SEC Wants Shareholder Reports Certified
September 9, 2002
Shortly after the Securities and Exchange Commission decided to require top executives of mutual fund companies to certify their firms' financial reports, the commission proposed in an open meeting last week to extend the rule to shareholder reports, as well.
The rules are part of anti-corporate fraud legislation, known as the Sarbanes-Oxley Act, designed to prevent fraud akin to the alleged misconduct at WorldCom, Enron and other companies. President Bush signed the legislation in July.
The Investment Company Institute, meanwhile, has told the SEC that it is not certain that the new law applies to fund companies' own financial reports.
Chip Roame, a mutual fund consultant based in Tiburon, Calif., said that the fund industry may balk at being required to certify its financial statements.
He said there have not been many cases of funds misstating their finances. Despite that, Roame said SEC is applying rules designed to prevent public companies from cooking the books.
"Applying a rule for corporations to fund companies seems stretching a bit," he said. "I wouldn't be surprised to see some fund companies having a negative reaction to that."
During an Aug. 27 open meeting, the SEC decided that a requirement in the Sarbanes-Oxley Act that top executives and financial officers certify financial statements should also apply to fund companies' SEC filings. The certifications are to be registered with the commission via a form known as N-SAR.
Then last week, the SEC proposed amending its interpretation of the Act to require executives to certify financial statements through two filings, one intended for SEC use, and one for shareholders.
Executives have until Oct. 16 to comment on the proposed rule amendment.
The proposal would require investment companies to file a report with the SEC on a new form known as N-CSR, for "certified shareholder report." That form would include a copy of any required shareholder report as well as additional information regarding disclosure procedures. Most importantly, the N-CSR form would contain the certification from top fund executives that is called for under the Sarbanes-Oxley Act.
The reason for the new rule, the SEC said in a statement, is that the commission believes that requiring fund executives to certify only form N-SAR "is not sufficient" to enforce the intent of the Sarbanes-Oxley Act.
For funds, "the required reports to shareholders, rather than Form N-SAR, are the primary vehicle for providing financial statements to investors," the commission said, "We believe that the information in these reports should be certified."
The ICI issued a letter to the commission before the SEC's Aug. 27 meeting, urging it to make special considerations when applying the Sarbanes-Oxley Act to fund companies. The letter, dated Aug. 16, stated, "It is not entirely clear that investment companies are covered, or were intended to be covered, by" the new law.
The ICI contends that fund company executives should not be required to certify information on the N-SAR form because it "only contains limited financial information derived from the fund's financial statements, along with a significant amount of other information that is not financial in nature."
"Form N-SAR is not provided to shareholders, and even if they obtain it, the information it contains would be of little value in assessing a fund," the ICI said.
The ICI is also concerned about certifying reports issued to shareholders because such reports often contain "president's letters," as well as interviews with portfolio managers. That information does not relate to a fund's financial statements and shouldn't have to be certified, the ICI said.