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The Sarbanes-Oxley Act
Securities Act of 1933

Often referred to as the "truth in securities" law, the Securities Act of 1933 has two basic objectives:


Require that investors receive financial and other significant information concerning securities being offered for public sale; and

Prohibit deceit, misrepresentations, and other fraud in the sale of securities.

Purpose of Registration
A primary means of accomplishing these goals is the disclosure of important financial information through the registration of securities.
 
This information enables investors, not the government, to make informed judgments about whether to purchase a company's securities.
 
While the SEC requires that the information provided be accurate, it does not guarantee it. Investors who purchase securities and suffer losses have important recovery rights if they can prove that there was incomplete or inaccurate disclosure of important information.

The Registration Process
In general, securities sold in the U.S. must be registered. The registration forms companies file provide essential facts while minimizing the burden and expense of complying with the law. In general, registration forms call for:


A description of the company's properties and business;

A description of the security to be offered for sale;

Information about the management of the company; and

Financial statements certified by independent accountants.

Registration statements and prospectuses become public shortly after filing with the SEC. If filed by U.S. domestic companies, the statements are available on the EDGAR database accessible at www.sec.gov. Registration statements are subject to examination for compliance with disclosure requirements.

Not all offerings of securities must be registered with the Commission. Some exemptions from the registration requirement include:

Private offerings to a limited number of persons or institutions;

Offerings of limited size;

Intrastate offerings; and

Securities of municipal, state, and federal governments.

By exempting many small offerings from the registration process, the SEC seeks to foster capital formation by lowering the cost of offering securities to the public.
 
Securities Exchange Act of 1934

With this Act, Congress created the Securities and Exchange Commission. The Act empowers the SEC with broad authority over all aspects of the securities industry.
 
This includes the power to register, regulate, and oversee brokerage firms, transfer agents, and clearing agencies as well as the nation's securities self regulatory organizations (SROs).
 
The various securities exchanges, such as the New York Stock Exchange, the NASDAQ Stock Market, and the Chicago Board of Options are SROs.
 
The Financial Industry Regulatory Authority (FINRA) is also an SRO.

The Act also identifies and prohibits certain types of conduct in the markets and provides the Commission with disciplinary powers over regulated entities and persons associated with them.

The Act also empowers the SEC to require periodic reporting of information by companies with publicly traded securities.

Corporate Reporting

Companies with more than $10 million in assets whose securities are held by more than 500 owners must file annual and other periodic reports.
 
These reports are available to the public through the SEC's EDGAR database.

Proxy Solicitations

The Securities Exchange Act also governs the disclosure in materials used to solicit shareholders' votes in annual or special meetings held for the election of directors and the approval of other corporate action.
 
This information, contained in proxy materials, must be filed with the Commission in advance of any solicitation to ensure compliance with the disclosure rules.
 
Solicitations, whether by management or shareholder groups, must disclose all important facts concerning the issues on which holders are asked to vote.

Tender Offers

The Securities Exchange Act requires disclosure of important information by anyone seeking to acquire more than 5 percent of a company's securities by direct purchase or tender offer.
 
Such an offer often is extended in an effort to gain control of the company. As with the proxy rules, this allows shareholders to make informed decisions on these critical corporate events.

Insider Trading

The securities laws broadly prohibit fraudulent activities of any kind in connection with the offer, purchase, or sale of securities.
 
These provisions are the basis for many types of disciplinary actions, including actions against fraudulent insider trading.
 
Insider trading is illegal when a person trades a security while in possession of material nonpublic information in violation of a duty to withhold the information or refrain from trading.

Registration of Exchanges, Associations, and Others

The Act requires a variety of market participants to register with the Commission, including exchanges, brokers and dealers, transfer agents, and clearing agencies. Registration for these organizations involves filing disclosure documents that are updated on a regular basis.

The exchanges and the Financial Industry Regulatory Authority (FINRA) are identified as self-regulatory organizations (SRO).
 
SROs must create rules that allow for disciplining members for improper conduct and for establishing measures to ensure market integrity and investor protection.
 
SRO proposed rules are subject to SEC review and published to solicit public comment.
 
While many SRO proposed rules are effective upon filing, some are subject to SEC approval before they can go into effect.

Trust Indenture Act of 1939

This Act applies to debt securities such as bonds, debentures, and notes that are offered for public sale.
 
Even though such securities may be registered under the Securities Act, they may not be offered for sale to the public unless a formal agreement between the issuer of bonds and the bondholder, known as the trust indenture, conforms to the standards of this Act.

Investment Company Act of 1940

This Act regulates the organization of companies, including mutual funds, that engage primarily in investing, reinvesting, and trading in securities, and whose own securities are offered to the investing public. The regulation is designed to minimize conflicts of interest that arise in these complex operations.
 
The Act requires these companies to disclose their financial condition and investment policies to investors when stock is initially sold and, subsequently, on a regular basis.
 
The focus of this Act is on disclosure to the investing public of information about the fund and its investment objectives, as well as on investment company structure and operations.
 
It is important to remember that the Act does not permit the SEC to directly supervise the investment decisions or activities of these companies or judge the merits of their investments.

Investment Advisers Act of 1940

This law regulates investment advisers. With certain exceptions, this Act requires that firms or sole practitioners compensated for advising others about securities investments must register with the SEC and conform to regulations designed to protect investors.
 
Since the Act was amended in 1996 and 2010, generally only advisers who have at least $100 million of assets under management or advise a registered investment company must register with the Commission.

Sarbanes-Oxley Act of 2002

On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002, which he characterized as "the most far reaching reforms of American business practices since the time of Franklin Delano Roosevelt."
 
The Act mandated a number of reforms to enhance corporate responsibility, enhance financial disclosures and combat corporate and accounting fraud, and created the "Public Company Accounting Oversight Board," also known as the PCAOB, to oversee the activities of the auditing profession.

Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010

The Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law on July 21, 2010 by President Barack Obama.
 
The legislation set out to reshape the U.S. regulatory system in a number of areas including but not limited to consumer protection, trading restrictions, credit ratings, regulation of financial products, corporate governance and disclosure, and transparency.

Jumpstart Our Business Startups Act of 2012

The Jumpstart Our Business Startups Act (the "JOBS Act") was enacted on April 5, 2012. The JOBS Act aims to help businesses raise funds in public capital markets by minimizing regulatory requirements.
 

 
The Sarbanes Oxley Act
 
Responding to corporate failures and fraud that resulted in substantial financial losses to institutional and individual investors, Congress passed the Sarbanes-Oxley Act in 2002.
 
The act contains provisions affecting the corporate governance, auditing, and financial reporting of public companies, including provisions intended to deter and punish corporate accounting fraud and corruption.

The Sarbanes-Oxley Act generally applies to those companies required to file reports with SEC under the Securities Exchange Act of 1934 and does not differentiate between small and large businesses.
 
The definition of small varies among agencies, but SEC generally calls companies that had less than $75 million in public float non-accelerated filers.
 
Accelerated filers are required by SEC regulations to file their annual and quarterly reports to SEC on an accelerated basis compared to non-accelerated filers.
 
As of 2005, SEC estimated that about 60 percent —5,971 companies—of all registered public companies were non-accelerated filers.
 
SEC recently further differentiated smaller companies from what it calls “well-known seasoned issuers”—those largest companies ($700 million or more in public float) with the most active market following, institutional ownership, and analyst coverage.

Title I of the act establishes PCAOB as a private-sector nonprofit organization to oversee the audits of public companies that are subject to the securities laws.
 
PCAOB is subject to SEC oversight.
 
The act gives PCAOB four primary areas of responsibility:

• registration of accounting firms that audit public companies in the U.S. securities markets;

• inspections of registered accounting firms;

• establishment of auditing, quality control, and ethics standards for registered accounting firms; and

• investigation and discipline of registered accounting firms for violations of
law or professional standards.

Title II of the act addresses auditor independence.
 
It prohibits the registered external auditor of a public company from providing certain nonaudit services to that public company audit client.
 
Title II also specifies communication that is required between auditors and the public company’s audit committee (or board of directors) and requires periodic rotation of the audit partners managing a public company’s audits.
 
Titles III and IV of the act focus on corporate responsibility and enhanced
financial disclosures.
 
Title III addresses listed company audit committees, including responsibilities and independence, and corporate responsibilities for financial reports, including certifications by corporate officers in annual and quarterly reports, among other provisions.
 
Title IV addresses disclosures in financial reporting and transactions involving management and principal stockholders and other provisions such as internal control over financial reporting.
 
More specifically, section 404 of the act establishes requirements for companies to publicly report on management’s responsibility for establishing and maintaining an adequate internal control structure, including controls over financial reporting and the results of management’s assessment of the effectiveness of internal control over financial reporting.
 
Section 404 also requires the firms that serve as external auditors for public companies to attest to the assessment made by the companies’ management, and report on the results of their attestation and whether they agree with management’s assessment of the company’s internal control over financial reporting.

SEC and PCAOB
have issued regulations, standards, and guidance to implement the Sarbanes-Oxley Act.
 
For instance, both SEC regulations and PCAOB’s Auditing Standard Number 2, “An Audit of Internal Control Over Financial Reporting Performed in Conjunction with an Audit of Financial Statements” state that management is required to base its assessment of the effectiveness of the company’s internal control over financial reporting on a suitable, recognized control framework established by a body of experts that followed due process procedures, including the broad distribution of the framework for public comment.

Both the SEC guidance and PCAOB’s auditing standard cite the COSO principles as providing a suitable framework for purposes of section 404
compliance.
 
In 1992, COSO issued its “Internal Control—Integrated Framework” (the COSO Framework) to help businesses and other entities assess and enhance their internal control.
 
Since that time, the COSO framework has been recognized by regulatory standards setters and others as a comprehensive framework for evaluating internal control, including internal control over financial reporting.
 
The COSO framework includes a common definition of internal control and criteria against which companies could evaluate the effectiveness of their internal control systems.
 
The framework consists of five interrelated components: control environment, risk assessment, control activities, information and communication, and monitoring.
 
While SEC and PCAOB do not mandate the use of any particular framework, PCAOB states that the framework used by a company should have elements that encompass the five COSO components on internal control.

Internal control generally serves as
a first line of defense in safeguarding assets and preventing and detecting errors and fraud.
 
Internal control is defined as a process, effected by an entity’s board of directors, management, and other personnel, designed to provide reasonable
assurance regarding the achievement of the following objectives:
 
(1) effectiveness and efficiency of operations;
 
(2) reliability of financial reporting; and
 
(3) compliance with laws and regulations.
 
Internal control over financial reporting is further defined in the SEC regulations implementing section 404.
 
These regulations define internal control over financial reporting as providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements, including those policies and procedures that

pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the
company;

• p
rovide reasonable assurance that transactions are recorded as necessary
to permit preparation of financial statements in conformity with generally
accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and

provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.

PCAOB’s Auditing Standard No. 2 reiterates this definition of internal control over financial reporting. Internal control is not a new requirement
for public companies.
 
In December 1977, as a result of corporate falsification of records and improper accounting, Congress enacted the Foreign Corrupt Practices Act (FCPA).
 
The FCPA’s internal accounting control requirements were intended to prevent fraudulent financial reporting, among other things.
 
The FCPA required companies to:
 
(1) make and keep books, records, and accounts that in reasonable detail accurately and fairly reflect the transactions and dispositions of assets and
 
(2) develop and maintain a system of internal accounting controls sufficient to provide reasonable assurance over the recording and executing of transactions, the preparation of financial statements in accordance with standards, and maintaining accountability for assets.
 

 
The Sarbanes-Oxley Act for smaller public companies
 
Regulators, public companies, audit firms, and investors generally agree that the Sarbanes-Oxley Act of 2002 has had a positive and significant impact on investor protection and confidence.
 
However, for smaller public companies (defined in this report as $700 million or less in market capitalization), the cost of compliance has been disproportionately higher (as a percentage of revenues) than for large public companies, particularly with respect to the internal control reporting provisions in section 404 and related audit fees.

Smaller public companies noted that resource limitations and questions regarding the application of existing internal control over financial reporting  guidance to smaller public companies contributed to challenges they face in implementing section 404.
 
The costs associated with complying with the act,  along with other market factors, may be encouraging some companies to become private.
 
The companies going private were small by any measure and represented 2 percent of public companies in 2004.
 
The full impact of the act on smaller public companies remains unclear because the majority of smaller public companies have not fully implemented section 404.

To address concerns from smaller public companies, SEC extended the section 404 deadline for smaller companies with less than $75 million in market capitalization, with the latest extension to 2007.
 
Additionally, SEC and PCAOB issued guidance intended to make the section 404 compliance process more economical, efficient, and effective.
 
SEC also encouraged the Committee of Sponsoring Organizations of the Treadway Commission (COSO), to develop guidance for smaller public companies in implementing internal control over financial reporting in a cost-effective manner.
 
COSO’s guidance had not been finalized as of March 2006.
 
SEC also formed an advisory committee to examine, among other things, the impact of the act on smaller public companies.
 
The committee plans to issue a report in April 2006 that will recommend, in effect, a tiered approach with certain smaller public companies partially or fully exempt from section 404, “unless and until” a framework for assessing internal control over financial reporting is developed that recognizes the characteristics and needs of smaller public companies.
 
As SEC considers these recommendations, it is essential that the overriding purpose of the Sarbanes-Oxley Act—investor protection—is preserved and that SEC assess available guidance to determine if additional supplemental or clarifying guidance for smaller public companies is needed.

Smaller public companies have been able to obtain access to needed audit
services and many moved from the largest accounting firms to mid-sized and
small firms.
 
The reasons for these changes range from audit cost and service
concerns cited by companies to client profitability and risk concerns cited
by accounting firms, including capacity constraints and assessments of
client risk.
 
Overall, mid-sized and small accounting firms conducted 30 percent of total public company audits in 2004—up from 22 percent in 2002.
 
However, large accounting firms continue to dominate the overall market, auditing 98 percent of U.S. publicly traded company sales or revenues.
 

 
Summary of SEC Actions and SEC Related Provisions Pursuant to the Sarbanes-Oxley Act of 2002

Restoring Confidence in the Accounting Profession

The Act established the Public Company Accounting Oversight Board

Section 108(b) - On April 25, 2003, the SEC recognized the Financial Accounting Standards Board as the accounting standard setter.

Section 108(d) - On July 25, 2003, the SEC issued a study on principles-based accounting.

Section 109 - The Act established an independent funding source for the FASB.

Title II - On January 22, 2003, the SEC adopted rules improving the independence of outside auditors.

Section 303 - On April 24, 2003, the SEC adopted rules forbidding the improper influence on outside auditors.

Section 802 - On January 22, 2003, the SEC adopted rules governing the retention of audit records by outside auditors

Improving the "Tone at the Top"

Section 302 - On August 27, 2002, the SEC adopted rules requiring CEOs and CFOs to certify financial and other information in their companies' quarterly and annual reports.

Section 304 - This section requires management to return bonuses or profits from stock sales received within 12 months of a restatement resulting from material non-compliance with financial reporting requirements as a result of misconduct.

Section 306 - On January 15, 2003, the SEC adopted rules prohibiting company officers from trading during pension fund blackout periods.

Section 402 - This section prohibits companies from making loans to insiders.

Section 403 - On August 27, 2002, the SEC adopted rules that accelerated deadlines and mandated electronic filing of disclosures of insider transactions in company stock.

Section 406 - On January 15, 2003, the SEC adopted rules requiring companies to disclose whether they have a code of ethics for their CEO, CFO and senior accounting personnel.

Improving Disclosure and Financial Reporting

Section 401(a) - On January 22, 2003, the SEC adopted rules requiring disclosure of all material off-balance sheet transactions.

Section 401(b) - On January 15, 2003, the SEC adopted Regulation G, governing the use of non-GAAP financial measures, including disclosure and reconciliation requirements.

Section 404 - On May 27, 2003, the SEC adopted rules requiring an annual management report on and auditor attestation of a company's internal controls over financial reporting.

Section 408 - This section requires that the Commission review the Exchange Act reports of each company no less frequently than once every three years.

Improving the Performance of "Gatekeepers"

Section 301 - On April 1, 2003, the SEC adopted rules directing the SROs to adopt listing standards for audit committees.

Section 407 - On January 15, 2003, the SEC adopted rules requiring the disclosure about financial experts on audit committees.

Section 307 - On January 23, 2003, the SEC adopted rules governing standards of conduct for attorneys appearing and practicing before the Commission.

Section 501 - On July 29, 2003, the SEC approved new SRO rules governing research analyst conflicts of interest.

Enhancing Enforcement Tools

Section 106 - This section addresses SEC access to foreign audit workpapers.

Section 305 - This section sets standards for imposing officer and director bars and penalties.

Section 308 - This section establishes FAIR Funds for Investors and requires a study of the same, which the SEC issued on January 24, 2003.

Section 602 - This section addresses the SEC's authority over professionals who appear and practice before the Commission.

Section 603 - This section grants federal courts the ability to impose penny stock bars.

Section 703 - On January 24, 2003, the SEC issued a study on aiding and abetting liability under the federal securities laws.

Section 704 - On January 24, 2003, the SEC issued a study of enforcement actions involving violations of reporting requirements and restatements.

Section 803 - This section provides that debts are not dischargeable in bankruptcy if they were incurred as a result of securities fraud.

Section 1103 - This section allows the SEC to temporarily freeze certain extraordinary payments made to securities law violators.

Section 1105 - This section gives the SEC the authority in administrative proceedings to prohibit persons from serving as officers or directors.1
 

 
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Summary of SEC Actions and SEC Related Provisions Pursuant to the Sarbanes-Oxley Act of 2002
The Act established the Public Company Accounting Oversight Board

Section 108(b) - On April 25, 2003, the SEC recognized the Financial Accounting Standards Board as the accounting standard setter.

Section 108(d) - On July 25, 2003, the SEC issued a study on principles-based accounting.

Section 109 - The Act established an independent funding source for the FASB.

Section 303 - On April 24, 2003, the SEC adopted rules forbidding the improper influence on outside auditors.

Section 802 - On January 22, 2003, the SEC adopted rules governing the retention of audit records by outside auditors
Improving the "Tone at the Top"

Section 302 - On August 27, 2002, the SEC adopted rules requiring CEOs and CFOs to certify financial and other information in their companies' quarterly and annual reports.

Section 304 - This section requires management to return bonuses or profits from stock sales received within 12 months of a restatement resulting from material non-compliance with financial reporting requirements as a result of misconduct.

Section 306 - On January 15, 2003, the SEC adopted rules prohibiting company officers from trading during pension fund blackout periods.

Section 402 - This section prohibits companies from making loans to insiders.

Section 403 - On August 27, 2002, the SEC adopted rules that accelerated deadlines and mandated electronic filing of disclosures of insider transactions in company stock.

Section 406 - On January 15, 2003, the SEC adopted rules requiring companies to disclose whether they have a code of ethics for their CEO, CFO and senior accounting personnel.

Section 401(a) - On January 22, 2003, the SEC adopted rules requiring disclosure of all material off-balance sheet transactions.

Section 401(b) - On January 15, 2003, the SEC adopted Regulation G, governing the use of non-GAAP financial measures, including disclosure and reconciliation requirements.

Section 404 - On May 27, 2003, the SEC adopted rules requiring an annual management report on and auditor attestation of a company's internal controls over financial reporting.

Section 408 - This section requires that the Commission review the Exchange Act reports of each company no less frequently than once every three years.

Section 301 - On April 1, 2003, the SEC adopted rules directing the SROs to adopt listing standards for audit committees.

Section 407 - On January 15, 2003, the SEC adopted rules requiring the disclosure about financial experts on audit committees.

Section 307 - On January 23, 2003, the SEC adopted rules governing standards of conduct for attorneys appearing and practicing before the Commission.

Section 501 - On July 29, 2003, the SEC approved new SRO rules governing research analyst conflicts of interest.
Enhancing Enforcement Tools

Section 106 - This section addresses SEC access to foreign audit workpapers.

Section 305 - This section sets standards for imposing officer and director bars and penalties.

Section 308 - This section establishes FAIR Funds for Investors and requires a study of the same, which the SEC issued on January 24, 2003.

Section 602 - This section addresses the SEC's authority over professionals who appear and practice before the Commission.

Section 603 - This section grants federal courts the ability to impose penny stock bars.

Section 703 - On January 24, 2003, the SEC issued a study on aiding and abetting liability under the federal securities laws.

Section 704 - On January 24, 2003, the SEC issued a study of enforcement actions involving violations of reporting requirements and restatements.

Section 803 - This section provides that debts are not dischargeable in bankruptcy if they were incurred as a result of securities fraud.

Section 1103 - This section allows the SEC to temporarily freeze certain extraordinary payments made to securities law violators.

Section 1105 - This section gives the SEC the authority in administrative proceedings to prohibit persons from serving as officers or directors.Management's Report on Internal Control over Financial Reporting
 


Management's report on internal control over financial reporting and certification of disclosure in Exchange Act periodic reports
 
Section 404 of the Act directs the Commission to adopt rules requiring each annual report of a company, other than a registered investment company, to contain
 
(1) a statement of management's responsibility for establishing and maintaining an adequate internal control structure and procedures for financial reporting; and
 
(2) management's 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 auditor to attest to, and report on management's assessment of the effectiveness of the company's internal controls and procedures for financial reporting in accordance with standards established by the Public Company Accounting Oversight Board.
 
The Commission received over 60 comments on the Section 404 proposals that expressed general overall support for the Commission's approach to implementing Section 404 of the Act.
 
The adopting release will incorporate a number of changes recommended by commenters.

Under the final rules, management's annual internal control report will have to contain:

A statement of management's responsibility for establishing and maintaining adequate internal control over financial reporting for the company;

A statement identifying the framework used by management to evaluate the effectiveness of this internal control;

Management's assessment of the effectiveness of this internal control as of the end of the company's most recent fiscal year; and

A statement that its auditor has issued an attestation report on management's assessment.

Under the new rules, management must disclose any material weakness and will be unable to conclude that the company's internal control over financial reporting is effective if there are one or more material weaknesses in such control.
 
Furthermore, the framework on which management's evaluation is based will have to be a suitable, recognized control framework that is established by a body or group that has followed due-process procedures, including the broad distribution of the framework for public comment.

The new rules implementing Section 404 of the Act will define the term "internal control over financial reporting" to
 
 - Mean a process designed by, or under the supervision of, the registrant's principal executive and principal financial officers, or persons performing similar functions, and effected by the registrant's board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the registrant;

 - Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and receipts and expenditures of the registrant are being made only in accordance with authorizations of management and directors of the registrant; and

 - Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the registrant's assets that could have a material effect on the financial statements.

The Commission also voted to adopt amendments requiring companies to perform quarterly evaluations of changes that have materially affected or are reasonably likely to materially affect the company's internal control over financial reporting.

Compliance with the rules regarding management's report on internal controls will be required as follows: companies, other than foreign private issuers, meeting the definition of an "accelerated filer" in Exchange Act Rule 12b-2 (generally, U.S. companies that have equity market capitalization over $75 million and have filed an annual report with the Commission) will be required to comply with the management report on internal control over financial reporting requirements for fiscal years ending on or after June 15, 2004, and all other issuers, including small business issuers and foreign private issuers, will be required to comply for their fiscal years ending on or after April 15, 2005.

Certifications

The final rules will amend the exhibit requirements for periodic reports to add the certifications required by Sections 302 and 906 of the Sarbanes-Oxley Act to the list of required exhibits to be included in reports filed with the Commission.
 
Under the final rules, the specific form and content of the Section 302 certification will be set forth in the applicable exhibit filing requirements for a company's periodic reports.

The amendments will permit companies to "furnish" rather than "file" the Section 906 certifications with the Commission. Thus, the certifications will not be subject to liability under Section 18 of the Exchange Act.
 
Moreover, the certifications will not be subject to automatic incorporation by reference into a company's Securities Act registration statements, which are subject to liability under Section 11 of the Securities Act, unless the issuer takes steps to include the certifications in a registration statement.

The rules and form amendments concerning Section 302 and Section 906 certifications generally will become effective sixty days after their publication in the Federal Register.
Rule 3a-8

As adopted by the Commission, new Rule 3a-8 under the Investment Company Act will modernize the test that R&D companies use in determining their status under the Act.

R&D companies tend to have few tangible assets and often hold large amounts of capital in liquid instruments so that funds are readily available for research and development activities. Some R&D companies also enter into strategic alliances that may include a strategic investment, where one R&D company purchases a non-controlling securities position in another company. As a result, an R&D company may fall within the definition of investment company.
 
The new rule will serve as a nonexclusive safe harbor from the definition of investment company in Section 3(a)(1) of the Act.

The analysis set forth in the new rule generally will focus on an R&D company's use of its capital and other indicia of the company's primary engagement in a non-investment business. Generally, a company will be eligible to rely on the rule's nonexclusive safe harbor if it:

Has research and development expenses that are a substantial percentage of its total expenses for its last four fiscal quarters combined and that equal at least half of its net income derived from investments in securities for that period;

Has investment-related expenses that do not exceed five percent of its total expenses for its last four fiscal quarters combined;

Makes its investments to conserve capital and liquidity until it uses the funds in its primary business subject to certain exceptions; and

Is primarily engaged, directly or through a company or companies that it controls primarily, in a noninvestment business, as evidenced by the activities of its officers, directors and employees, its public representations of policies, and its historical development.

 
The Sarbanes-Oxley Act: The sections of the Act in an easy to read format
The complete legislative text
 

   
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