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SEC Ponders New Rule Requiring Execs to 'Certify' Annual Reports

Accounting: Under the proposal, CEOs and CFOs could be subject to increased legal liability if their companies provide misleading information.


NEW YORK -- Executives whose companies give inaccurate or misleading information to shareholders could face increased legal liability under a rule being considered by the Securities and Exchange Commission.

The rule would force chief executives and chief financial officers to "certify" that quarterly and annual reports are truthful and complete. The executives would have to sign a section of the reports attesting to the accuracy of the information conveyed and to their personal familiarity with it.

The commission will vote today on whether to formally propose the rule and put it out for public comment. The commission also will consider a separate proposal that would force companies to quickly divulge important information to investors.

The proposed rules are among several that SEC Chairman Harvey Pitt has advanced in the wake of the Enron Corp. collapse. Many companies have been criticized for withholding key information from shareholders.

If they are held directly accountable for corporate reports, CEOs and CFOs could be exposed to heightened legal liability should problems arise at their companies, legal experts said.

Frequently, executives who are challenged by securities regulators or by aggrieved shareholders in lawsuits try to defend themselves by saying they were not aware of the minutiae released to the public.

Securities law experts pointed out that current laws already require executives to release accurate and thorough information. But the proposed rule would make it tougher for them to hide behind claims of ignorance, they said.

"It eliminates the 'I didn't know, I didn't realize, I didn't read it' defense, not that that defense is credible in the first place," said Jacob Frenkel, a former SEC attorney now at Smith Gambrell & Russell in Washington.

During a February appearance before a congressional committee, former Enron CEO Jeffrey K. Skilling said he didn't know key details about controversial partnerships that led to his company's collapse.

The rule could force CEOs to pay closer attention to what is happening at their companies and to what shareholders have a right to know, said Seth Taube, a securities attorney at McCarter & English in Newark, N.J.

"It's not a huge step, but it's an important step in motivating management to recognize their responsibilities" to shareholders, Taube said.

The second proposal would affect the filing of 8-Ks, which are forms companies use to notify investors about important news.

Currently, six events, such as a change in a company's outside accountant or the resignation of a director, require the filing of an 8-K within five to 15 days.

The proposal would add 13 events to the list of 8-K triggers. They include the departure of top executives, the downgrading of a company's bonds or the loss of important clients.

The new rule also would mandate that the form be filed within two days.

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