404 Exemption Plan Proceeds With Tweaks; More

The Securities and Exchange Commission’s closely watched Advisory Committee On Smaller Public Companies made some last-minute additions last week to recommendations on exempting small businesses from Sarbanes-Oxley’s Section 404, including the idea that some form of “indexing” be included for its suggested revenue filters.

Committee member Richard Jaffee, chairman of the board of Oil-Dri Corp., suggested the plan at the committee’s penultimate meeting last week, as a way to make sure exemption thresholds “don’t get stale in a few years.” In an interview after the meeting, Committee co-chair Herbert Wander did not provide any further details.

The Advisory Committee is putting the finishing touches on its report, which it plans to submit to the SEC April 23. The Committee will vote on all of the changes to its draft report in its final meeting, which will take place Thursday at the SEC’s headquarters in Washington D.C.

Despite the controversy surrounding its recommendation to exempt some small companies from Section 404 and provide partial relief to others, Wander, a partner at law firm Katten Muchin Rosenman, indicated that the group has no plans to back away from that recommendation.

Wander

“I’ve been asked if all of the recent press reports will lead the Committee to alter our course of action,” Wander said. “Our basic recommendations are well-grounded and we should stick by them. The SEC will determine whether and how to implement them or not.”

Under the Advisory Committee’s draft proposal, “microcaps”—those companies with $125 million or less in annual revenue and market capitalizations of $128 million or less—would be exempt from all requirements of Section 404; “small companies” with market caps between $128 million and $787 million annual and revenues of less than $250 million, would be exempt only from the external audit requirement.

Along with the new indexing recommendation, the Committee approved three other statements to be included in the final report for possible future study and action by the SEC. The Committee will suggest in a footnote that the SEC consider revising its 1990 “Black Box no-action letter,” to facilitate changing more easily between public and private securities offerings. In addition, the panel will mention that the SEC consider some sort of system of random audits of internal controls, and that it consider professionals other than a company’s external auditor to do the 404 internal controls audit.

Those statements won’t be formal recommendations, since they weren’t made in time to be fully vetted, Wander confirmed. The specifics of other changes to be included in the report, which Wander noted were provided to members in the most recent draft of the report, weren’t discussed during last week’s teleconference meeting.

The final report will also make mention of the fact that Canadian authorities decided not to have an external auditor attestation of internal controls (see "No Audit Burden In Canadian Version Of SOX 404" in box at right).

The Committee received about 180 comments on its draft report, mostly from issuers. Wander said he was “disappointed” by the lack of professional investor comments. “Perhaps that’s a message itself we should think about,” he said during the meeting, adding that a comment letter from the National Venture Capital Association “may be a proxy for some institutional investors.”

Big Board's Regulator Eliminates Treasury-Share Exception

NYSE Regulation, the nonprofit self-regulatory arm of the New York Stock Exchange, voted to abolish its controversial treasury-share exception, a provision in its rules that allowed companies to issue shares amounting to more than 20 percent of their previously outstanding stock without shareholder approval.

The exception, which made headlines in a recent fight between Sovereign Bancorp Inc. and it largest shareholder, Relational Investors, stemmed from the way the rule—which required companies to obtain shareholder approval before issuing stock in certain situations or in significantly large amounts—was written. The controversy prompted NYSE to seek comment on the issue back in December.

Under a provision in NYSE’s Listed Company Manual, companies are required to get shareholder approval before issuing stock in certain situations or in significantly large amounts, including issuance of more than 20 percent of the current outstanding shares in any transaction other than a public offering or “bona fide” private financing.

But the rule historically hadn’t been applied to a reissuance of shares once issued but then reacquired by the company. NYSE had taken the view that once listed, shares remain listed even if they are repurchased by the company and taken back into “treasury.” So, when treasury shares are reissued, NYSE doesn’t require that they be “relisted,” and the provision requiring shareholder approval isn’t triggered.

In its deal with Banco Santander, Sovereign sought to issue new shares to Santander and also to transfer existing treasury shares. Among other issues, shareholders such as Relational argued that counting the treasury shares would have pushed the transaction over the 20 percent threshold, requiring a shareholder vote. The two sides reached an agreement last month after acrimonious and public sparring (see related coverage at right).

Brendan Intindola, a spokesman for NYSE Regulation, said NYSE Regulation expects to file a rule change to eliminate the exception with the SEC in the coming weeks. The SEC would still have to publish the rule for comment and approve it for it to take effect.