By Stephanie Bess, Paul Harter, Bernard Grinspan, Jean-Philippe Robe, Christoph Hoebbel, Christoph Kuhmann, John F. Olson and Ronald O. Mueller

Originally published on November 14, 2002

The staff of the Division of Corporation Finance of the US Securities and Exchange Commission (the "SEC") confirmed publicly earlier this week that a company that is an "issuer" under SOX because it has registered debt securities under the Securities Act of 1933 (for example in a registered exchange offer for high yield notes) automatically ceases to be an "issuer" under SOX when its obligation to file periodic reports is suspended under Section 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"), provided that the company has no securities registered under Section 12 of the Exchange Act. The obligation to file the reports is suspended automatically at the beginning of the first fiscal year that the registered debt securities are held of record by fewer than 300 holders, other than a year in which the company has a registration statement become effective.

If a company ceases to be an "issuer" under SOX, there are several provisions of SOX that will no longer apply to it, including Section 304, which requires that the CEO and CFO forfeit bonuses and incentive and equity based compensation if the issuer is required to restate its financial statements due to material non-compliance with financial reporting requirements as a result of misconduct; Section 402, which prohibits issuers from making loans to any of its directors or executive officers; and Section 906, which requires the CEO and CFO to certify that financial statements in periodic reports fully comply with the requirements of the Exchange Act and that the information in the reports fairly presents the financial condition and results of operations of the issuer.

It should be noted, however, that if a company continues to file periodic reports on a voluntary basis after the obligation to file reports has been suspended under Section 15(d) of the Exchange Act (for example to comply with covenants in the indenture for the debt securities), several other provisions of SOX will continue to apply to the company, including the CEO/CFO certification requirements imposed by Section 302 of SOX and new Rule 15d-14 under the Exchange Act.

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Copyright © 2002 Gibson, Dunn & Crutcher LLP

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