Certification Deadline: "If everybody's sensitive,

WASHINGTON (HedgeWorld.com)--Under the accounting reform bill that became law last month, Aug. 14 was the deadline for most chief executives and chief financial officers to swear under oath, subject to severe criminal penalties, that their corporate financial statements are accurate and complete.

Most of the corporations who came within the scope of this requirement--those that use the calendar year as a budgetary year--waited until the last minute to satisfy it. "As of yesterday," said Gary Wolfe, an attorney with Seward & Kissel LLP, "about 300 CEOs had signed off," on their statements. Mr. Wolfe is the head of the capital markets group at Seward& Kissel, and he works with both corporations and hedge funds.

From an investment perspective, the day probably will not turn out to be particularly important. While, according to Mr. Wolfe, some hedge fund managers say they are getting some sense of which industries are particularly sensitive to the effects of more stringent accounting rules, and which are not; others tell him that they believe everybody is sensitive. In his view, though, "if everybody's sensitive, then nobody's sensitive," and the passage of the day will not be a particularly critical event in terms of investment strategy.

Wednesday's deadline represents not a one-time event but a new routine. The law requires that beginning Aug. 14 every periodic report containing financial statements filed with the Securities and Exchange Commission must be accompanied by a written statement from both the chief executive and the chief financial officer to the effect that the information contained in the report fairly presents the company's financial condition. Noncompliance will subject both of those officials to criminal liability.

The SEC is directed to adopt rules covering these points beginning in January, but the basic principles apply immediately, without intervening SEC action. Indeed, the SEC adopted its own certification requirement a month before passage of the Sarbanes-Oxley statute superceded that earlier initiative.

Another Crucial Provision

A less notorious provision of the new statute, but one that may have a greater impact upon hedge fund activity than the well-publicized certification rule, is the requirement of speedier insider short-swing trade reporting.

Currently, directors, executive officers, and (this is the provision that most concerns hedge fund managers) shareholders with more than a 10% interest in a corporation must report changes in their equity and equity derivative holdings within 10 days of the end of the month in which their transactions occur. That allows for a delay of up to 40 days between transaction and report. But effective Aug. 29, insiders will be required to file reports no later than the second business day after the transaction.

Mr. Wolfe expressed concern that this could create a continuous demand for paperwork for hedge funds with strategies that often put them over that 10% limit. It could also create unwanted transparency, requiring that they tip their plans to the rest of the financial world weeks earlier than has until now been the case.

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