SEC Disclosure Controls and Procedures
by Stuart M. Sieger
The fallout from the Sarbanes Oxley Act of 2002 (“SOA”) is continuing. In addition to very important certifications of the financial statements in Form10-K and Form 10-Q by the CEO and CFO of public companies, they must also certify as to the quality of their company’s internal reporting system, and will be required to report on the same in SEC reports. Event related reporting on Form 8-K has been revised to require reports on a wide variety of non-financial business matters within as little as two business days of the event, such as entering into a material agreement, or even a letter of intent, not in the ordinary course, termination or reduction of a business relationship, creation of material liability, including contingent liabilities, events triggering material liabilities and material impairment of assets. These and other matters are being considered by the SEC. There are intensified reporting requirements for off balance sheet transactions affecting liabilities, which can cover a wide range of subjects. The SEC, the Board of Directors, the Audit Committee, outside auditors, outside counsel, lenders, investors, business partners, and insurers are all becoming increasingly focused on the quality of a company’s internal reporting, not just of financial information, but also of business deals and events affecting the financial, business, intellectual property and litigation (among other) risk profile of the company. Public companies will be required to disclose the nature of their internal reporting structures.
Our recommended response is the creation of a disciplined and pro-active permanent management structure within the company, the sole function of which is disclosure. This disclosure group, rather than an ad hoc group of executives, would be responsible for all company reporting, including all SEC reports as well as press releases, teleconferences etc. The disclosure group would include the Chief Legal Officer, the Chief Financial Officer; inside and/or general counsel; the public relations officer and the Chief Risk Officer. A disclosure group charter should be prepared, covering members, meetings, duties and reporting relationships. The charter is a critical document, since it governs the structure and function of the disclosure group. Members or their representatives should be available for weekly meetings at a regularly scheduled time. Ad hoc meetings could be called on several hours’ notice. Minutes should be kept relating to the subject matter of the meetings. Meetings should address forthcoming disclosure and assign drafting responsibility, and should review drafting prepared as a result of assignments at prior meetings. The disclosure group’s secretary should be responsible for distributing material that has been cleared by the disclosure group and collecting comments for the next meeting of the group.
The disclosure group will have primary responsibility for drafting all SEC reports and other public disclosures. This would include the annual report on Form 10-K, quarterly reports on Form 10-Q, event related reports on Form 8-K and all press releases, financial and otherwise, script of conferences and teleconferences, etc. The disclosure group should distribute drafts of reports and press releases to the CEO, audit committee, outside counsel and outside auditors for comment. The disclosure group should also be involved in providing the basic script for conference calls and other communications with investors, and the preparation of the annual report to stockholders. In so doing, the disclosure committee would be in a uniquely suitable position to deal with Regulation FD issues, making sure that material non-public information that has been selectively disclosed is then promptly disclosed publicly.
The disclosure group should meet with outside counsel and auditors and with the Audit Committee of the Board of Directors. The disclosure group will also meet with the CEO prior to required certifications. The disclosure group should set black out periods when management cannot purchase or sell securities of the company. Black out periods based on 10-K and 10-Q reporting can be established in advance, while those relating to disclosures on 8-K reporting could be declared at virtually any time. Such black outs would also fall within the scope of the disclosure committee in accordance with guidelines established in the committees charter.
Of course, the disclosure group would be ineffective without a timely and reliable stream of information from all parts of the company, so-called “up the ladder” reporting. Such reporting requires careful structuring to assure full cooperation by designated employees. Each responsible employee in financial reporting and in operations should be furnished with a checklist of “news worthy” items, and should be required to submit a report weekly in advance of regularly scheduled disclosure group meetings indicating either “news” or “no news” as to each item. One or more employees may have a specific assignment to facilitate information gathering. This reporting structure should be reinforced by a company wide education campaign stressing its importance and the reasons it is needed.
Needless to say, the structure must be proportioned to each company. Smaller companies will need simpler structures than larger companies. Nevertheless, the structures for each must be able to produce the desired results.
A recent development makes a quality reporting structure even more necessary. Under recently adopted regulations, the SEC requires counsel practicing before the SEC, which can include internal or outside counsel consulting on the preparation of SEC reports, to require answers to a substantial concern they may have about violations or potential violations by the company of securities and any other laws, and if they don’t get a satisfactory answer from senior management, to seek the same from the Board of Directors. This is all by way of saying that your counsel can be of most assistance in helping the company avoid problems, and may become less helpful in solving the problems, once the same have developed. This is one more reason to create and operate a “bullet-proof” reporting structure.
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Stuart M. Sieger is Counsel at Ruskin Moscou Faltischek, where he is a member of the Firm's Corporate & Securities Department, Technology Group and Corporate Governance Practice Group. He can be reached at 516-663-6546 or ssieger@rmfpc.com.
