SEC Adoption of Rule Implementing Reporting of Illegal Acts

Washington, DC, March 24, 1997 - The Securities and Exchange Commission recently adopted Rule 10A-1 under the Securities Exchange Act of 1934. Rule 10A-1 implements the reporting requirements contained in Section 10A of the Exchange Act that were adopted as part of the Private Securities Litigation Reform Act of 1995. Section 10A requires that each audit under the Exchange Act, including audits of investment companies, include procedures regarding the detection of illegal acts, the identification of related party transactions, and the evaluation of the issuer's ability to continue as a going concern. Section 10A imposes expanded obligations on auditors to report in a timely manner certain uncorrected illegal acts to an issuer's board of directors. It further requires the issuer, or if the issuer fails to do so then the auditor, to provide information regarding the illegal act to the Commission.

Under Section 10A, if the auditor detects or otherwise becomes aware of information indicating that an illegal act has occurred, the auditor must promptly inform the appropriate level of management and assure that the audit committee or the board of directors is adequately informed with respect to the illegal act. If the auditor concludes that 1) the illegal act has a material effect on the financial statements of the issuer, 2) senior management has not taken, and the board of directors has not caused senior management to take timely and appropriate remedial action, and 3) the failure to take remedial action is expected to warrant departure from the standard audit opinion, or resignation from the engagement, then the auditor must directly report its conclusions to the board of directors.

If the board of directors receives a report that the auditor has reached these conclusions, then the board has one business day to notify the SEC that it received such a report. If the auditor does not receive a copy of the board's notice to the Commission within that one business day period, then the auditor is required to provide the SEC a copy of the report given to the board. Resignation from the engagement does not relieve the auditor from his obligation to file the report with the Commission.

Rule 10A-1
Rule 10A-1 implements the procedures for filing the notices and reports contemplated under Section 10A. The rule designates the Commission's Office of the Chief Accountant ("OCA") as the appropriate office to receive the notice provided by an issuer or the report provided by an auditor. Delivery of the notice or report to OCA may be made by facsimile, telegraph, personal delivery, or any other means, provided it is received by the OCA within the required time period. Rule 10A-1 provides that notices and reports provided to the Commission will be nonpublic and exempt from disclosure under the Freedom of Information Act to the same extent as the Commission's investigative records.

Rule 10A-1 also sets forth the required contents for an issuer's notice to the Commission. The notice provided by an issuer must be in writing and must identify the issuer, the auditor, and state the date the auditor made its report to the board. The issuer must provide a summary of the auditor's report or include a copy of the auditor's report in the notice provided to the Commission. Consistent with the original rule proposal, the rule specifically permits an issuer to include additional information with the required notice to the Commission regarding the issuer's view of, and response to, the Section 10A report it received from the auditor. The rule is effective April 17, 1997.