, 78u–5, 78w(a), 

78ll, 78mm, 79e(b), 79j(a), 79n, 79t(a), 80a–

8, 80a–20, 80a–29, 80a–30, 80a–37(a), 80b–3, 

80b–11 unless otherwise noted.

Section 210.1–02 is also issued under secs. 

3(a) and 404, Pub. L. No. 107–204, 116 Stat. 

745. 

Section 210.2–02 is also issued under secs. 

3(a) and 404, Pub. L. No. 107–204, 116 Stat. 

745.

2. Amend § 210.1–02 by: 

a. Removing the authority citation 

following § 210.1–02;

66230 Federal Register / Vol. 67, No. 210 / Wednesday, October 30, 2002 / Proposed Rules 

b. Redesignating paragraphs (a) 

through (bb) as (b) through (cc); and 

c. Adding new paragraph (a) to read 

as follows:

§ 210.1–02 Definition of terms used in 

Regulation S–X (17 CFR part 210). 

(a) Accountant’s attestation. The term 

accountant’s attestation means a 

document in which a registered public 

accounting firm expresses an opinion 

concerning a registrant’s assertion about 

the effectiveness of its internal controls 

and procedures for financial reporting 

in accordance with standards for 

attestation engagements. The attestation 

indicates the scope of the accountant’s 

examination and sets forth the 

accountant’s opinion as to whether the 

registrant’s assertion about the 

effectiveness of its internal controls and 

procedures for financial reporting is 

fairly stated, in all material respects, or 

includes an opinion to the effect that an 

overall opinion cannot be expressed. 

When an overall opinion cannot be 

expressed, the registered public 

accounting firm must explain why it is 

unable to express such an opinion.

* * * * *

3. Amend § 210.2–02 by: 

a. Revising the section heading; 

b. Revising the headings of paragraphs 

(a), (b), (c) and (d); and 

c. Adding new paragraph (f). 

The additions and revisions read as 

follows.

§ 210.2–02 Accountants’ reports and 

attestations. 

(a) Technical requirements for 

accountants’ reports. * * * 

(b) Representations as to the audit 

included in accountants’ reports. * * * 

(c) Opinions to be expressed in 

accountants’ reports. * * * 

(d) Exceptions identified in 

accountants’ reports. ***

* * * * *

(f) Accountants’ attestations. Every 

registered public accounting firm that 

issues or prepares an accountant’s 

report for a registrant, other than an 

investment company registered under 

section 8 of the Investment Company 

Act of 1940 (15 U.S.C. 80a–8), must 

examine, attest to, and report separately 

on, the internal control report of 

management concerning the 

effectiveness of the registrant’s internal 

controls and procedures for financial 

reporting. The accountant’s attestation 

shall be dated, signed manually, 

identify the period covered by the report 

and clearly state the opinion of the 

accountant as to whether the registrant’s 

disclosure about the effectiveness of its 

internal controls and procedures for 

financial reporting is fairly stated in all 

material respects, or must include an 

opinion to the effect that an overall 

opinion cannot be expressed. If an 

overall opinion cannot be expressed, 

explain why.

PART 228—INTEGRATED 

DISCLOSURE SYSTEM FOR SMALL 

BUSINESS ISSUERS 

4. The authority citation for Part 228 

is revised to read as follows:

Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 

77k, 77s, 77z–2, 77z–3, 77aa(25), 77aa(26), 

77ddd, 77eee, 77ggg, 77hhh, 77jjj, 77nnn, 

77sss, 78l, 78m, 78n, 78o, 78u–5, 78w, 78ll, 

78mm, 80a–8, 80a–29, 80a–30, 80a–37 and 

80b–11.

Section 228.307 is also issued under secs. 

3(a), 302 and 404, Pub. L. No. 107–204, 116 

Stat. 745. 

Section 228.309 is also issued under secs. 

3(a) and 407, Pub. L. No. 107–204, 116 Stat. 

745. 

Section 228.406 is also issued under secs. 

3(a) and 406, Pub. L. No. 107–204, 116 Stat. 

745.

5. Revise § 228.307 to read as follows:

§ 228.307 (Item 307) Controls and 

procedures. 

(a) Evaluation of disclosure controls 

and procedures and internal controls 

and procedures for financial reporting.

Disclose the conclusions of the small 

business issuer’s principal executive 

officer or officers and principal financial 

officer or officers, or persons performing 

similar functions, about the 

effectiveness of the small business 

issuer’s disclosure controls and 

procedures and internal controls and 

procedures for financial reporting based 

on management’s evaluation of these 

controls and procedures in accordance 

with §§ 240.13a–15 or 240.15d–this 

chapter as of the end of the period 

covered by the quarterly or annual 

report that includes the disclosure 

required by this paragraph. 

(b) Changes to internal controls and 

procedures for financial reporting. 

Disclose any significant changes to 

the small business issuer’s internal 

controls and procedures for financial 

reporting made during the period 

covered by the quarterly or annual 

report that includes the disclosure 

required by this paragraph, including 

any actions taken to correct significant 

deficiencies and material weaknesses in 

the small business issuer’s internal 

controls and procedures for financial 

reporting. 

(c) Report on management’s 

responsibilities. Furnish an internal 

control report of management that 

includes: 

(1) A statement of management’s 

responsibilities for establishing and 

maintaining adequate internal controls 

and procedures for financial reporting 

for the small business issuer; 

(2) Conclusions about the 

effectiveness of the small business 

issuer’s internal controls and 

procedures for financial reporting based 

on management’s evaluation of those 

controls and procedures in accordance 

with §§ 240.13a–15 or 240.15d–15 of 

this chapter as of the end of the small 

business issuer’s most recent fiscal year;

(3) A statement that the registered 

public accounting firm that prepared or 

issued the small business issuer’s audit 

report relating to the financial 

statements included in the report 

containing the disclosure required by 

this Item has attested to, and reported 

on, management’s evaluation of the 

small business issuer’s internal controls 

and procedures for financial reporting; 

and 

(4) The attestation report of the 

registered public accounting firm that 

audited or reviewed the financial 

statements included in the annual 

report containing the disclosure 

required by this Item. 

Instructions to Item 307 

1. A small business issuer that is an 

Asset-Backed Issuer (as defined in 

§ 240.13a–14(g) and § 240.15d–14(g) of 

this chapter) is not required to disclose 

the information required by this Item. 

2. For purposes of this Item, the terms 

‘‘disclosure controls and procedures’’

and ‘‘internal controls and procedures 

for financial reporting’’ shall have the 

meanings specified in § 240.13a–14 and 

§ 240.15d–14 of this chapter. 

3. If the conclusions of the small 

business issuer’s principal executive 

and financial officers are reflected in the 

conclusions disclosed pursuant to 

paragraph (c)(2) of this Item, the small 

business issuer does not have to include 

any separate disclosure required by 

paragraph (a) of this Item regarding the 

effectiveness of the small business 

issuer’s internal controls and 

procedures for financial reporting as of 

the end of the small business issuer’s 

most recent fiscal year. 

4. The small business issuer is 

encouraged, but not required, to include 

the annual report disclosure required by 

paragraph (b) of this Item in the internal 

control report required by paragraph (c) 

of this Item, rather than disclosing it 

elsewhere in the annual report. 

6. Add § 228.309 to read as follows:

§ 228.309 (Item 309) Audit committee 

financial experts. 

Disclose the number and names of the 

persons that the small business issuer’s 

board of directors has determined to be 

Federal Register / Vol. 67, No. 210 / Wednesday, October 30, 2002 / Proposed Rules 66231

the financial expert or experts serving 

on the small business issuer’s audit 

committee, as defined in section 3(a)(58) 

of the Exchange Act (15 U.S.C. 

78c(a)(58)). Also disclose whether the 

financial expert or experts are 

independent, as that term is used in 

section 10A(m)(3) of the Exchange Act 

(15 U.S.C. 78j–1(m)(3)) and if not, an 

explanation of why they are not. If the 

small business issuer’s board of 

directors has not determined that a 

financial expert is serving on its audit 

committee, the small business issuer 

must disclose that fact and explain why 

it does not have such an expert. 

Instructions to Item 309 

1. For purposes of the determination 

by the board of directors under this Item 

309, the term ‘‘financial expert’’ means 

a person who has, through education 

and experience as a public accountant 

or auditor, or a principal financial 

officer, controller, or principal 

accounting officer, of a company that, at 

the time the person held such position, 

was required to file reports pursuant to 

section 13(a) or 15(d) of the Exchange 

Act (15 U.S.C. 78m(a) and 78o(d)), or 

experience in one or more positions that 

involve the performance of similar 

functions (or that results, in the 

judgment of the board of directors, in 

the person’s having similar expertise 

and experience), the following 

attributes: 

a. An understanding of generally 

accepted accounting principles and 

financial statements; 

b. Experience applying such generally 

accepted accounting principles in 

connection with the accounting for 

estimates, accruals, and reserves that are 

generally comparable to the estimates, 

accruals and reserves, if any, used in the 

small business issuer’s financial 

statements;

c. Experience preparing or auditing 

financial statements that present 

accounting issues that are generally 

comparable to those raised by the small 

business issuer’s financial statements; 

d. Experience with internal controls 

and procedures for financial reporting; 

and 

e. An understanding of audit 

committee functions. 

2. If the board of directors has 

determined that a person is a financial 

expert because, in the board’s judgment, 

he or she has similar expertise and 

experience to those enumerated, the 

small business issuer must disclose the 

basis for that determination. 

3. In evaluating the education and 

experience of a person, the board of 

directors should consider the following 

factors in the aggregate: 

a. The level of the person’s accounting 

or financial education, including 

whether the person has earned an 

advanced degree in finance or 

accounting; 

b. Whether the person is a certified 

public accountant, or the equivalent, in 

good standing, and the length of time 

that the person actively has practiced as 

a certified public accountant, or the 

equivalent; 

c. Whether the person is certified or 

otherwise identified as having 

accounting or financial experience by a 

recognized private body that establishes 

and administers standards in respect of 

such expertise, whether that person is in 

good standing with the recognized 

private body, and the length of time that 

the person has been actively certified or 

identified as having this expertise; 

d. Whether the person has served as 

a principal financial officer, controller 

or principal accounting officer of a 

company that, at the time the person 

held such position, was required to file 

reports pursuant to section 13(a) or 

15(d) of the Exchange Act, and if so, for 

how long; 

e. The person’s specific duties while 

serving as a public accountant, auditor, 

principal financial officer, controller, 

principal accounting officer or position 

involving the performance of similar 

functions; 

f. The person’s level of familiarity and 

experience with all applicable laws and 

regulations regarding the preparation of 

financial statements that must be 

included in reports filed under section 

13(a) or 15(d) of the Exchange Act; 

g. The level and amount of the 

person’s direct experience reviewing, 

preparing, auditing or analyzing 

financial statements that must be 

included in reports filed under section 

13(a) or 15(d) of the Exchange Act; 

h. The person’s past or current 

membership on one or more audit 

committees of companies that, at the 

time the person held such membership, 

were required to file reports pursuant to 

section 13(a) or 15(d) of the Exchange 

Act; 

i. The person’s level of familiarity and 

experience with the use and analysis of 

financial statements of public 

companies; 

j. Whether the person has any other 

relevant qualifications or experience 

that would assist him or her in 

understanding and evaluating the small 

business issuer’s financial statements 

and other financial information and to 

make knowledgeable and thorough 

inquiries whether: 

i. The financial statements fairly 

present the financial condition, results 

of operations and cash flows of the 

small business issuer in accordance 

with generally accepted accounting 

principles; and 

ii. The financial statements and other 

financial information, taken together, 

fairly present the financial condition, 

results of operations and cash flows of 

the small business issuer; and

k. In the case of a foreign private 

issuer, the person’s level of experience 

in respect of public companies in the 

foreign private issuer’s home country, 

generally accepted accounting 

principles used by the issuer, and the 

reconciliation of financial statements 

with U.S. generally accepted accounting 

principles. 

4. Although the board of directors 

should consider the factors listed in 

Instruction 3, those factors are not 

replacements for, and a financial expert 

must satisfy, all of the attributes listed 

in Instruction 1 to this Item. 

5. In the case of foreign private issuers 

with two-tier boards of directors, for 

purposes of this Item 309, the term 

‘‘board of directors’’ means the 

supervisory or non-management board. 

6. A small business issuer that is an 

Asset-Backed Issuer (as defined in 

§ 240.13a–14(g) and § 240.15d–14(g) of 

this chapter) is not required to disclose 

the information required by this Item. 

7. Add § 228.406 to read as follows:

§ 228.406 (Item 406) Code of ethics. 

(a) Disclose whether the small 

business issuer has adopted a written 

code of ethics that applies to the small 

business issuer’s principal executive 

officer, principal financial officer, 

principal accounting officer or 

controller, or persons performing 

similar functions. If the small business 

issuer has not adopted such a code of 

ethics, explain why it has not done so. 

(b) If the small business issuer plans 

to elect to disclose any amendments to, 

or waivers from, its code of ethics on its 

Internet website, disclose the small 

business issuer’s Internet address and 

its intention to disclose these events on 

its website. If the small business issuer 

elects to disclose this information 

through its website, it must make such 

information available for at least a 12-

month period. Following the 12-month 

period, the small business issuer must 

retain the information for a period of 

five years. Upon request, the small 

business issuer must furnish to the 

Commission or its staff a copy of any or 

all information retained pursuant to this 

requirement. 

Instructions to Item 406 

1. For purposes of this Item 406, the 

term ‘‘code of ethics’’ means a 

codification of such standards that is 

66232 Federal Register / Vol. 67, No. 210 / Wednesday, October 30, 2002 / Proposed Rules 

reasonably designed to deter 

wrongdoing and to promote: 

(a) Honest and ethical conduct, 

including the ethical handling of actual 

or apparent conflicts of interest between 

personal and professional relationships; 

(b) Avoidance of conflicts of interest, 

including disclosure to an appropriate 

person or persons identified in the code 

of any material transaction or 

relationship that reasonably could be 

expected to give rise to such a conflict; 

(c) Full, fair, accurate, timely, and 

understandable disclosure in reports 

and documents that a registrant files 

with, or submits to, the Commission and 

in other public communications made 

by the small business issuer; 

(d) Compliance with applicable 

governmental laws, rules and 

regulations; 

(e) The prompt internal reporting to 

an appropriate person or persons 

identified in the code of violations of 

the code; and 

(f) Accountability for adherence to the 

code. 

2. A small business issuer that is an 

Asset-Backed Issuer (as defined in 

§ 240.13a–14(g) and § 240.15d–14(g) of 

this chapter) is not required to disclose 

the information required by this Item. 

8. Amend § 228.601 by: 

a. Removing the ‘‘No exhibit 

required’’ designation for exhibit (14) 

and adding ‘‘Code of ethics’’ in its place 

in the Exhibit Table;

b. Removing ‘‘N/A’’ corresponding to 

exhibit (14) under all captions in the 

Exhibit Table; 

c. Adding an ‘‘X’’ corresponding to 

exhibit (14) under the caption 

‘‘Exchange Act Forms,’’ ‘‘8–K and ‘‘10–

KSB’’ in the Exhibit Table; and 

d. Adding the text of paragraph 

(b)(14). 

The addition reads as follows:

§ 228.601 (Item 601) Exhibits.

* * * * *

(b) Description of exhibits. ***

(14) Code of ethics. Any written code 

of ethics, or amendment to that code of 

ethics, that applies to the small business 

issuer’s principal executive officer, 

principal financial officer, principal 

accounting officer or controller, or 

persons performing similar functions, 

subject to disclosure under Item 406 of 

Regulation S–B (§ 228.406) or Item 5.05 

of Form 8–K (§ 249.308 of this chapter).

* * * * *

PART 229—STANDARD 

INSTRUCTIONS FOR FILING FORMS 

UNDER SECURITIES ACT OF 1933, 

SECURITIES EXCHANGE ACT OF 1934 

AND ENERGY POLICY AND 

CONSERVATION ACT OF 1975—

REGULATION S–K 

9. The authority citation for Part 229 

is revised to read as follows:

Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 

77k, 77s, 77z–2, 77z–3, 77aa(25), 77aa(26), 

77ddd, 77eee, 77ggg, 77hhh, 77iii, 77jjj, 

77nnn, 77sss, 78c, 78i, 78j, 78l, 78m, 78n, 

78o, 78u–5, 78w, 78ll(d), 78mm, 79e, 79n, 

79t, 80a–8, 80a–29, 80a–30, 80a–31(c), 80a–

37, 80a–38(a) and 80b–11, unless otherwise 

noted.

Section 229.307 is also issued under secs. 

3(a), 302 and 404, Pub. L. 107–204, 116 Stat. 

745. 

Section 229.309 is also issued under secs. 

3(a) and 407, Pub. L. 107–204, 116 Stat. 745. 

Section 229.406 is also issued under secs. 

3(a) and 406, Pub. L. 107–204, 116 Stat. 745. 

Section 229.601 is also issued under secs. 

3(a) and 406, Pub. L. 107–204, 116 Stat. 745.

10. Revise § 229.307 to read as 

follows.

§ 229.307 (Item 307) Controls and 

procedures. 

(a) Evaluation of disclosure controls 

and procedures and internal controls 

and procedures for financial reporting.

Disclose the conclusions of the 

registrant’s principal executive officer or 

officers and principal financial officer or 

officers, or persons performing similar 

functions, about the effectiveness of the 

registrant’s disclosure controls and 

procedures and internal controls and 

procedures for financial reporting based 

on management’s evaluation of these 

controls and procedures in accordance 

with §§ 240.13a–15 and 240.15d–15 of 

this chapter as of the end of the period 

covered by the quarterly or annual 

report that includes the disclosure 

required by this paragraph. 

(b) Changes to internal controls and 

procedures for financial reporting.

Disclose any significant changes to the 

registrant’s internal controls and 

procedures for financial reporting made 

during the period covered by the 

quarterly or annual report that includes 

the disclosure required by this 

paragraph, including any actions taken 

to correct significant deficiencies and 

material weaknesses in the registrant’s 

internal controls and procedures for 

financial reporting. 

(c) Report on management’s 

responsibilities. Furnish an internal 

control report of management that 

includes:

(1) A statement of management’s 

responsibilities for establishing and 

maintaining adequate internal controls 

and procedures for financial reporting 

for the registrant; 

(2) Conclusions about the 

effectiveness of the registrant’s internal 

controls and procedures for financial 

reporting based on management’s 

evaluation of those controls and 

procedures in accordance with 

§§ 240.13a–15 or 240.15d–15 of this 

chapter as of the end of the registrant’s 

most recent fiscal year; 

(3) A statement that the registered 

public accounting firm that prepared or 

issued the registrant’s audit report 

relating to the financial statements 

included in the report containing the 

disclosure required by this Item has 

attested to, and reported on, 

management’s evaluation of the 

registrant’s internal controls and 

procedures for financial reporting; and 

(4) The attestation report of the 

registered public accounting firm that 

audited or reviewed the financial 

statements included in the annual 

report containing the disclosure 

required by this Item. 

Instructions to Item 307 

1. A registrant that is an Asset-Backed 

Issuer (as defined in § 240.13a–14(g) and 

§ 240.15d–14(g) of this chapter) is not 

required to disclose the information 

required by this Item. 

2. For purposes of this Item, the terms 

‘‘disclosure controls and procedures’’

and ‘‘internal controls and procedures 

for financial reporting’’ shall have the 

meanings specified in § 240.13a–14 and 

§ 240.15d–14 of this chapter. 

3. If the conclusions of the registrant’s 

principal executive and financial 

officers are reflected in the conclusions 

disclosed pursuant to paragraph (c)(2) of 

this Item, the registrant does not have to 

include any separate disclosure required 

by paragraph (a) of this Item regarding 

the effectiveness of the registrant’s 

internal controls and procedures for 

financial reporting as of the end of the 

registrant’s most recent fiscal year. 

4. The registrant is encouraged, but 

not required, to include the annual 

report disclosure required by paragraph 

(b) of this Item in the internal control 

report required by paragraph (c) of this 

Item, rather than disclosing it elsewhere 

in the annual report. 

11. Add § 229.309 to read as follows:

§ 229.309 (Item 309) Audit committee 

financial experts. 

Disclose the number and names of the 

persons that the registrant’s board of 

directors has determined to be the 

financial experts serving on the 

registrant’s audit committee, as defined 

in section 3(a)(58) of the Exchange Act 

(15 U.S.C. 78c(a)(58)). Also disclose 

Federal Register / Vol. 67, No. 210 / Wednesday, October 30, 2002 / Proposed Rules 66233

whether the financial expert or experts 

are independent as that term is used in 

section 10A(m)(3) of the Exchange Act 

(15 U.S.C. 78j–1(m)(3)), and if not, an 

explanation of why they are not. If the 

registrant’s board of directors has not 

determined that a financial expert is 

serving on its audit committee, the 

registrant must disclose that fact and 

explain why it does not have such an 

expert. 

Instructions to Item 309 

1. For purposes of the determination 

by the board of directors under this Item 

309, the term ‘‘financial expert’’ means 

a person who has, through education 

and experience as a public accountant 

or auditor, or a principal financial 

officer, controller, or principal 

accounting officer, of a company that, at 

the time the person held such position, 

was required to file reports pursuant to 

section 13(a) or 15(d) of the Exchange 

Act (15 U.S.C. 78m(a) and 78o(d)), or 

experience in one or more positions that 

involve the performance of similar 

functions (or that results, in the 

judgment of the board of directors, in 

the person’s having similar expertise 

and experience), the following 

attributes: 

a. An understanding of generally 

accepted accounting principles and 

financial statements;

b. Experience applying such generally 

accepted accounting principles in 

connection with the accounting for 

estimates, accruals, and reserves that are 

generally comparable to the estimates, 

accruals and reserves, if any, used in the 

registrant’s financial statements; 

c. Experience preparing or auditing 

financial statements that present 

accounting issues that are generally 

comparable to those raised by the 

registrant’s financial statements; 

d. Experience with internal controls 

and procedures for financial reporting; 

and 

e. An understanding of audit 

committee functions. 

2. If the board of directors has 

determined that a person is a financial 

expert because, in the board’s judgment, 

he or she has similar expertise and 

experience to those enumerated, the 

registrant must disclose the basis for 

that determination. 

3. In evaluating the education and 

experience of a person, the board of 

directors should consider the following 

factors in the aggregate: 

a. The level of the person’s accounting 

or financial education, including 

whether the person has earned an 

advanced degree in finance or 

accounting; 

b. Whether the person is a certified 

public accountant, or the equivalent, in 

good standing, and the length of time 

that the person actively has practiced as 

a certified public accountant, or the 

equivalent; 

c. Whether the person is certified or 

otherwise identified as having 

accounting or financial experience by a 

recognized private body that establishes 

and administers standards in respect of 

such expertise, whether that person is in 

good standing with the recognized 

private body, and the length of time that 

the person has been actively certified or 

identified as having this expertise; 

d. Whether the person has served as 

a principal financial officer, controller 

or principal accounting officer of a 

company that, at the time the person 

held such position, was required to file 

reports pursuant to section 13(a) or 

15(d) of the Exchange Act, and if so, for 

how long; 

e. The person’s specific duties while 

serving as a public accountant, auditor, 

principal financial officer, controller, 

principal accounting officer or position 

involving the performance of similar 

functions; 

f. The person’s level of familiarity and 

experience with all applicable laws and 

regulations regarding the preparation of 

financial statements that must be 

included in reports filed under section 

13(a) or 15(d) of the Exchange Act; 

g. The level and amount of the 

person’s direct experience reviewing, 

preparing, auditing or analyzing 

financial statements that must be 

included in reports filed under section 

13(a) or 15(d) of the Exchange Act; 

h. The person’s past or current 

membership on one or more audit 

committees of companies that, at the 

time the person held such membership, 

were required to file reports pursuant to 

section 13(a) or 15(d) of the Exchange 

Act; 

i. The person’s level of familiarity and 

experience with the use and analysis of 

financial statements of public 

companies; 

j. Whether the person has any other 

relevant qualifications or experience 

that would assist him or her in 

understanding and evaluating the 

registrant’s financial statements and 

other financial information and to make 

knowledgeable and thorough inquiries 

whether: 

i. The financial statements fairly 

present the financial condition, results 

of operations and cash flows of the 

registrant in accordance with generally 

accepted accounting principles; and 

ii. The financial statements and other 

financial information, taken together, 

fairly present the financial condition, 

results of operations and cash flows of 

the registrant; and

k. In the case of a foreign private 

issuer, the person’s level of experience 

in respect of public companies in the 

foreign private issuer’s home country, 

generally accepted accounting 

principles used by the issuer, and the 

reconciliation of financial statements 

with U.S. generally accepted accounting 

principles. 

4. Although the board of directors 

should consider the factors listed in 

Instruction 3, those factors are not 

replacements for, and a financial expert 

must satisfy, all of the attributes listed 

in Instruction 1 to this Item. 

5. In the case of foreign private issuers 

with two-tier boards of directors, for 

purposes of this Item 309, the term 

‘‘board of directors’’ means the 

supervisory or non-management board. 

6. A registrant that is an Asset-Backed 

Issuer (as defined in § 240.13a–14(g) and 

§ 240.15d–14(g) of this chapter) is not 

required to disclose the information 

required by this Item. 

12. Add § 229.406 to read as follows:

§ 229.406 (Item 406) Code of ethics. 

(a) Disclose whether the registrant has 

adopted a written code of ethics that 

applies to the registrant’s principal 

executive officer, principal financial 

officer, principal accounting officer or 

controller, or persons performing 

similar functions. If the registrant has 

not adopted such a code of ethics, 

explain why it has not done so. 

(b) If the registrant plans to elect to 

disclose any amendments to, or waivers 

from, its code of ethics on its Internet 

website, disclose the registrant’s 

Internet address and its intention to 

disclose these events on its website. If 

the registrant elects to disclose this 

information through its website, it must 

make such information available for at 

least a 12-month period. Following the 

12-month period, the registrant must 

retain the information for a period of not 

less than five years. Upon request, the 

registrant must furnish to the 

Commission or its staff a copy of any or 

all information retained pursuant to this 

requirement. 

Instructions to Item 406 

1. For purposes of this Item 406, the 

term ‘‘code of ethics’’ means a 

codification of such standards that is 

reasonably designed to deter 

wrongdoing and to promote: 

(a) Honest and ethical conduct, 

including the ethical handling of actual 

or apparent conflicts of interest between 

personal and professional relationships; 

(b) Avoidance of conflicts of interest, 

including disclosure to an appropriate 

66234 Federal Register / Vol. 67, No. 210 / Wednesday, October 30, 2002 / Proposed Rules 

person or persons identified in the code 

of any material transaction or 

relationship that reasonably could be 

expected to give rise to such a conflict; 

(c) Full, fair, accurate, timely, and 

understandable disclosure in reports 

and documents that a registrant files 

with, or submits to, the Commission and 

in other public communications made 

by the registrant; 

(d) Compliance with applicable 

governmental laws, rules and 

regulations; 

(e) The prompt internal reporting to 

an appropriate person or persons 

identified in the code of violations of 

the code; and 

(f) Accountability for adherence to the 

code. 

2. A registrant that is an Asset-Backed 

Issuer (as defined in § 240.13a–14(g) and 

§ 240.15d–14(g) of this chapter) is not 

required to disclose the information 

required by this Item. 

13. Amend § 229.601 by: 

a. Removing the ‘‘reserved’’

designation for exhibit (14) and adding 

‘‘Code of ethics’’ in its place in the 

Exhibit Table; 

b. Removing ‘‘N/A’’ corresponding to 

exhibit (14) under all captions in the 

Exhibit Table;

c. Adding an ‘‘X’’ corresponding to 

exhibit (14) under the caption 

‘‘Exchange Act Forms’’, ‘‘8–K’’ and ‘‘10–

K’’ in the Exhibit Table; and 

d. Adding the text of paragraph 

(b)(14). 

The addition reads as follows:

§ 229.601 (Item 601) Exhibits.

* * * * *

(b) Description of exhibits. * * * 

(14) Code of ethics. Any written code 

of ethics, or amendment to that code of 

ethics, that applies to the registrant’s 

principal executive officer, principal 

financial officer, principal accounting 

officer or controller, or persons 

performing similar functions, subject to 

disclosure under Item 406 of Regulation 

S–K (§ 229.406) or Item 5.05 of Form 8–

K (§ 249.308 of this chapter).

* * * * *

PART 240—GENERAL RULES AND 

REGULATIONS, SECURITIES 

EXCHANGE ACT OF 1934 

14. The authority citation for Part 240 

is amended by revising the specific 

authority for ‘‘Section 240.13a–15’’ and 

‘‘Section 240.15d–15’’ and adding an 

authority in numerical order to read as 

follows:

Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 

77s, 77z–2, 77z–3, 77eee, 77ggg, 77nnn, 

77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i, 78j, 

78j–1, 78k, 78k–1, 78l, 78m, 78n, 78o, 78p, 

78q, 78s, 78u–5, 78w, 78x, 78ll, 78mm, 79q, 

79t, 80a–20, 80a–23, 80a–29, 80a–37, 80b–3, 

80b–4 and 80b–11, unless otherwise noted.

* * * * *

Section 240.13a–15 is also issued under 

secs. 3(a), 302 and 404, Pub. L. 107–204, 116 

Stat. 745.

* * * * *

Section 240.14a–101 is also issued under 

secs. 3(a) and 407, Pub. L. 107–204, 116 Stat. 

745.

* * * * *

Section 240.15d–15 is also issued under 

secs. 3(a), 302 and 404, Pub. L. 107–204, 116 

Stat. 745.

* * * * *

15. As proposed in 67 FR 42914, 

amend § 240.12b–25 by revising the 

section heading and paragraphs (a) and 

(b)(2)(ii) to read as follows:

§ 240.12b–25 Notification of inability to 

timely file all or any required portion of a 

Form 10–K, 10–KSB, 20–F, 11–K, N–SAR, 

N–CSR, 10–Q, 10–QSB or 8–K. 

(a) If all or any required portion of an 

annual or transition report on Form 10–

K, 10–KSB, 20–F or 11–K (17 CFR 

249.310, 249.310b, 249.220f or 249.311), 

or a quarterly or transition report on 

Form 10–Q or 10–QSB (17 CFR 

249.308a or 249.308b), or a current 

report on Form 8–K (17 CFR 249.308) 

required to be filed pursuant to sections 

13 or 15(d) of the Act (15 U.S.C. 78m or 

78o(d)) and rules thereunder, or if all or 

any portion of a semi-annual, annual or 

transition report on Form N–SAR or N–

CSR (17 CFR 274.101 or 274.128 of this 

chapter) required to be filed pursuant to 

sections 13 or 15(d) of the Act or section 

30 of the Investment Company Act of 

1940 (15 U.S.C. 80a–29) and the rules 

thereunder is not filed within the time 

period prescribed for such report, the 

registrant, no later than one business 

day after the due date for such report, 

shall file a Form 12b–25 (17 CFR 

249.322 of this chapter) with the 

Commission which shall contain 

disclosure of its inability to file the 

report timely and the reasons therefor in 

reasonable detail. 

(b) * * * 

(1) * * * 

(2) * * * 

(i) * * * 

(ii) The subject annual report, semiannual report or transition report on 

Form 10–K, 10–KSB, 20–F, 11–K, N–

SAR, or N–CSR, or portion thereof, will 

be filed no later than the fifteenth 

calendar day following the prescribed 

due date; or the subject quarterly report 

or transition report on Form 10–Q or 

10–QSB, or portion thereof, will be filed 

no later than the fifth calendar day 

following the prescribed due date; or the 

subject current report on Form 8–K, or 

portion thereof, will be filed no later 

than the second business day following 

the prescribed due date and, in the case 

of Form 8–K, specifying the Item 

number or numbers to be included in 

the filing; and 

16. Amend § 240.13a–14 by: 

a. Revising paragraph (b)(4); 

b. Redesignating paragraphs (d), (e), 

(f) and (g) as paragraphs (e), (f), (g) and 

(h); and 

c. Adding new paragraph (d). 

The revisions and additions read as 

follows:

§ 240.13a–14 Certification of disclosure in 

annual and quarterly reports.

* * * * *

(b) * * *

(4) He or she and the other certifying 

officers are responsible for establishing 

and maintaining disclosure controls and 

procedures and internal controls and 

procedures for financial reporting (as 

such terms are defined in paragraphs (c) 

and (d) of this section) for the issuer and 

have: 

(i) Designed such disclosure controls 

and procedures, or caused such 

disclosure controls and procedures to be 

designed under their supervision, to 

ensure that material information relating 

to the issuer, including its consolidated 

subsidiaries, is made known to them by 

others within those entities, particularly 

during the period in which periodic 

reports are being prepared; 

(ii) Designed such internal controls 

and procedures for financial reporting, 

or caused such internal controls and 

procedures for financial reporting to be 

designed under their supervision, to 

provide reasonable assurances that the 

registrant’s financial statements are 

fairly presented in conformity with 

generally accepted accounting 

principles; 

(iii) Evaluated the effectiveness of the 

registrant’s disclosure controls and 

procedures and internal controls and 

procedures for financial reporting as of 

the end of the period covered by the 

report (‘‘Evaluation Date’’); 

(iv) Presented in the report their 

conclusions about the effectiveness of 

the disclosure controls and procedures 

and internal controls and procedures for 

financial reporting, in each case based 

on their evaluation as of the Evaluation 

Date; 

(v) Disclosed to the registrant’s 

auditors and the audit committee of the 

board of directors (or persons fulfilling 

the equivalent function): 

(A) All significant deficiencies and 

material weaknesses in the design or 

operation of internal controls and 

procedures for financial reporting which 

could adversely affect the registrant’s 

Federal Register / Vol. 67, No. 210 / Wednesday, October 30, 2002 / Proposed Rules 66235

ability to record, process, summarize 

and report financial information 

required to be disclosed by the 

registrant in the reports that it files or 

submits under the Act (15 U.S.C. 78a et 

seq.), within the time periods specified 

in the Commission’s rules and forms; 

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 procedures for financial reporting; 

and 

(vi) Indicated in the report any 

significant changes in the registrant’s 

internal controls and procedures for 

financial reporting or in other factors 

that could significantly affect internal 

controls and procedures for financial 

reporting made during the period 

covered by the report, including any 

actions taken to correct significant 

deficiencies and material weaknesses in 

the registrant’s internal controls and 

procedures for financial reporting.

* * * * *

(d) For purposes of this section and 

§ 240.13a–15, the term internal controls 

and procedures for financial reporting

means controls that pertain to the 

preparation of financial statements for 

external purposes that are fairly 

presented in conformity with generally 

accepted accounting principles as 

addressed by the Codification of 

Statements on Auditing Standards § 319 

or any superseding definition or other 

literature that is issued or adopted by 

the Public Company Accounting 

Oversight Board.

* * * * *

17. Amend § 240.13a–15 by: 

a. Revising the section heading and 

paragraph (b); and 

b. Adding paragraph (c). 

The revisions and addition read as 

follows:

§ 240.13a–15 Controls and procedures.

* * * * *

(b) In connection with each report, 

including transition reports, filed on 

Form 10–Q, Form 10–QSB, Form 10–K, 

Form 10–KSB, Form 20–F or Form 40–

F (§§ 249.308a, 249.308b, 249.310, 

249.310b, 249.220f or 249.240f of this 

chapter) under section 13(a) of the Act 

(15 U.S.C. 78m(a)), other than a report 

filed by an Asset-Backed Issuer (as 

defined in § 240.13a–14), the issuer’s 

management must conduct an 

evaluation, with the participation of the 

issuer’s principal executive officer or 

officers and principal financial officer or 

officers, or persons performing similar 

functions, of the effectiveness, as of the 

end of the period covered by the report, 

of the design and operation of the 

issuer’s disclosure controls and 

procedures and the issuer’s internal 

controls and procedures for financial 

reporting. 

(c) In connection with each report, 

including transition reports, filed on 

Form N–CSR (§§ 249.331 and 274.128 of 

this chapter) or Form N–SAR 

(§§ 249.330 and 274.101 of this chapter) 

that requires certification under 

§ 270.30a–2 of this chapter, the issuer’s 

management must conduct an 

evaluation, with the participation of the 

issuer’s principal executive officer or 

officers and principal financial officer or 

officers, or persons performing similar 

functions, of the effectiveness, as of the 

end of the period covered by the report, 

of the design and operation of the 

issuer’s disclosure controls and 

procedures. 

18. Amend § 240.15d–14 by: 

a. Revising paragraph (b)(4); 

b. Redesignating paragraphs (d), (e), 

(f) and (g) as paragraphs (e), (f), (g) and 

(h); and 

c. Adding new paragraph (d). 

The revisions and additions read as 

follows:

§ 240.15d–14 Certification of disclosure in 

annual and quarterly reports.

* * * * *

(b) * * * 

(4) He or she and the other certifying 

officers are responsible for establishing 

and maintaining disclosure controls and 

procedures and internal controls and 

procedures for financial reporting (as 

such terms are defined in paragraphs (c) 

and (d) of this section) for the issuer and 

have: 

(i) Designed such disclosure controls 

and procedures, or caused such 

disclosure controls and procedures to be 

designed under their supervision, to 

ensure that material information relating 

to the issuer, including its consolidated 

subsidiaries, is made known to them by 

others within those entities, particularly 

during the period in which periodic 

reports are being prepared; 

(ii) Designed such internal controls 

and procedures for financial reporting, 

or caused such internal controls and 

procedures for financial reporting to be 

designed under their supervision, to 

provide reasonable assurances that the 

registrant’s financial statements are 

fairly presented in conformity with 

generally accepted accounting 

principles; 

(iii) Evaluated the effectiveness of the 

registrant’s disclosure controls and 

procedures and internal controls and 

procedures for financial reporting as of 

the end of the period covered by the 

report (‘‘Evaluation Date’’); 

(iv) Presented in the report their 

conclusions about the effectiveness of 

the disclosure controls and procedures 

and internal controls and procedures for 

financial reporting, in each case based 

on their evaluation as of the Evaluation 

Date; 

(v) Disclosed to the registrant’s 

auditors and the audit committee of the 

board of directors (or persons fulfilling 

the equivalent function): 

(A) All significant deficiencies and 

material weaknesses in the design or 

operation of internal controls and 

procedures for financial reporting which 

could adversely affect the registrant’s 

ability to record, process, summarize 

and report financial information 

required to be disclosed by the 

registrant in the reports that it files or 

submits under the Act (15 U.S.C. 78a et 

seq.), within the time periods specified 

in the Commission’s rules and forms; 

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 procedures for financial reporting; 

and 

(vi) Indicated in the report any 

significant changes in the registrant’s 

internal controls and procedures for 

financial reporting or in other factors 

that could significantly affect internal 

controls and procedures for financial 

reporting made during the period 

covered by the report, including any 

actions taken to correct significant 

deficiencies and material weaknesses in 

the registrant’s internal controls and 

procedures for financial reporting.

* * * * *

(d) For purposes of this section and 

§ 240.15d–15, the term internal controls 

and procedures for financial reporting

means controls that pertain to the 

preparation of financial statements for 

external purposes that are fairly 

presented in conformity with generally 

accepted accounting principles as 

addressed by the Codification of 

Statements on Auditing Standards § 319 

or any superseding definition or other 

literature that is issued or adopted by 

the Public Company Accounting 

Oversight Board.

* * * * *

19. Amend § 240.15d–15 by: 

a. Revising the section heading and 

paragraph (b); and 

b. Adding paragraph (c). 

The revisions and addition read as 

follows:

§ 240.15d–15 Controls and procedures.

* * * * *

(b) In connection with each report, 

including transition reports, filed on 

66236 Federal Register / Vol. 67, No. 210 / Wednesday, October 30, 2002 / Proposed Rules 

Form 10–Q, Form 10–QSB, Form 10–K, 

Form 10–KSB, Form 20–F or Form 40–

F (§§ 249.308a, 249.308b, 249.310, 

249.310b, 249.220f or 249.240f of this 

chapter) under section 15(d) of the Act 

(15 U.S.C. 78o(d)), other than a report 

filed by an Asset-Backed Issuer (as 

defined in § 240.15d–14), the issuer’s 

management must conduct an 

evaluation, with the participation of the 

issuer’s principal executive officer or 

officers and principal financial officer or 

officers, or persons performing similar 

functions, of the effectiveness, as of the 

end of the period covered by the report, 

of the design and operation of the 

issuer’s disclosure controls and 

procedures and the issuer’s internal 

controls and procedures for financial 

reporting. 

(c) In connection with each report, 

including transition reports, filed on 

Form N–CSR (§§ 249.331 and 274.128 of 

this chapter) or Form N–SAR 

(§§ 249.330 and 274.101 of this chapter) 

that requires certification under 

§ 270.30a–2 of this chapter, the issuer’s 

management must conduct an 

evaluation, with the participation of the 

issuer’s principal executive officer or 

officers and principal financial officer or 

officers, or persons performing similar 

functions, of the effectiveness, as of the 

end of the period covered by the report, 

of the design and operation of the 

issuer’s disclosure controls and 

procedures.

PART 249—FORMS, SECURITIES 

EXCHANGE ACT OF 1934 

20. The authority citation for Part 249 

is revised to read as follows:

Authority: 15 U.S.C. 78a et seq., unless 

otherwise noted.

Section 249.220f is also issued under secs. 

3(a), 302, 404 and 407, Pub. L. 107–204, 116 

Stat. 745. 

Section 249.240f is also issued under secs. 

3(a), 302, 404 and 407, Pub. L. 107–204, 116 

Stat. 745. 

Section 249.308 is also issued under 15 

U.S.C. 80a–29 and secs. 3(a), 302 and 404, 

Pub. L. 107–204, 116 Stat. 745. 

Section 249.308a is also issued under secs. 

3(a), 302 and 404, Pub. L. 107–204, 116 Stat. 

745. 

Section 249.308b is also issued under secs. 

3(a), 302 and 404, Pub. L. 107–204, 116 Stat. 

745. 

Section 249.310 is also issued under secs. 

3(a), 302, 404 and 407, Pub. L. 107–204, 116 

Stat. 745. 

Section 249.310b is also issued under secs. 

3(a), 302, 404 and 407, Pub. L. 107–204, 116 

Stat. 745. 

Section 249.326(T) is also issued under 15 

U.S.C. 78m(f)(1). 

Section 249.330 is also issued under secs. 

3(a), 302, 406, and 407, Pub. L. 107–204, 116 

Stat. 745. 

Section 249.331 is also issued under secs. 

3(a), 302, 406, and 407, Pub. L. 107–204, 116 

Stat. 745.

21. As proposed in 67 FR 42914, 

amend Form 8–K (referenced in 

§ 249.308) by adding Item 5.05 to read 

as follows:

Note: The text of Form 8–K does not, and 

this amendment will not, appear in the Code 

of Federal Regulations.

Form 8–K 

Current Report 

Pursuant to Section 13 or 15(d) of the 

Securities Exchange Act of 1934

* * * * *

Item 5.05. Amendments to the 

Registrant’s Code of Ethics, or Waiver of 

a Provision of the Code of Ethics

If the registrant has amended its code 

of ethics that applies to its principal 

executive officer, principal financial 

officer, principal accounting officer or 

controller, or persons performing 

similar functions or granted a waiver, 

including an implicit waiver, from a 

provision of the code of ethics to one of 

these officers or persons, the registrant 

must briefly describe the nature of the 

amendment or waiver. Disclosure 

regarding waivers must include the 

name of the person to whom the waiver 

was granted, and the date of the waiver. 

Instruction 

The registrant does not need to 

provide any information pursuant to 

this Item if it discloses the required 

information on its Internet website 

within two business days following the 

date of the amendment or waiver and 

the registrant has disclosed in its most 

recently filed annual report its Internet 

address and intention to provide 

disclosure in this manner. If the 

registrant elects to disclose the 

information required by this Item 

through its website, such information 

must remain available on the website for 

at least a 12-month period. Following 

the 12-month period, the registrant must 

retain the information for a period of not 

less than five years. Upon request, the 

registrant must furnish to the 

Commission or its staff a copy of any or 

all information retained pursuant to this 

requirement.

* * * * *

22. Amend Form 10–Q (referenced in 

§ 249.308a) by: 

a. Revising Item 4 in Part I—Financial 

Information; and 

b. Revising the ‘‘Certifications’’

section. 

The revisions read as follows:

Note: The text of Form 10–Q does not, and 

this amendment will not, appear in the Code 

of Federal Regulations.

Form 10–Q

* * * * *

Part I—Financial Information

* * * * *

Item 4. Controls and Procedures 

Furnish the information required by 

Item 307(a) and (b) of Regulation S–K 

(§ 229.307(a) and (b) of this chapter).

* * * * *

Certifications* 

I, [identify the certifying individual], 

certify that: 

1. I have reviewed this quarterly 

report on Form 10–Q 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 statements, and other financial 

information included in this report, 

fairly present in all material respects the 

financial condition, results of operations 

and 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 and internal 

controls and procedures for financial 

reporting (as defined in Exchange Act 

Rules 13a–14 and 15d–14) for the 

registrant and we have:

(a) Designed such disclosure controls 

and procedures, or caused such 

disclosure controls and procedures to be 

designed under our supervision, to 

ensure that material information relating 

to the issuer, 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) Designed such internal controls 

and procedures for financial reporting, 

or caused such internal controls and 

procedures for financial reporting to be 

designed under their supervision, to 

provide reasonable assurances that the 

registrant’s financial statements are 

fairly presented in conformity with 

generally accepted accounting 

principles; 

(c) Evaluated the effectiveness of the 

registrant’s disclosure controls and 

Federal Register / Vol. 67, No. 210 / Wednesday, October 30, 2002 / Proposed Rules 66237

procedures and internal controls and 

procedures for financial reporting as of 

the end of the period covered by this 

report (‘‘Evaluation Date’’); 

(d) Presented in this report our 

conclusions about the effectiveness of 

the disclosure controls and procedures 

and internal controls and procedures for 

financial reporting based on our 

evaluation as of the Evaluation Date; 

(e) Disclosed to the registrant’s 

auditors and the audit committee of the 

board of directors (or persons fulfilling 

the equivalent function): 

(i) All significant deficiencies and 

material weaknesses in the design or 

operation of internal controls and 

procedures for financial reporting which 

could adversely affect the registrant’s 

ability to record, process, summarize 

and report financial information 

required to be disclosed by the 

registrant in the reports that it files or 

submits under the Act (15 U.S.C. 78a et 

seq.), within the time periods specified 

in the U.S. Securities and Exchange 

Commission’s rules and forms; and 

(ii) Any fraud, whether or not 

material, that involves management or 

other employees who have a significant 

role in the registrant’s internal controls 

and procedures for financial reporting; 

and 

(f) Indicated in this report any 

significant changes in the registrant’s 

internal controls and procedures for 

financial reporting or in other factors 

that could significantly affect internal 

controls and procedures for financial 

reporting made during the period 

covered by this report, including any 

actions taken to correct significant 

deficiencies and material weaknesses in 

the registrant’s internal controls and 

procedures for financial reporting.

Date: llllllllllllllll

lllllllllllllllllll

[Signature]

lllllllllllllllllll

[Title]

* Provide a separate certification for 

each principal executive officer and 

principal financial officer of the 

registrant. See Rules 13a–14 and 15d–

14. The required certification must be in 

the exact form set forth above. 

23. Amend Form 10–QSB (referenced 

in § 249.308b) by: 

a Revising Item 3 in Part I—Financial 

Information; and 

b. Revising the ‘‘Certifications’’

section. 

The revisions read as follows:

Note: The text of Form 10–QSB does not, 

and this amendment will not, appear in the 

Code of Federal Regulations.

Form 10–QSB

* * * * *

Part I—Financial Information

* * * * *

Item 3. Controls and Procedures 

Furnish the information required by 

Item 307(a) and (b) of Regulation S–B 

(§ 228.307(a) and (b) of this chapter).

* * * * *

Certifications* 

I, [identify the certifying individual], 

certify that: 

1. I have reviewed this quarterly 

report on Form 10–QSB 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 statements, and other financial 

information included in this report, 

fairly present in all material respects the 

financial condition, results of operations 

and cash flows of the small business 

issuer as of, and for, the periods 

presented in this report; 

4. The small business issuer’s other 

certifying officers and I are responsible 

for establishing and maintaining 

disclosure controls and procedures and 

internal controls and procedures for 

financial reporting (as defined in 

Exchange Act Rules 13a–14 and 15d–14) 

for the small business issuer and we 

have: 

(a) Designed such disclosure controls 

and procedures, or caused such 

disclosure controls and procedures to be 

designed under our supervision, to 

ensure that material information relating 

to the issuer, 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) Designed such internal controls 

and procedures for financial reporting, 

or caused such internal controls and 

procedures for financial reporting to be 

designed under their supervision, to 

provide reasonable assurances that the 

small business issuer’s financial 

statements are fairly presented in 

conformity with generally accepted 

accounting principles; 

(c) Evaluated the effectiveness of the 

small business issuer’s disclosure 

controls and procedures and internal 

controls and procedures for financial 

reporting as of the end of the period 

covered by this report (‘‘Evaluation 

Date’’); 

(d) Presented in this report our 

conclusions about the effectiveness of 

the disclosure controls and procedures 

and internal controls and procedures for 

financial reporting based on our 

evaluation as of the Evaluation Date; 

(e) Disclosed to the small business 

issuer’s auditors and the audit 

committee of the board of directors (or 

persons fulfilling the equivalent 

function): 

(i) All significant deficiencies and 

material weaknesses in the design or 

operation of internal controls and 

procedures for financial reporting which 

could adversely affect the small 

business issuer’s ability to record, 

process, summarize and report financial 

information required to be disclosed by 

the small business issuer in the reports 

that it files or submits under the Act (15 

U.S.C. 78a et seq.), within the time 

periods specified in the U.S. Securities 

and Exchange Commission’s rules and 

forms; and 

(ii) Any fraud, whether or not 

material, that involves management or 

other employees who have a significant 

role in the small business issuer’s 

internal controls and procedures for 

financial reporting; and

(f) Indicated in this report any 

significant changes in the small 

business issuer’s internal controls and 

procedures for financial reporting or in 

other factors that could significantly 

affect internal controls and procedures 

for financial reporting made during the 

period covered by this report, including 

any actions taken to correct significant 

deficiencies and material weaknesses in 

the small business issuer’s internal 

controls and procedures for financial 

reporting.

Date: llllllllllllllll

lllllllllllllllllll

[Signature]

lllllllllllllllllll

[Title]

* Provide a separate certification for 

each principal executive officer and 

principal financial officer of the small 

business issuer. See Rules 13a–14 and 

15d–14. The required certification must 

be in the exact form set forth above. 

24. Amend Form 20–F (referenced in 

§ 249.220f) by: 

a. Adding Item 15; 

b. Redesignating paragraph 10 of 

‘‘Instructions as to Exhibits’’ as 

paragraph 11; 

c. Adding new paragraph 10 to 

‘‘Instructions as to Exhibits’’; and 

d. Revising the ‘‘Certifications’’

section. 

66238 Federal Register / Vol. 67, No. 210 / Wednesday, October 30, 2002 / Proposed Rules 

The additions and revisions read as 

follows:

Note: The text of Form 20–F does not, and 

this amendment will not, appear in the Code 

of Federal Regulations.

Form 20–F

* * * * *

Item 15 Certain Disclosures 

(a) Controls and Procedures 

(1) Evaluation of Disclosure Controls 

and Procedures and Internal Controls 

and Procedures for Financial Reporting.

Disclose the conclusions of the 

registrant’s principal executive officer or 

officers and principal financial officer or 

officers, or persons performing similar 

functions, about the effectiveness of the 

registrant’s disclosure controls and 

procedures and internal controls and 

procedures for financial reporting based 

on management’s evaluation of these 

controls and procedures in accordance 

with §§ 240.13a–15 or 240.15d–15 of 

this chapter as of the end of the period 

covered by the annual report that 

includes the disclosure required by this 

paragraph. 

(2) Changes to Internal Controls and 

Procedures for Financial Reporting.

Disclose any significant changes to the 

registrant’s internal controls and 

procedures for financial reporting made 

during the period covered by the annual 

report that includes the disclosure 

required by this paragraph, including 

any actions taken to correct significant 

deficiencies and material weaknesses in 

the registrant’s internal controls and 

procedures for financial reporting. 

(3) Report on management’s 

responsibilities. Furnish an internal 

control report of management that 

includes: 

(i) A statement of management’s 

responsibilities for establishing and 

maintaining adequate internal controls 

and procedures for financial reporting 

for the registrant; 

(ii) Conclusions about the 

effectiveness of the registrant’s internal 

controls and procedures for financial 

reporting based on management’s 

evaluation of those controls and 

procedures in accordance with 

§§ 240.13a–15 or 240.15d–15 of this 

chapter as of the end of the registrant’s 

most recent fiscal year; 

(iii) A statement that the registered 

public accounting firm that prepared or 

issued the registrant’s audit report 

relating to the financial statements 

included in the report containing the 

disclosure required by this Item has 

attested to, and reported on, 

management’s evaluation of the 

registrant’s internal controls and 

procedures for financial reporting; and 

(iv) The attestation report of the 

registered public accounting firm that 

audited or reviewed the financial 

statements included in the annual 

report containing the disclosure 

required by this Item 15(a)(3). 

Instructions to Item 15(a) 

1. You do not need to provide the 

information called for by this Item 15(a) 

unless you are using this form as an 

annual report. 

2. A registrant that is an Asset-Backed 

Issuer (as defined in § 240.13a–14(g) and 

§ 240.15d–14(g)) is not required to 

disclose the information required by 

this Item 15(a). 

3. For purposes of this Item, the terms 

‘‘disclosure controls and procedures’’

and ‘‘internal controls and procedures 

for financial reporting’’ shall have the 

meanings specified in § 240.13a–14 and 

§ 240.15d–14 of this chapter. 

4. If the conclusions of the registrant’s 

principal executive and financial 

officers are reflected in the conclusions 

disclosed pursuant to paragraph (c)(2) of 

this Item, the registrant does not have to 

include any separate disclosure required 

by paragraph (a) of this Item regarding 

the effectiveness of the registrant’s 

internal controls and procedures for 

financial reporting as of the end of the 

registrant’s most recent fiscal year. 

5. The registrant is encouraged, but 

not required, to include the annual 

report disclosure required by paragraph 

(a)(2) of this Item in the internal control 

report required by paragraph (a)(3) of 

this Item, rather than disclosing it 

elsewhere in the annual report. 

(b) Audit Committee Financial Experts 

Disclose the number and names of the 

persons that the registrant’s board of 

directors has determined to be the 

financial experts serving on the 

registrant’s audit committee, as defined 

in section 3(a)(58) of the Exchange Act. 

Also disclose whether the financial 

expert or experts are independent as 

that term is used in section 10A(m)(3) 

of the Exchange Act, and if not, an 

explanation of why they are not. If the 

registrant’s board of directors has not 

determined that a financial expert is 

serving on its audit committee, the 

registrant must disclose that fact and 

explain why it does not have such an 

expert. 

Instructions to Item 15(b) 

1. You do not need to provide the 

information called for by this Item 15(b) 

unless you are using this form as an 

annual report. 

2. For purposes of the determination 

by the board of directors under this Item 

15(b), the term ‘‘financial expert’’ means 

a person who has, through education 

and experience as a public accountant 

or auditor, or a principal financial 

officer, controller, or principal 

accounting officer, of a company that, at 

the time the person held such position, 

was required to file reports pursuant to 

section 13(a) or 15(d) of the Exchange 

Act, or experience in one or more 

positions that involve the performance 

of similar functions (or that result, in 

the judgment of the board of directors, 

in the person’s having similar expertise 

and experience), the following 

attributes: 

a. An understanding of financial 

statements and generally accepted 

accounting principles used by the 

registrant in its primary financial 

statements; 

b. Experience applying such generally 

accepted accounting principles in 

connection with the accounting for 

estimates, accruals, and reserves that are 

generally comparable to the estimates, 

accruals and reserves, if any, used in the 

registrant’s financial statements; 

c. Experience preparing or auditing 

financial statements that present 

accounting issues that are generally 

comparable to those raised by the 

registrant’s financial statements; 

d. Experience with internal controls 

and procedures for financial reporting; 

and 

e. An understanding of audit 

committee functions.

3. If the board of directors has 

determined that a person is a financial 

expert because, in the board’s judgment, 

he or she has similar expertise and 

experience to those enumerated, the 

registrant must disclose the basis for 

that determination. 

4. In evaluating the education and 

experience of a person, the board of 

directors should consider the following 

factors in the aggregate: 

a. The level of the person’s accounting 

or financial education, including 

whether the person has earned an 

advanced degree in finance or 

accounting; 

b. Whether the person is a certified 

public accountant, or the equivalent, in 

good standing, and the length of time 

that the person actively has practiced as 

a certified public accountant, or the 

equivalent; 

c. Whether the person is certified or 

otherwise identified as having 

accounting or financial experience by a 

recognized private body that establishes 

and administers standards in respect of 

such expertise, whether that person is in 

good standing with the recognized 

Federal Register / Vol. 67, No. 210 / Wednesday, October 30, 2002 / Proposed Rules 66239

private body, and the length of time that 

the person has been actively certified or 

identified as having this expertise; 

d. Whether the person has served as 

a principal financial officer, controller 

or principal accounting officer of a 

company that, at the time the person 

held such position, was required to file 

reports pursuant to section 13(a) or 

15(d) of the Exchange Act, and if so, for 

how long; 

e. The person’s specific duties while 

serving as a public accountant, auditor, 

principal financial officer, controller, 

principal accounting officer or position 

involving the performance of similar 

functions; 

f. The person’s level of familiarity and 

experience with all applicable laws and 

regulations regarding the preparation of 

financial statements that must be 

included in reports filed under section 

13(a) or 15(d) of the Exchange Act; 

g. The level and amount of the 

person’s direct experience reviewing, 

preparing, auditing or analyzing 

financial statements that must be 

included in reports filed under section 

13(a) or 15(d) of the Exchange Act; 

h. The person’s past or current 

membership on one or more audit 

committees of companies that, at the 

time the person held such membership, 

were required to file reports pursuant to 

section 13(a) or 15(d) of the Exchange 

Act; 

i. The person’s level of familiarity and 

experience with the use and analysis of 

financial statements of public 

companies; 

j. Whether the person has any other 

relevant qualifications or experience 

that would assist him or her in 

understanding and evaluating the 

registrant’s financial statements and 

other financial information and to make 

knowledgeable and thorough inquiries 

whether: 

i. The financial statements fairly 

present the financial condition, results 

of operations and cash flows of the 

registrant in accordance with generally 

accepted accounting principles; and 

ii. The financial statements and other 

financial information, taken together, 

fairly present the financial condition, 

results of operations and cash flows of 

the registrant; and 

k. The person’s level of experience 

with reconciliation of financial 

statements with U.S. generally accepted 

accounting principles. 

5. Although the board of directors 

should consider the factors listed in 

Instruction 4, those factors are not 

replacements for, and a financial expert 

must satisfy, all of the attributes listed 

in Instruction 2 to this Item 15(b).

6. In the case of foreign private issuers 

with two-tier boards of directors, for 

purposes of this Item 15(b), the term 

‘‘board of directors’’ means the 

supervisory or non-management board. 

7. A registrant that is an Asset-Backed 

Issuer (as defined in § 240.13a–14(g) and 

§ 240.15d–14(g) of this chapter) is not 

required to disclose the information 

required by this Item. 

(c) Code of Ethics 

(1) Disclose whether the registrant has 

adopted a written code of ethics that 

applies to the registrant’s principal 

executive officer, principal financial 

officer, principal accounting officer or 

controller, or persons performing 

similar functions. If the registrant has 

not adopted such a code of ethics, 

explain why it has not done so. 

(2) If, during the last fiscal year, the 

registrant has amended its code of ethics 

that applies to its principal executive 

officer, principal financial officer, 

principal accounting officer or 

controller, or persons performing 

similar functions, or granted a waiver 

from a provision of the code of ethics to 

one of these officers or persons, the 

registrant must briefly describe the 

nature of the amendment or waiver. 

Disclosure regarding waivers must 

include the name of the person to whom 

the waiver was granted, and the date of 

the waiver. 

Instructions to Item 15(c) 

1. You do not need to provide the 

information called for by this Item 15(c) 

unless you are using this form as an 

annual report. 

2. A registrant that is an Asset-Backed 

Issuer (as defined in § 240.13a–14(g) and 

§ 240.15d–14(g) of this chapter) is not 

required to disclose the information 

required by this Item 15(c). 

3. For purposes of this Item 15(c), the 

term ‘‘code of ethics’’ means a 

codification of such standards that is 

reasonably designed to deter 

wrongdoing and to promote: 

a. Honest and ethical conduct, 

including the ethical handling of actual 

or apparent conflicts of interest between 

personal and professional relationships; 

b. Avoidance of conflicts of interest, 

including disclosure to an appropriate 

person or persons identified in the code 

of any material transaction or 

relationship that reasonably could be 

expected to give rise to such a conflict; 

c. Full, fair, accurate, timely, and 

understandable disclosure in reports 

and documents that a registrant files 

with, or submits to, the Commission and 

in other public communications made 

by the registrant; 

d. Compliance with applicable 

governmental laws, rules and 

regulations; 

e. The prompt internal reporting to an 

appropriate person or persons identified 

in the code of violations of the code; 

and 

f. Accountability for adherence to the 

code.

* * * * *

Certifications*

I, [identify the certifying individual], 

certify that: 

1. I have reviewed this annual report 

on Form 20–F 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 statements, and other financial 

information included in this report, 

fairly present in all material respects the 

financial condition, results of operations 

and 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 and internal 

controls and procedures for financial 

reporting (as defined in Exchange Act 

Rules 13a–14 and 15d–14) for the 

registrant and we have: 

(a) Designed such disclosure controls 

and procedures, or caused such 

disclosure controls and procedures to be 

designed under our supervision, to 

ensure that material information relating 

to the issuer, 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) Designed such internal controls 

and procedures for financial reporting, 

or caused such internal controls and 

procedures for financial reporting to be 

designed under their supervision, to 

provide reasonable assurances that the 

registrant’s financial statements are 

fairly presented in conformity with 

generally accepted accounting 

principles; 

(c) Evaluated the effectiveness of the 

registrant’s disclosure controls and 

procedures and internal controls and 

procedures for financial reporting as of 

the end of the period covered by this 

report (‘‘Evaluation Date’’); 

(d) Presented in this report our 

conclusions about the effectiveness of 

66240 Federal Register / Vol. 67, No. 210 / Wednesday, October 30, 2002 / Proposed Rules 

the disclosure controls and procedures 

and internal controls and procedures for 

financial reporting based on our 

evaluation as of the Evaluation Date; 

(e) Disclosed to the registrant’s 

auditors and the audit committee of the 

board of directors (or persons fulfilling 

the equivalent function): 

(i) All significant deficiencies and 

material weaknesses in the design or 

operation of internal controls and 

procedures for financial reporting which 

could adversely affect the registrant’s 

ability to record, process, summarize 

and report financial information 

required to be disclosed by the 

registrant in the reports that it files or 

submits under the Act (15 U.S.C. 78a et 

seq.), within the time periods specified 

in the U.S. Securities and Exchange 

Commission’s rules and forms; and 

(ii) Any fraud, whether or not 

material, that involves management or 

other employees who have a significant 

role in the registrant’s internal controls 

and procedures for financial reporting; 

and 

(f) Indicated in this report any 

significant changes in the registrant’s 

internal controls and procedures for 

financial reporting or in other factors 

that could significantly affect internal 

controls and procedures for financial 

reporting made during the period 

covered by this report, including any 

actions taken to correct significant 

deficiencies and material weaknesses in 

the registrant’s internal controls and 

procedures for financial reporting.

Date: llllllllllllllll

lllllllllllllllllll

[Signature]

lllllllllllllllllll

[Title]

* Provide a separate certification for 

each principal executive officer and 

principal financial officer of the 

registrant. See Rules 13a–14 and 15d–

14. The required certification must be in 

the exact form set forth above. 

Instructions as to Exhibits

* * * * *

10. Any written code of ethics, or 

amendment to that code of ethics, that 

applies to the registrant’s principal 

executive officer, principal financial 

officer, principal accounting officer or 

controller, or persons performing 

similar functions, subject to disclosure 

under Item 15(c) of this Form.

* * * * *

25. Amend Form 40–F (referenced in 

§ 249.240f) by:

a. Adding paragraphs (7), (8) and (9) 

to General Instruction B; and 

b. Revising the ‘‘Certifications’’

section. 

The additions and revisions read as 

follows.

Note: The text of Form 40–F does not, and 

this amendment will not, appear in the Code 

of Federal Regulations.

Form 40–F

* * * * *

General Instructions

* * * * *

B. Information To Be Filed on This Form

* * * * *

(7) Controls and Procedures 

(a) Evaluation of Disclosure Controls 

and Procedures and Internal Controls 

and Procedures for Financial Reporting. 

Disclose the conclusions of the 

registrant’s principal executive officer or 

officers and principal financial officer or 

officers, or persons performing similar 

functions, about the effectiveness of the 

registrant’s disclosure controls and 

procedures and internal controls and 

procedures for financial reporting based 

on management’s evaluation of these 

controls and procedures in accordance 

with §§ 240.13a–15 or 240.15d–15 of 

this chapter as of the end of the period 

covered by the annual report that 

includes the disclosure required by this 

paragraph. 

(b) Changes to Internal Controls and 

Procedures for Financial Reporting. 

Disclose any significant changes to the 

registrant’s internal controls and 

procedures for financial reporting made 

during the period covered by the annual 

report that includes the disclosure 

required by this paragraph, including 

any actions taken to correct significant 

deficiencies and material weaknesses in 

the registrant’s internal controls and 

procedures for financial reporting. 

(c) Report on management’s 

responsibilities. Furnish an internal 

control report of management that 

includes: 

(1) A statement of management’s 

responsibilities for establishing and 

maintaining adequate internal controls 

and procedures for financial reporting 

for the registrant; 

(2) Conclusions about the 

effectiveness of the registrant’s internal 

controls and procedures for financial 

reporting based on management’s 

evaluation of those controls and 

procedures in accordance with 

§§ 240.13a–15 of 240.15d–15 of this 

chapter as of the end of the registrant’s 

most recent fiscal year; 

(3) A statement that the registered 

public accounting firm that prepared or 

issued the registrant’s audit report 

relating to the financial statements 

included in the report containing the 

disclosure required by this Instruction 

B.(7)(c) has attested to, and reported on, 

management’s evaluation of the 

registrant’s internal controls and 

procedures for financial reporting; 

(4) The attestation report of the 

registered public accounting firm that 

audited or reviewed the financial 

statements included in the annual 

report containing the disclosure 

required by this Instruction B.(7)(c). 

Notes to Instruction B.(7) 

1. You do not need to provide the 

information called for by this 

Instruction B.(7) unless you are using 

this form as an annual report. 

2. A registrant that is an Asset-Backed 

Issuer (as defined in § 240.13a–14(g) and 

§ 240.15d–14(g)) is not required to 

disclose the information required by 

this Instruction B.(7).

3. For purposes of this Instruction 

B.(7), the terms ‘‘disclosure controls and 

procedures’’ and ‘‘internal controls and 

procedures for financial reporting’’ shall 

have the meanings specified in 

§ 240.13a–14 and § 240.15d–14 of this 

chapter. 

4. If the conclusions of the registrant’s 

principal executive and financial 

officers are reflected in the conclusions 

disclosed pursuant to paragraph (c)(2) of 

this Instruction B.(7), the registrant does 

not have to include any separate 

disclosure required by paragraph (a) of 

this Item regarding the effectiveness of 

the registrant’s internal controls and 

procedures for financial reporting as of 

the end of the registrant’s most recent 

fiscal year. 

5. The registrant is encouraged, but 

not required, to include the annual 

report disclosure required by paragraph 

(b) of this Instruction B.(7) in the 

internal control report required by 

paragraph (c) of this Instruction B.(7), 

rather than disclosing it elsewhere in 

the annual report. 

(8) Audit Committee Financial Experts 

(a) Disclose the number and names of 

the persons that the board of directors 

has determined to be the financial 

experts serving on the registrant’s audit 

committee, as defined in section 3(a)(58) 

of the Exchange Act. Also disclose 

whether the financial expert or experts 

are independent as that term is used in 

section 10A(m)(3) of the Exchange Act, 

and if not, an explanation of why they 

are not. If the registrant’s board of 

directors has not determined that a 

financial expert is serving on its audit 

committee, the registrant must disclose 

that fact and explain why it does not 

have such an expert. 

Federal Register / Vol. 67, No. 210 / Wednesday, October 30, 2002 / Proposed Rules 66241

Notes to Instruction B.(8) 

1. You do not need to provide the 

information called for by this 

Instruction B.(8) unless you are using 

this form as an annual report. 

2. For purposes of the determination 

by the board of directors under this 

Instruction B.(8), the term ‘‘financial 

expert’’ means a person who has, 

through education and experience as a 

public accountant or auditor, or a 

principal financial officer, controller, or 

principal accounting officer, of a 

company that, at the time the person 

held such position, was required to file 

reports pursuant to section 13(a) or 

15(d) of the Exchange Act, or experience 

in one or more positions that involve 

the performance of similar functions (or 

that result, in the judgment of the board 

of directors, in the person’s having 

similar expertise and experience), the 

following attributes: 

a. An understanding of financial 

statements and generally accepted 

accounting principles used by the 

registrant in its primary financial 

statements; 

b. Experience applying such generally 

accepted accounting principles in 

connection with the accounting for 

estimates, accruals, and reserves that are 

generally comparable to the estimates, 

accruals and reserves, if any, used in the 

registrant’s financial statements; 

c. Experience preparing or auditing 

financial statements that present 

accounting issues that are generally 

comparable to those raised by the 

registrant’s financial statements; 

d. Experience with internal controls 

and procedures for financial reporting; 

and 

e. An understanding of audit 

committee functions. 

3. If the board of directors has 

determined that a person is a financial 

expert because, in the board’s judgment, 

he or she has similar expertise and 

experience to those enumerated, the 

registrant must disclose the basis for 

that determination. 

4. In evaluating the education and 

experience of a person, the board of 

directors should consider the following 

factors in the aggregate: 

a. The level of the person’s accounting 

or financial education, including 

whether the person has earned an 

advanced degree in finance or 

accounting;

b. Whether the person is a certified 

public accountant, or the equivalent, in 

good standing, and the length of time 

that the person actively has practiced as 

a certified public accountant, or the 

equivalent; 

c. Whether the person is certified or 

otherwise identified as having 

accounting or financial experience by a 

recognized private body that establishes 

and administers standards in respect of 

such expertise, whether that person is in 

good standing with the recognized 

private body, and the length of time that 

the person has been actively certified or 

identified as having this expertise; 

d. Whether the person has served as 

a principal financial officer, controller 

or principal accounting officer of a 

company that, at the time the person 

held such position, was required to file 

reports pursuant to section 13(a) or 

15(d) of the Exchange Act, and if so, for 

how long; 

e. The person’s specific duties while 

serving as a public accountant, auditor, 

principal financial officer, controller, 

principal accounting officer or position 

involving the performance of similar 

functions; 

f. The person’s level of familiarity and 

experience with all applicable laws and 

regulations regarding the preparation of 

financial statements that must be 

included in reports filed under section 

13(a) or 15(d) of the Exchange Act; 

g. The level and amount of the 

person’s direct experience reviewing, 

preparing, auditing or analyzing 

financial statements that must be 

included in reports filed under section 

13(a) or 15(d) of the Exchange Act; 

h. The person’s past or current 

membership on one or more audit 

committees of companies that, at the 

time the person held such membership, 

were required to file reports pursuant to 

section 13(a) or 15(d) of the Exchange 

Act; 

i. The person’s level of familiarity and 

experience with the use and analysis of 

financial statements of public 

companies; 

j. Whether the person has any other 

relevant qualifications or experience 

that would assist him or her in 

understanding and evaluating the 

registrant’s financial statements and 

other financial information and to make 

knowledgeable and thorough inquiries 

whether: 

i. The financial statements fairly 

present the financial condition, results 

of operations and cash flows of the 

registrant in accordance with generally 

accepted accounting principles; and 

ii. The financial statements and other 

financial information, taken together, 

fairly present the financial condition, 

results of operations and cash flows of 

the registrant; and 

k. The person’s level of experience 

with reconciliation of financial 

statements with U.S. generally accepted 

accounting principles. 

5. Although the board of directors 

should consider the factors listed in 

Note 4, those factors are not 

replacements for, and a financial expert 

must satisfy, all of the attributes listed 

in Note 2 to this Instruction B.(8). 

6. In the case of foreign private issuers 

with two-tier boards of directors, for 

purposes of this Instruction B.(8), the 

term ‘‘board of directors’’ means the 

supervisory or non-management board. 

7. A registrant that is an Asset-Backed 

Issuer (as defined in § 240.13a–14(g) and 

§ 240.15d–14(g) of this chapter) is not 

required to disclose the information 

required by this Instruction B.(8). 

(9) Code of Ethics 

(a) Disclose whether the registrant has 

adopted a written code of ethics that 

applies to the registrant’s principal 

executive officer, principal financial 

officer, principal accounting officer or 

controller, or persons performing 

similar functions. Such code of ethics, 

or amendment to that code of ethics, 

must be attached as an exhibit and filed 

with this Form. If the registrant has not 

adopted such a code of ethics, explain 

why it has not done so. 

(b) If, during the last fiscal year, the 

registrant has amended its code of ethics 

that applies to its principal executive 

officer, principal financial officer, 

principal accounting officer or 

controller, or persons performing 

similar functions, or granted a waiver 

from a provision of the code of ethics to 

one of these officers or persons, the 

registrant must briefly describe the 

nature of the amendment or waiver. 

Disclosure regarding waivers must 

include the name of the person to whom 

the waiver was granted, and the date of 

the waiver. 

Notes to Instruction B.(9) 

1. You do not need to provide the 

information called for by this 

Instruction B.(9) unless you are using 

this form as an annual report. 

2. A registrant that is an Asset-Backed 

Issuer (as defined in § 240.13a–14(g) and 

§ 240.15d–14(g) of this chapter) is not 

required to disclose the information 

required by this Instruction B.(9). 

3. For purposes of the required 

disclosures, the term ‘‘code of ethics’’

means a codification of such standards 

that is reasonably designed to deter 

wrongdoing and to promote: 

(a) Honest and ethical conduct, 

including the ethical handling of actual 

or apparent conflicts of interest between 

personal and professional relationships; 

(b) Avoidance of conflicts of interest, 

including disclosure to an appropriate 

person or persons identified in the code 

of any material transaction or 

relationship that reasonably could be 

expected to give rise to such a conflict;

66242 Federal Register / Vol. 67, No. 210 / Wednesday, October 30, 2002 / Proposed Rules 

(c) Full, fair, accurate, timely, and 

understandable disclosure in reports 

and documents that a registrant files 

with, or submits to, the Commission and 

in other public communications made 

by the registrant; 

(d) Compliance with applicable 

governmental laws, rules and 

regulations; 

(e) The prompt internal reporting to 

an appropriate person or persons 

identified in the code of violations of 

the code; and 

(f) Accountability for adherence to the 

code.

* * * * *

Certifications*

I, [identify the certifying individual], 

certify that: 

1. I have reviewed this annual report 

on Form 40–F 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 statements, and other financial 

information included in this report, 

fairly present in all material respects the 

financial condition, results of operations 

and 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 and internal 

controls and procedures for financial 

reporting (as defined in Exchange Act 

Rules 13a–14 and 15d–14) for the 

registrant and we have: 

(a) Designed such disclosure controls 

and procedures, or caused such 

disclosure controls and procedures to be 

designed under our supervision, to 

ensure that material information relating 

to the issuer, 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) Designed such internal controls 

and procedures for financial reporting, 

or caused such internal controls and 

procedures for financial reporting to be 

designed under their supervision, to 

provide reasonable assurances that the 

registrant’s financial statements are 

fairly presented in conformity with 

generally accepted accounting 

principles; 

(c) Evaluated the effectiveness of the 

registrant’s disclosure controls and 

procedures and internal controls and 

procedures for financial reporting as of 

the end of the period covered by this 

report (‘‘Evaluation Date’’); 

(d) Presented in this report our 

conclusions about the effectiveness of 

the disclosure controls and procedures 

and internal controls and procedures for 

financial reporting based on our 

evaluation as of the Evaluation Date; 

(e) Disclosed to the registrant’s 

auditors and the audit committee of the 

board of directors (or persons fulfilling 

the equivalent function): 

(i) All significant deficiencies and 

material weaknesses in the design or 

operation of internal controls and 

procedures for financial reporting which 

could adversely affect the registrant’s 

ability to record, process, summarize 

and report financial information 

required to be disclosed by the 

registrant in the reports that it files or 

submits under the Act (15 U.S.C. 78a et 

seq.), within the time periods specified 

in the U.S. Securities and Exchange 

Commission’s rules and forms; and

(ii) Any fraud, whether or not 

material, that involves management or 

other employees who have a significant 

role in the registrant’s internal controls 

and procedures for financial reporting; 

and 

(f) Indicated in this report any 

significant changes in the registrant’s 

internal controls and procedures for 

financial reporting or in other factors 

that could significantly affect internal 

controls and procedures for financial 

reporting made during the period 

covered by this report, including any 

actions taken to correct significant 

deficiencies and material weaknesses in 

the registrant’s internal controls and 

procedures for financial reporting.

Date: llllllllllllllll

lllllllllllllllllll

[Signature]

lllllllllllllllllll

[Title]

* Provide a separate certification for 

each principal executive officer and 

principal financial officer of the 

registrant. See Rules 13a–14 and 15d–

14. The required certification must be in 

the exact form set forth above. 

26. Amend Form 10–K (referenced in 

§ 249.310) by: 

a. Revising Item 10 in Part III; 

b. Redesignating Item 15 as Item 16 in 

Part IV; 

c. Adding new Item 15 to Part III; and 

d. Revising the ‘‘Certifications’’

section. 

The revisions and additions read as 

follows:

Note: The text of Form 10–K does not, and 

this amendment will not, appear in the Code 

of Federal Regulations.

Form 10–K 

Annual Report Pursuant to Section 13 or 

15(d) of the Securities Exchange Act of 

1934

* * * * *

Part III

* * * * *

Item 10. Directors and Executive 

Officers of the Registrant 

Furnish the information required by 

Items 401, 405 and 406 of Regulation S–

K (§§ 229.401, 229.405 and 229.406 of 

this chapter).

* * * * *

Item 15. Audit Committee Financial 

Experts 

Furnish the information required by 

Item 309 of Regulation S–K (§ 229.309 of 

this chapter).

* * * * *

Certifications*

I, [identify the certifying individual], 

certify that: 

1. I have reviewed this annual report 

on Form 10–K 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 statements, and other financial 

information included in this report, 

fairly present in all material respects the 

financial condition, results of operations 

and 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 and internal 

controls and procedures for financial 

reporting (as defined in Exchange Act 

Rules 13a–14 and 15d–14) for the 

registrant and we have: 

(a) Designed such disclosure controls 

and procedures, or caused such 

disclosure controls and procedures to be 

designed under our supervision, to 

ensure that material information relating 

to the issuer, 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) Designed such internal controls 

and procedures for financial reporting, 

or caused such internal controls and 

procedures for financial reporting to be 

Federal Register / Vol. 67, No. 210 / Wednesday, October 30, 2002 / Proposed Rules 66243

designed under their supervision, to 

provide reasonable assurances that the 

registrant’s financial statements are 

fairly presented in conformity with 

generally accepted accounting 

principles; 

(c) Evaluated the effectiveness of the 

registrant’s disclosure controls and 

procedures and internal controls and 

procedures for financial reporting as of 

the end of the period covered by this 

report (‘‘Evaluation Date’’); 

(d) Presented in this report our 

conclusions about the effectiveness of 

the disclosure controls and procedures 

and internal controls and procedures for 

financial reporting based on our 

evaluation as of the Evaluation Date; 

(e) Disclosed to the registrant’s 

auditors and the audit committee of the 

board of directors (or persons fulfilling 

the equivalent function): 

(i) All significant deficiencies and 

material weaknesses in the design or 

operation of internal controls and 

procedures for financial reporting which 

could adversely affect the registrant’s 

ability to record, process, summarize 

and report financial information 

required to be disclosed by the 

registrant in the reports that it files or 

submits under the Act (15 U.S.C. 78a et 

seq.), within the time periods specified 

in the U.S. Securities and Exchange 

Commission’s rules and forms; and 

(ii) Any fraud, whether or not 

material, that involves management or 

other employees who have a significant 

role in the registrant’s internal controls 

and procedures for financial reporting; 

and 

(f) Indicated in this report any 

significant changes in the registrant’s 

internal controls and procedures for 

financial reporting or in other factors 

that could significantly affect internal 

controls and procedures for financial 

reporting made during the period 

covered by this report, including any 

actions taken to correct significant 

deficiencies and material weaknesses in 

the registrant’s internal controls and 

procedures for financial reporting.

Date: llllllllllllllll

lllllllllllllllllll

[Signature]

lllllllllllllllllll

[Title]

* Provide a separate certification for 

each principal executive officer and 

principal financial officer of the 

registrant. See Rules 13a–14 and 15d–

14. The required certification must be in 

the exact form set forth above.

* * * * *

29. Amend Form 10–KSB (referenced 

in § 249.310b) by: 

a. Revising Item 9 in Part III; 

b. Adding Item 15 in Part III; and 

c. Revising the ‘‘Certifications’’

section. 

The revisions and addition read as 

follows:

Note: The text of Form 10–KSB does not, 

and this amendment will not, appear in the 

Code of Federal Regulations.

Form 10–KSB

[ ] Annual Report Pursuant to Section 

13 or 15(d) of the Securities Exchange 

Act of 1934

* * * * *

Part III

* * * * *

Item 9. Directors and Executive Officers 

of the Registrant 

Furnish the information required by 

Items 401, 405 and 406 of Regulation S–

B (§§ 228.401, 228.405, and 228.406 of 

this chapter).

* * * * *

Item 15. Audit Committee Financial 

Experts 

Provide the information required by 

Item 309 of Regulation S–B (§ 228.309 of 

this chapter).

* * * * *

Certifications* 

I, [identify the certifying individual], 

certify that: 

1. I have reviewed this annual report 

on Form 10–KSB 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 statements, and other financial 

information included in this report, 

fairly present in all material respects the 

financial condition, results of operations 

and cash flows of the small business 

issuer as of, and for, the periods 

presented in this report; 

4. The small business issuer’s other 

certifying officers and I are responsible 

for establishing and maintaining 

disclosure controls and procedures and 

internal controls and procedures for 

financial reporting (as defined in 

Exchange Act Rules 13a–14 and 15d–14) 

for the small business issuer and we 

have: 

(a) Designed such disclosure controls 

and procedures, or caused such 

disclosure controls and procedures to be 

designed under our supervision, to 

ensure that material information relating 

to the issuer, 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) Designed such internal controls 

and procedures for financial reporting, 

or caused such internal controls and 

procedures for financial reporting to be 

designed under their supervision, to 

provide reasonable assurances that the 

small business issuer’s financial 

statements are fairly presented in 

conformity with generally accepted 

accounting principles; 

(c) Evaluated the effectiveness of the 

small business issuer’s disclosure 

controls and procedures and internal 

controls and procedures for financial 

reporting as of the end of the period 

covered by this report (‘‘Evaluation 

Date’’); 

(d) Presented in this report our 

conclusions about the effectiveness of 

the disclosure controls and procedures 

and internal controls and procedures for 

financial reporting based on our 

evaluation as of the Evaluation Date; 

(e) Disclosed to the small business 

issuer’s auditors and the audit 

committee of the board of directors (or 

persons fulfilling the equivalent 

function): 

(i) All significant deficiencies and 

material weaknesses in the design or 

operation of internal controls and 

procedures for financial reporting which 

could adversely affect the small 

business issuer’s ability to record, 

process, summarize and report financial 

information required to be disclosed by 

the small business issuer in the reports 

that it files or submits under the Act (15 

U.S.C. 78a et seq.), within the time 

periods specified in the U.S. Securities 

and Exchange Commission’s rules and 

forms; and

(ii) Any fraud, whether or not 

material, that involves management or 

other employees who have a significant 

role in the small business issuer’s 

internal controls and procedures for 

financial reporting; and 

(f) Indicated in this report any 

significant changes in the small 

business issuer’s internal controls and 

procedures for financial reporting or in 

other factors that could significantly 

affect internal controls and procedures 

for financial reporting made during the 

period covered by this report, including 

any actions taken to correct significant 

deficiencies and material weaknesses in 

the small business issuer’s internal 

controls and procedures for financial 

reporting.

Date: llllllllllllllll

66244 Federal Register / Vol. 67, No. 210 / Wednesday, October 30, 2002 / Proposed Rules 

lllllllllllllllllll

[Signature]

lllllllllllllllllll

[Title]

* Provide a separate certification for 

each principal executive officer and 

principal financial officer of the small 

business issuer. See Rules 13a–14 and 

15d–14. The required certification must 

be in the exact form set forth above.

* * * * *

30. Amend § 249.322 by revising 

paragraph (a) to read as follows:

§ 249.322 Form 12b–25—Notification of 

late filing. 

(a) This form shall be filed pursuant 

to § 240.12b–25 of this chapter by 

issuers who are unable to file timely all 

or any required portion of an annual or 

transition report on Form 10–K and 

Form 10–KSB, 20–F, or 11–K 

(§§ 249.310, 249.310b, 249.220f or 

249.311) or a quarterly or transition 

report on Form 10–Q and Form 10–QSB 

(§§ 249.308a and 249.308b) or a current 

report on Form 8–K (§ 249.308) 

pursuant to section 13 or 15(d) of the 

Act (15 U.S.C. 78m or 78o(d)) or a semiannual, annual or transition report on 

Form N–SAR or Form N–CSR (17 CFR 

274.101 or 274.128) pursuant to section 

13 or 15(d) of the Act or section 30 of 

the Investment Company Act of 1940 

(15 U.S.C. 80a–29). The filing shall 

consist of a signed original and three 

conformed copies, and shall be filed 

with the Commission at Washington, DC 

20549, no later than one business day 

after the due date for the periodic report 

in question. Copies of this form may be 

obtained from ‘‘Publications,’’ Securities 

and Exchange Commission, 450 5th 

Street, NW., Washington, DC 20549 and 

at our Web site at http://www.sec.gov.

* * * * *

31. Amend Form 12b–25 (referenced 

in § 249.322) by: 

a. Revising the preamble; 

b. Revising paragraph (b) of Part II; 

and 

c. Revising Part III to read as follows:

Note: The text of Form 12b–25 does not, 

and this amendment will not, appear in the 

Code of Federal Regulations.

Form 12b–25 

Notification of Late Filing 

(Check One): l Form 10–K l Form 20–

F l Form 11–K l Form 10–Q l

Form 8–K l Form N–SAR l Form 

N–CSR

* * * * *

Part II—Rules 12b–25(b) and (c)

* * * * *

(b) The subject annual report, semiannual report, transition report on Form 

10–K, Form 20–F, Form 11–K, Form N–

SAR or Form N–CSR, or portion thereof, 

will be filed on or before the fifteenth 

calendar day following the prescribed 

due date; or the subject quarterly report 

or transition report on Form 10–Q, or 

portion thereof, will be filed on or 

before the fifth calendar day following 

the prescribed due date; or the subject 

current report on Form 8–K will be filed 

on or before the second business day 

following the prescribed due date; and

* * * * *

Part III—Narrative 

State below in reasonable detail why 

Forms 10–K, 20–F, 11–K, 10–Q, 8–K, N–

SAR, N–CSR, or the transition report or 

portion thereof, could not be filed 

within the prescribed time period.

* * * * *

PART 270—RULES AND 

REGULATIONS, INVESTMENT 

COMPANY ACT OF 1940 

32. The general authority citation for 

part 270 is revised to read as follows:

Authority: 15 U.S.C. 80a–1 et seq., 80a–

34(d), 80a–37, and 80a–39, unless otherwise 

noted;

* * * * *

33. Amend § 270.30a–2 by: 

a. Revising paragraph (b)(4); 

b. Removing paragraphs (b)(5) and 

(b)(6); and 

c. Adding paragraph (d). 

The revisions and additions read as 

follows:

§ 270.30a–2 Certification of disclosure in 

annual and semi-annual reports.

* * * * *

(b) * * *

(4) He or she and the other certifying 

officers are responsible for establishing 

and maintaining disclosure controls and 

procedures and internal controls and 

procedures for financial reporting (as 

such terms are defined in paragraphs (c) 

and (d) of this section) for the 

investment company and have: 

(i) Designed such disclosure controls 

and procedures, or caused such 

disclosure controls and procedures to be 

designed under their supervision, to 

ensure that material information relating 

to the investment company, including 

its consolidated subsidiaries, is made 

known to them by others within those 

entities, particularly during the period 

in which periodic reports are being 

prepared; 

(ii) Designed such internal controls 

and procedures for financial reporting, 

or caused such internal controls and 

procedures for financial reporting to be 

designed under their supervision, to 

provide reasonable assurances that the 

investment company’s financial 

statements are fairly presented in 

conformity with generally accepted 

accounting principles; 

(iii) Evaluated the effectiveness of the 

investment company’s disclosure 

controls and procedures as of the end of 

the period covered by the report 

(‘‘Evaluation Date’’); 

(iv) Presented in the report their 

conclusions about the effectiveness of 

the disclosure controls and procedures 

based on their evaluation as of the 

Evaluation Date; and 

(v) Disclosed to the investment 

company’s auditors and the audit 

committee of the board of directors (or 

persons fulfilling the equivalent 

function): 

(A) All significant deficiencies and 

material weaknesses in the design or 

operation of internal controls and 

procedures for financial reporting which 

could adversely affect the investment 

company’s ability to record, process, 

summarize, and report financial 

information required to be disclosed by 

the investment company in the reports 

that it files or submits under the 

Securities Exchange Act of 1934 (15 

U.S.C. 78a et seq.) and the Investment 

Company Act of 1940 (15 U.S.C. 80a–1 

et seq.), within the time periods 

specified in the Commission’s rules and 

forms; and 

(B) Any fraud, whether or not 

material, that involves management or 

other employees who have a significant 

role in the investment company’s 

internal controls and procedures for 

financial reporting; and 

(vi) Indicated in the report any 

significant changes in the investment 

company’s internal controls and 

procedures for financial reporting or in 

other factors that could significantly 

affect internal controls and procedures 

for financial reporting made during the 

period covered by the report, including 

any actions taken to correct significant 

deficiencies and material weaknesses in 

the investment company’s internal 

controls and procedures for financial 

reporting.

* * * * *

(d) For purposes of this section, the 

term internal controls and procedures 

for financial reporting means controls 

that pertain to the preparation of 

financial statements for external 

purposes that are fairly presented in 

conformity with generally accepted 

accounting principles as addressed by 

the Codification of Statements on 

Auditing Standards § 319 or any 

superseding definition or other 

literature that is issued or adopted by 

the Public Company Accounting 

Oversight Board. 

Federal Register / Vol. 67, No. 210 / Wednesday, October 30, 2002 / Proposed Rules 66245

34. Amend § 270.30a–3 (as proposed 

in 67 FR 57298 (9/9/02)) by revising 

paragraph (b) to read as follows:

§ 270.30a–3 Disclosure controls and 

procedures related to preparation of 

required filings.

* * * * *

(b) In connection with each report, 

including transition reports, that 

requires certification under § 270.30a–2, 

the registered investment company’s 

management must conduct an 

evaluation, with the participation of the 

registered investment company’s 

principal executive officer or officers 

and principal financial officer or 

officers, or persons performing similar 

functions, of the effectiveness, as of the 

end of the period covered by the report, 

of the design and operation of the 

registered investment company’s 

disclosure controls and procedures.

PART 274—FORMS PRESCRIBED 

UNDER THE INVESTMENT COMPANY 

ACT OF 1940 

35. The authority citation for Part 274 

is revised to read as follows:

Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 

78c(b), 78l, 78m, 78n, 78o(d), 80a–8, 80a–24, 

80a–26, and 80a–29, unless otherwise noted.

Section 274.101 is also issued under secs. 

3(a), 302, 406, and 407, Pub. L. No. 107–204, 

116 Stat. 745. 

Section 274.128 is also issued under secs. 

3(a), 302, 406, and 407, Pub. L. No. 107–204, 

116 Stat. 745.

PART 249—FORMS, SECURITIES 

EXCHANGE ACT OF 1934

PART 274—FORMS PRESCRIBED 

UNDER THE INVESTMENT COMPANY 

ACT OF 1940

36. Amend Form N–SAR (referenced in 

§§ 249.330 and 274.101) by: 

a. Revising the reference ‘‘133’’ in item 6 

to read ‘‘134’’; 

b. Redesignating item 133 as item 134; 

c. Adding new item 133; 

d. Revising newly redesignated item 134; 

e. Revising the reference ‘‘items 77 and 

102’’ in paragraph (1) of General Instruction 

D, ‘‘Preparation of Report,’’ to read ‘‘items 77, 

102, and 134(b)’’; 

f. Revising the reference ‘‘133’’ in the fifth 

paragraph of General Instruction A to read 

‘‘134’’;

g. Revising paragraphs (a)(i) and (a)(ii) of 

sub-item 77Q3 in Instructions to Specific 

Items; 

h. Revising the Certification contained in 

paragraph (a)(iii) of sub-item 77Q3 in 

Instructions to Specific Items; 

i. Designating the current Instruction to 

sub-item 102P3 as Instruction (c); 

j. Adding Instructions (a) and (b) to subitem 102P3; 

k. Adding an Instruction to item 133; 

l. Revising the Instruction to newly 

redesignated item 134; and 

m. Revising the reference ‘‘133’’ in the 

Instructions to the Signature Page to read 

‘‘134.’’

These additions and revisions read as 

follows:

Note: The text of Form N–SAR does not, 

and this amendment will not, appear in the 

Code of Federal Regulations.

Form N–SAR

* * * * *

Item 133: Code of Ethics 

(a) Disclose whether each of the 

registrant’s sponsor, depositor, trustee, 

and principal underwriter has adopted 

a written code of ethics that applies to 

the principal executive officer, principal 

financial officer, principal accounting 

officer or controller, or persons 

performing similar functions of, 

respectively, the registrant’s sponsor, 

depositor, trustee, and principal 

underwriter. If any of the registrant’s 

sponsor, depositor, trustee, and 

principal underwriter has not adopted 

such a code of ethics, explain why it has 

not done so. 

(b) If the registrant’s sponsor, 

depositor, trustee, or principal 

underwriter has amended its code of 

ethics that applies to its principal 

executive officer, principal financial 

officer, principal accounting officer or 

controller, or persons performing 

similar functions, or granted a waiver, 

including an implicit waiver, from a 

provision of the code of ethics to one of 

these officers or persons, the registrant 

must briefly describe the nature of the 

amendment or waiver. Disclosure 

regarding waivers must include the 

name of the person to whom the waiver 

was granted, and the date of the waiver. 

(c) If the registrant plans to elect to 

disclose any amendments to, or waivers 

from, its sponsor’s, depositor’s, 

trustee’s, or principal underwriter’s 

codes of ethics on the registrant’s 

Internet website, disclose the 

registrant’s Internet address and its 

intention to disclose these events on its 

website. 

Item 134 

Include the following exhibits: 

(a)The certifications required by rule 

30a–2 under the Investment Company 

Act (17 CFR 270.30a–2). 

(b) Any written code of ethics, or 

amendment to that code of ethics, that 

applies to the principal executive 

officer, principal financial officer, 

principal accounting officer or 

controller, or persons performing 

similar functions of registrant’s sponsor, 

depositor, trustee, or principal 

underwriter, subject to disclosure under 

Item 133 of this Form.

* * * * *

Instructions to Specific Items

* * * * *

Sub-Item 77Q3

* * * * *

(a) * * * 

(i) Disclose the conclusions of the 

registrant’s principal executive officer or 

officers and principal financial officer or 

officers, or persons performing similar 

functions, about the effectiveness of the 

registrant’s disclosure controls and 

procedures (as defined in rule 30a–2(c) 

under the Act (17 CFR 270.30a–2(c))) 

based on management’s evaluation of 

these controls and procedures in 

accordance with Rule 13a–15(c) or 15d–

15(c) under the 1934 Act (17 CFR 

240.13a–15(c) or 15d–15(c)) and Rule 

30a–3(b) under the Act (17 CFR 

270.30a–3(b)) as of the end of the period 

covered by the report that includes the 

disclosure required by this paragraph. 

(ii) Disclose any significant changes to 

the registrant’s internal controls and 

procedures for financial reporting (as 

defined in rule 30a–2(d) under the Act 

(17 CFR 270.30a–2(d))) made during the 

period covered by the report that 

includes the disclosure required by this 

paragraph, including any actions taken 

to correct significant deficiencies and 

material weaknesses in the registrant’s 

internal controls and procedures for 

financial reporting. 

(iii) * * * 

Certifications 

I, [identify the certifying individual], 

certify that: 

1. I have reviewed this report on Form 

N–SAR, including exhibits, of [identify 

registrant]; 

2. Based on my knowledge, this 

report, including exhibits, 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, including exhibits, 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;

66246 Federal Register / Vol. 67, No. 210 / Wednesday, October 30, 2002 / Proposed Rules 

4. The registrant’s other certifying 

officers and I are responsible for 

establishing and maintaining disclosure 

controls and procedures and internal 

controls and procedures for financial 

reporting (as defined in rule 30a–2(c) 

and (d) under the Investment Company 

Act) for the registrant and we have: 

(a) Designed such disclosure controls 

and procedures, or caused such 

disclosure controls and procedures to be 

designed under our supervision, 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) Designed such internal controls 

and procedures for financial reporting, 

or caused such internal controls and 

procedures for financial reporting to be 

designed under our supervision, to 

provide reasonable assurances that the 

registrant’s financial statements are 

fairly presented in conformity with 

generally accepted accounting 

principles; 

(c) Evaluated the effectiveness of the 

registrant’s disclosure controls and 

procedures as of the end of the period 

covered by this report (‘‘Evaluation 

Date’’); 

(d) Presented in this report our 

conclusions about the effectiveness of 

the disclosure controls and procedures 

based on our evaluation as of the 

Evaluation Date; 

(e) Disclosed to the registrant’s 

auditors and the audit committee of the 

board of directors (or persons fulfilling 

the equivalent function): 

(i) All significant deficiencies and 

material weaknesses in the design or 

operation of internal controls and 

procedures for financial reporting which 

could adversely affect the registrant’s 

ability to record, process, summarize, 

and report financial information 

required to be disclosed by the 

registrant in the reports that it files or 

submits under the Securities Exchange 

Act of 1934 and the Investment 

Company Act of 1940, within the time 

periods specified in the U.S. Securities 

and Exchange Commission’s rules and 

forms; and 

(ii) Any fraud, whether or not 

material, that involves management or 

other employees who have a significant 

role in the registrant’s internal controls 

and procedures for financial reporting; 

and 

(f) Indicated in this report any 

significant changes in the registrant’s 

internal controls and procedures for 

financial reporting or in other factors 

that could significantly affect internal 

controls and procedures for financial 

reporting made during the period 

covered by this report, including any 

actions taken to correct significant 

deficiencies and material weaknesses in 

the registrant’s internal controls and 

procedures for financial reporting.

Date: llllllllllllllll

lllllllllllllllllll

[Signature]

lllllllllllllllllll

[Title]

* * * * *

Sub-Item 102P3

* * * * *

Instructions: (a)(1) Disclose whether 

each of the registrant, its investment 

adviser, and its principal underwriter 

has adopted a written code of ethics that 

applies to the principal executive 

officer, principal financial officer, 

principal accounting officer or 

controller, or persons performing 

similar functions of, respectively, the 

registrant, its investment adviser, and its 

principal underwriter. If any of the 

registrant, its investment adviser, and its 

principal underwriter has not adopted 

such a code of ethics, explain why it has 

not done so.

(2) If the registrant, its investment 

adviser, or its principal underwriter has 

amended its code of ethics that applies 

to its principal executive officer, 

principal financial officer, principal 

accounting officer or controller, or 

persons performing similar functions, or 

granted a waiver, including an implicit 

waiver, from a provision of the code of 

ethics to one of these officers or persons, 

the registrant must briefly describe the 

nature of the amendment or waiver. 

Disclosure regarding waivers must 

include the name of the person to whom 

the waiver was granted, and the date of 

the waiver. The registrant does not need 

to provide any information pursuant to 

this paragraph (a)(2) if it discloses the 

required information on its Internet 

website within two business days 

following the date of the amendment or 

waiver and the registrant has disclosed 

in its most recently filed report on this 

form its Internet address and intention 

to provide disclosure in this manner. If 

the amendment or waiver occurs on a 

Saturday, Sunday, or holiday on which 

the Commission is not open for 

business, then the two business day 

period shall begin to run on and include 

the first business day thereafter. If the 

registrant elects to disclose this 

information through its website, such 

information must remain available on 

the website for at least a 12-month 

period. The registrant must retain the 

information for a period of not less than 

six years following the end of the fiscal 

year in which the amendment or waiver 

occurred. Upon request, the registrant 

must furnish to the Commission or its 

staff a copy of any or all information 

retained pursuant to this requirement. 

(3) If the registrant plans to elect to 

disclose any amendments to, or waivers 

from, its code of ethics, or its 

investment adviser’s or principal 

underwriter’s codes of ethics, on the 

registrant’s Internet website, disclose 

the registrant’s Internet address and its 

intention to disclose these events on its 

website. 

(4) Include any written code of ethics, 

or amendment to that code of ethics, 

that applies to the principal executive 

officer, principal financial officer, 

principal accounting officer or 

controller, or persons performing 

similar functions of the registrant, its 

investment adviser, or its principal 

underwriter, subject to disclosure under 

paragraphs (a)(1) and (a)(2) of this 

Instruction. 

(5) The requirements of paragraphs 

(a)(1) through (a)(4) of this Instruction 

do not apply with respect to a code of 

ethics of any principal underwriter of 

the registrant unless: 

(i) The principal underwriter is an 

affiliated person of the registrant or the 

registrant’s investment adviser; or 

(ii) An officer, director, or general 

partner of the principal underwriter 

serves as an officer, director, or general 

partner of the registrant or of the 

registrant’s investment adviser. 

(6) For purposes of this Instruction 

102P3(a), the term ‘‘code of ethics’’

means a codification of such standards 

that is reasonably designed to deter 

wrongdoing and to promote: 

(i) Honest and ethical conduct, 

including the ethical handling of actual 

or apparent conflicts of interest between 

personal and professional relationships; 

(ii) Avoidance of conflicts of interest, 

including disclosure to an appropriate 

person or persons identified in the code 

of any material transaction or 

relationship that reasonably could be 

expected to give rise to such a conflict; 

(iii) Full, fair, accurate, timely, and 

understandable disclosure in reports 

and documents that are filed with, or 

submitted to, the Commission and in 

other public communications; 

(iv) Compliance with applicable 

governmental laws, rules and 

regulations; 

(v) The prompt internal reporting to 

an appropriate person or persons 

identified in the code of violations of 

the code; and 

(vi) Accountability for adherence to 

the code.

(7) The information required by 

paragraph (a)(1) of this Instruction is 

Federal Register / Vol. 67, No. 210 / Wednesday, October 30, 2002 / Proposed Rules 66247

only required for a report on this form 

filed for the registrant’s fiscal year. 

(b)(1) Disclose the number and names 

of the persons that the registrant’s board 

of directors has determined to be the 

financial experts serving on the 

registrant’s audit committee, as defined 

in section 3(a)(58) of the 1934 Act, as of 

the end of the period covered by the 

report. Also disclose whether the 

financial expert or experts are 

‘‘independent,’’ and if not, an 

explanation of why they are not. For 

this purpose, a financial expert would 

be considered to be ‘‘independent’’ if he 

or she (i) meets the criteria set forth in 

section 10A(m)(3)(B)(i) of the 1934 Act; 

and (ii) is not an ‘‘interested person’’ of 

the investment company as defined in 

section 2(a)(19) of the Act. If the 

registrant’s board of directors has not 

determined that a financial expert is 

serving on its audit committee, the 

registrant must disclose that fact and 

explain why it does not have such an 

expert. 

(2) For purposes of the determination 

by the board of directors under this 

Instruction 102P3(b), the term ‘‘financial 

expert’’ means a person who has, 

through education and experience as a 

public accountant or auditor, or a 

principal financial officer, controller, or 

principal accounting officer, of a 

company that, at the time the person 

held such position, was required to file 

reports pursuant to section 13(a) or 

15(d) of the 1934 Act, or experience in 

one or more positions that involve the 

performance of similar functions (or that 

results, in the judgment of the board of 

directors, in the person’s having similar 

expertise and experience), the following 

attributes: 

(i) An understanding of generally 

accepted accounting principles and 

financial statements; 

(ii) Experience applying such 

generally accepted accounting 

principles in connection with the 

accounting for estimates, accruals, and 

reserves that are generally comparable 

to the estimates, accruals, and reserves, 

if any, used in the registrant’s financial 

statements; 

(iii) Experience preparing or auditing 

financial statements that present 

accounting issues that are generally 

comparable to those raised by the 

registrant’s financial statements; 

(iv) Experience with internal controls 

and procedures for financial reporting; 

and 

(v) An understanding of audit 

committee functions. 

(3) If the board of directors has 

determined that a person is a financial 

expert because, in the board’s judgment, 

he or she has similar expertise and 

experience to those enumerated, the 

registrant must disclose the basis for 

that determination. 

(4) In evaluating the education and 

experience of a person, the board of 

directors should consider the following 

factors in the aggregate: 

(i) The level of the person’s 

accounting or financial education, 

including whether the person has 

earned an advanced degree in finance or 

accounting; 

(ii) Whether the person is a certified 

public accountant, or the equivalent, in 

good standing, and the length of time 

that the person actively has practiced as 

a certified public accountant, or the 

equivalent; 

(iii) Whether the person is certified or 

otherwise identified as having 

accounting or financial experience by a 

recognized private body that establishes 

and administers standards in respect of 

such expertise, whether that person is in 

good standing with the recognized 

private body, and the length of time that 

the person has been actively certified or 

identified as having this expertise; 

(iv) Whether the person has served as 

a principal financial officer, controller, 

or principal accounting officer of a 

company that, at the time the person 

held such position, was required to file 

reports pursuant to section 13(a) or 

15(d) of the 1934 Act, and if so, for how 

long; 

(v) The person’s specific duties while 

serving as a public accountant, auditor, 

principal financial officer, controller, 

principal accounting officer or position 

involving the performance of similar 

functions; 

(vi) The person’s level of familiarity 

and experience with all applicable laws 

and regulations regarding the 

preparation of financial statements that 

must be included in reports filed under 

section 13(a) or 15(d) of the 1934 Act; 

(vii) The level and amount of the 

person’s direct experience reviewing, 

preparing, auditing, or analyzing 

financial statements that must be 

included in reports filed under section 

13(a) or 15(d) of the 1934 Act; 

(viii) The person’s past or current 

membership on one or more audit 

committees of companies that, at the 

time the person held such membership, 

were required to file reports pursuant to 

section 13(a) or 15(d) of the 1934 Act; 

(ix) The person’s level of familiarity 

and experience with the use and 

analysis of financial statements of 

public companies; and 

(x) Whether the person has any other 

relevant qualifications or experience 

that would assist him or her in 

understanding and evaluating the 

registrant’s financial statements and 

other financial information and to make 

knowledgeable and thorough inquiries 

whether: (A) the financial statements 

fairly present the financial condition, 

results of operations, and cash flows of 

the registrant in accordance with 

generally accepted accounting 

principles; and (B) the financial 

statements and other financial 

information, taken together, fairly 

present the financial condition, results 

of operations, and cash flows of the 

registrant.

(5) Although the board of directors 

should consider the factors listed in 

paragraph (b)(4) of this Instruction, 

those factors are not replacements for, 

and a financial expert must satisfy, all 

of the attributes listed in paragraph 

(b)(2) of this Instruction. 

(c) * * *

* * * * *

Item 133

* * * * *

Instructions: (a) The requirements of 

Item 133 do not apply with respect to 

a code of ethics of any principal 

underwriter of the registrant unless: 

(1) The principal underwriter is an 

affiliated person of the registrant or the 

registrant’s sponsor, depositor, or 

trustee; or 

(2) An officer, director, or general 

partner of the principal underwriter 

serves as an officer, director, or general 

partner of the registrant’s sponsor, 

depositor, or trustee. 

(b) For purposes of Item 133, the term 

‘‘code of ethics’’ means a codification of 

such standards that is reasonably 

designed to deter wrongdoing and to 

promote: 

(1) Honest and ethical conduct, 

including the ethical handling of actual 

or apparent conflicts of interest between 

personal and professional relationships; 

(2) Avoidance of conflicts of interest, 

including disclosure to an appropriate 

person or persons identified in the code 

of any material transaction or 

relationship that reasonably could be 

expected to give rise to such a conflict; 

(3) Full, fair, accurate, timely, and 

understandable disclosure in reports 

and documents that are filed with, or 

submitted to, the Commission and in 

other public communications; 

(4) Compliance with applicable 

governmental laws, rules and 

regulations; 

(5) The prompt internal reporting to 

an appropriate person or persons 

identified in the code of violations of 

the code; and 

(6) Accountability for adherence to 

the code. 

(c) The registrant does not need to 

provide any information pursuant to 

66248 Federal Register / Vol. 67, No. 210 / Wednesday, October 30, 2002 / Proposed Rules 

paragraph (b) of this Item if it discloses 

the required information on its Internet 

website within two business days 

following the date of the amendment or 

waiver and the registrant has disclosed 

in its most recently filed report on this 

form its Internet address and intention 

to provide disclosure in this manner. If 

the amendment or waiver occurs on a 

Saturday, Sunday, or holiday on which 

the Commission is not open for 

business, then the two business day 

period shall begin to run on and include 

the first business day thereafter. If the 

registrant elects to disclose this 

information through its website, such 

information must remain available on 

the website for at least a 12-month 

period. The registrant must retain the 

information for a period of not less than 

six years following the end of the fiscal 

year in which the amendment or waiver 

occurred. Upon request, the registrant 

must furnish to the Commission or its 

staff a copy of any or all information 

retained pursuant to this requirement. 

Item 134

In responding to sub-item 134(a), 

include the exhibit required by 

instruction (a) for sub-item 77Q3. The 

registrant may omit paragraph 3 of the 

certification required by instruction 

(a)(iii).

* * * * *

37. Amend Form N–CSR (referenced 

in §§ 249.331 and 274.128; as proposed 

in 67 FR 57298 (9/9/02) and 67 FR 

60828 (9/26/02)) by:

a. Revising General Instruction D;

b. Redesignating General Instruction E as 

General Instruction F; 

c. Adding new General Instruction E; 

d. Removing Item 1; 

e. Redesignating Items 2, 3, and 4 as Items 

1, 2, and 5; 

f. Adding new Items 3, 4 and 6; 

g. Revising newly redesignated Item 5; and 

h. Revising the ‘‘Certifications’’ section, to 

read as follows:

Note: The text of Form N–CSR does not, 

and this amendment will not, appear in the 

Code of Federal Regulations

Form N–CSR

* * * * *

General Instructions

* * * * *

D. Incorporation by Reference 

A registrant may incorporate by 

reference information required by Item 

6(b), but no other Items of the Form 

shall be answered by incorporating any 

information by reference. All 

incorporation by reference must comply 

with the requirements of this Form and 

the following rules on incorporation by 

reference: Rule 10(d) of Regulation S–K 

under the Securities Act of 1933 [17 

CFR 229.10(d)] (general rules on 

incorporation by reference, which, 

among other things, prohibit, unless 

specifically required by this Form, 

incorporating by reference a document 

that includes incorporation by reference 

to another document, and limits 

incorporation to documents filed within 

the last 5 years, with certain 

exceptions); Rule 303 of Regulation S–

T [17 CFR 232.303] (specific 

requirements for electronically filed 

documents); Rules 12b–23 and 12b–32 

under the Securities Exchange Act of 

1934 (additional rules on incorporation 

by reference for reports filed pursuant to 

Sections 13 and 15(d) of the Securities 

Exchange Act of 1934); and Rules 0–4, 

8b–23, and 8b–32 under the Investment 

Company Act of 1940 [17 CFR 270.0–4, 

270.8b–23, and 270.8b–32] (additional 

rules on incorporation by reference for 

investment companies). 

E. Definitions 

Unless the context clearly indicates 

the contrary, terms used in this Form N–

CSR have meanings as defined in the 

Investment Company Act of 1940 and 

the rules and regulations thereunder. 

Unless otherwise indicated, all 

references in the form to statutory 

sections or to rules are sections of the 

Investment Company Act of 1940 and 

the rules and regulations thereunder.

* * * * *

Item 3. Code of Ethics 

(a) Disclose whether, as of the end of 

the period covered by the report, each 

of the registrant, its investment adviser, 

and its principal underwriter has 

adopted a written code of ethics that 

applies to the principal executive 

officer, principal financial officer, 

principal accounting officer or 

controller, or persons performing 

similar functions of, respectively, the 

registrant, its investment adviser, and its 

principal underwriter. If any of the 

registrant, its investment adviser, and its 

principal underwriter has not adopted 

such a code of ethics, explain why it has 

not done so. 

Instruction. The information required 

by this Item 3(a) is only required in a 

report on this Form N–CSR that is 

required by Item 6(a) to include a copy 

of an annual report transmitted to 

stockholders. 

(b) If the registrant, its investment 

adviser, or its principal underwriter has, 

during the period covered by the report, 

amended its code of ethics that applies 

to its principal executive officer, 

principal financial officer, principal 

accounting officer or controller, or 

persons performing similar functions or 

granted a waiver, including an implicit 

waiver, from a provision of the code of 

ethics to one of these officers or persons, 

the registrant must briefly describe the 

nature of the amendment or waiver. 

Disclosure regarding waivers must 

include the name of the person to whom 

the waiver was granted, and the date of 

the waiver. 

(c) If the registrant plans to elect to 

disclose any amendments to, or waivers 

from, its code of ethics, or its 

investment adviser’s or principal 

underwriter’s codes of ethics, on the 

registrant’s Internet website, disclose 

the registrant’s Internet address and its 

intention to disclose these events on its 

website. 

Instructions. 1. The requirements of 

this Item 3 do not apply with respect to 

a code of ethics of any principal 

underwriter of the registrant unless: 

(a) The principal underwriter is an 

affiliated person of the registrant or the 

registrant’s investment adviser; or 

(b) An officer, director, or general 

partner of the principal underwriter 

serves as an officer, director, or general 

partner of the registrant or of the 

registrant’s investment adviser. 

2. For purposes of this Item 3, the 

term ‘‘code of ethics’’ means a 

codification of such standards that is 

reasonably designed to deter 

wrongdoing and to promote: 

(a) Honest and ethical conduct, 

including the ethical handling of actual 

or apparent conflicts of interest between 

personal and professional relationships; 

(b) Avoidance of conflicts of interest, 

including disclosure to an appropriate 

person or persons identified in the code 

of any material transaction or 

relationship that reasonably could be 

expected to give rise to such a conflict;

(c) Full, fair, accurate, timely, and 

understandable disclosure in reports 

and documents that are filed with, or 

submitted to, the Commission and in 

other public communications; 

(d) Compliance with applicable 

governmental laws, rules and 

regulations; 

(e) The prompt internal reporting to 

an appropriate person or persons 

identified in the code of violations of 

the code; and 

(f) Accountability for adherence to the 

code. 

3. The registrant does not need to 

provide any information pursuant to 

this Item if it discloses the required 

information on its Internet website 

within two business days following the 

date of the amendment or waiver and 

the registrant has disclosed in its most 

recently filed report on this Form N–

CSR its Internet address and intention to 

Federal Register / Vol. 67, No. 210 / Wednesday, October 30, 2002 / Proposed Rules 66249

provide disclosure in this manner. If the 

amendment or waiver occurs on a 

Saturday, Sunday, or holiday on which 

the Commission is not open for 

business, then the two business day 

period shall begin to run on and include 

the first business day thereafter. If the 

registrant elects to disclose this 

information through its website, such 

information must remain available on 

the website for at least a 12-month 

period. The registrant must retain the 

information for a period of not less than 

six years following the end of the fiscal 

year in which the amendment or waiver 

occurred. Upon request, the registrant 

must furnish to the Commission or its 

staff a copy of any or all information 

retained pursuant to this requirement. 

Item 4. Audit Committee Financial 

Experts 

Disclose the number and names of the 

persons that the registrant’s board of 

directors has determined to be the 

financial experts serving on the 

registrant’s audit committee, as defined 

in section 3(a)(58) of the Securities 

Exchange Act of 1934, as of the end of 

the period covered by the report. Also 

disclose whether the financial expert or 

experts are ‘‘independent,’’ and if not, 

an explanation of why they are not. For 

this purpose, a financial expert would 

be considered to be ‘‘independent’’ if he 

or she (i) meets the criteria set forth in 

section 10A(m)(3)(B)(i) of the Securities 

Exchange Act of 1934; and (ii) is not an 

‘‘interested person’’ of the investment 

company as defined in section 2(a)(19) 

of the Investment Company Act of 1940. 

If the registrant’s board of directors has 

not determined that a financial expert is 

serving on its audit committee, the 

registrant must disclose that fact and 

explain why it does not have such an 

expert. 

Instructions. 1. The information 

required by this Item 4 is only required 

in a report on this Form N-CSR that is 

required by Item 6(a) to include a copy 

of an annual report transmitted to 

stockholders. 

2. For purposes of the determination 

by the board of directors under this Item 

4, the term ‘‘financial expert’’ means a 

person who has, through education and 

experience as a public accountant or 

auditor, or a principal financial officer, 

controller, or principal accounting 

officer, of a company that, at the time 

the person held such position, was 

required to file reports pursuant to 

section 13(a) or 15(d) of the Securities 

Exchange Act of 1934, or experience in 

one or more positions that involve the 

performance of similar functions (or that 

results, in the judgment of the board of 

directors, in the person’s having similar 

expertise and experience), the following 

attributes: 

a. An understanding of generally 

accepted accounting principles and 

financial statements; 

b. Experience applying such generally 

accepted accounting principles in 

connection with the accounting for 

estimates, accruals, and reserves that are 

generally comparable to the estimates, 

accruals, and reserves, if any, used in 

the registrant’s financial statements;

c. Experience preparing or auditing 

financial statements that present 

accounting issues that are generally 

comparable to those raised by the 

registrant’s financial statements; 

d. Experience with internal controls 

and procedures for financial reporting; 

and 

e. An understanding of audit 

committee functions. 

3. If the board of directors has 

determined that a person is a financial 

expert because, in the board’s judgment, 

he or she has similar expertise and 

experience to those enumerated, the 

registrant must disclose the basis for 

that determination. 

4. In evaluating the education and 

experience of a person, the board of 

directors should consider the following 

factors in the aggregate: 

a. The level of the person’s accounting 

or financial education, including 

whether the person has earned an 

advanced degree in finance or 

accounting; 

b. Whether the person is a certified 

public accountant, or the equivalent, in 

good standing, and the length of time 

that the person actively has practiced as 

a certified public accountant, or the 

equivalent; 

c. Whether the person is certified or 

otherwise identified as having 

accounting or financial experience by a 

recognized private body that establishes 

and administers standards in respect of 

such expertise, whether that person is in 

good standing with the recognized 

private body, and the length of time that 

the person has been actively certified or 

identified as having this expertise; 

d. Whether the person has served as 

a principal financial officer, controller, 

or principal accounting officer of a 

company that, at the time the person 

held such position, was required to file 

reports pursuant to section 13(a) or 

15(d) of the Securities Exchange Act of 

1934, and if so, for how long; 

e. The person’s specific duties while 

serving as a public accountant, auditor, 

principal financial officer, controller, 

principal accounting officer or position 

involving the performance of similar 

functions; 

f. The person’s level of familiarity and 

experience with all applicable laws and 

regulations regarding the preparation of 

financial statements that must be 

included in reports filed under section 

13(a) or 15(d) of the Securities Exchange 

Act of 1934; 

g. The level and amount of the 

person’s direct experience reviewing, 

preparing, auditing, or analyzing 

financial statements that must be 

included in reports filed under section 

13(a) or 15(d) of the Securities Exchange 

Act of 1934; 

h. The person’s past or current 

membership on one or more audit 

committees of companies that, at the 

time the person held such membership, 

were required to file reports pursuant to 

section 13(a) or 15(d) of the Securities 

Exchange Act of 1934; 

i. The person’s level of familiarity and 

experience with the use and analysis of 

financial statements of public 

companies; and 

j. Whether the person has any other 

relevant qualifications or experience 

that would assist him or her in 

understanding and evaluating the 

registrant’s financial statements and 

other financial information and to make 

knowledgeable and thorough inquiries 

whether: (i) the financial statements 

fairly present the financial condition, 

results of operations and cash flows of 

the registrant in accordance with 

generally accepted accounting 

principles; and (ii) the financial 

statements and other financial 

information, taken together, fairly 

present the financial condition, results 

of operations, and cash flows of the 

registrant. 

5. Although the board of directors 

should consider the factors listed in 

Instruction 4, those factors are not 

replacements for, and a financial expert 

must satisfy, all of the attributes listed 

in Instruction 2 to this Item.

Item 5. Controls and Procedures 

(a) Disclose the conclusions of the 

registrant’s principal executive officer or 

officers and principal financial officer or 

officers, or persons performing similar 

functions, about the effectiveness of the 

registrant’s disclosure controls and 

procedures (as defined in rule 30a–2(c) 

under the Investment Company Act of 

1940 (17 CFR 270.30a–2(c))) based on 

management’s evaluation of these 

controls and procedures in accordance 

with Rule 13a–15(c) or 15d–15(c) under 

the Securities Exchange Act of 1934 (17 

CFR 240.13a–15(c) or 240.15d–15(c)) 

and Rule 30a–3(b) under the Investment 

Company Act of 1940 (17 CFR 270.30a–

3(b)) as of the end of the period covered 

66250 Federal Register / Vol. 67, No. 210 / Wednesday, October 30, 2002 / Proposed Rules 

by the report that includes the 

disclosure required by this paragraph. 

(b) Disclose any significant changes to 

the registrant’s internal controls and 

procedures for financial reporting (as 

defined in rule 30a–2(d) under the 

Investment Company Act of 1940 (17 

CFR 270.30a–2(d))) made during the 

period covered by the report that 

includes the disclosure required by this 

paragraph, including any actions taken 

to correct significant deficiencies and 

material weaknesses in the registrant’s 

internal controls and procedures for 

financial reporting. 

Item 6. Exhibits 

File the exhibits listed below as part 

of this Form. Letter or number the 

exhibits in the sequence indicated. 

(a) A copy of the report transmitted to 

stockholders pursuant to Rule 30e–1 

under the Investment Company Act of 

1940 (17 CFR 270.30e–1). 

(b) Any written code of ethics, or 

amendment to that code of ethics, that 

applies to the principal executive 

officer, principal financial officer, 

principal accounting officer or 

controller, or persons performing 

similar functions of the registrant, its 

investment adviser, or its principal 

underwriter, subject to disclosure under 

Item 3.

* * * * *

Certifications* 

I, [identify the certifying individual], 

certify that: 

1. I have reviewed this report on Form 

N–CSR, including exhibits, of [identify 

registrant]; 

2. Based on my knowledge, this 

report, including exhibits, 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 statements, and other financial 

information included in this report, 

including exhibits, 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 and internal 

controls and procedures for financial 

reporting (as defined in rule 30a–2(c) 

and (d) under the Investment Company 

Act of 1940) for the registrant and we 

have: 

(a) Designed such disclosure controls 

and procedures, or caused such 

disclosure controls and procedures to be 

designed under our supervision, 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) Designed such internal controls 

and procedures for financial reporting, 

or caused such internal controls and 

procedures for financial reporting to be 

designed under our supervision, to 

provide reasonable assurances that the 

registrant’s financial statements are 

fairly presented in conformity with 

generally accepted accounting 

principles; 

(c) Evaluated the effectiveness of the 

registrant’s disclosure controls and 

procedures as of the end of the period 

covered by this report (‘‘Evaluation 

Date’’); 

(d) Presented in this report our 

conclusions about the effectiveness of 

the disclosure controls and procedures 

based on our evaluation as of the 

Evaluation Date; 

(e) Disclosed to the registrant’s 

auditors and the audit committee of the 

board of directors (or persons fulfilling 

the equivalent function): 

(i) All significant deficiencies and 

material weaknesses in the design or 

operation of internal controls and 

procedures for financial reporting which 

could adversely affect the registrant’s 

ability to record, process, summarize, 

and report financial information 

required to be disclosed by the 

registrant in the reports that it files or 

submits under the Securities Exchange 

Act of 1934 and the Investment 

Company Act of 1940, within the time 

periods specified in the U.S. Securities 

and Exchange Commission’s rules and 

forms; and 

(ii) Any fraud, whether or not 

material, that involves management or 

other employees who have a significant 

role in the registrant’s internal controls 

and procedures for financial reporting; 

and 

(f) Indicated in this report any 

significant changes in the registrant’s 

internal controls and procedures for 

financial reporting or in other factors 

that could significantly affect internal 

controls and procedures for financial 

reporting made during the period 

covered by this report, including any 

actions taken to correct significant 

deficiencies and material weaknesses in 

the registrant’s internal controls and 

procedures for financial reporting.

Date: llllllllllllllll

lllllllllllllllllll

[Signature]

lllllllllllllllllll

[Title] 

* Provide a separate certification for 

each principal executive officer and 

principal financial officer of the 

registrant. See Rule 30a–2 under the 

Investment Company Act of 1940 (17 

CFR 270.30a–2). The required 

certification must be in the exact form 

set forth above.

By the Commission.

Dated: October 22, 2002. 

Margaret H. McFarland, 

Deputy Secretary.

[FR Doc. 02–27302 Filed 10–29–02; 8:45 am] 

BILLING CODE 8010–01–P