404(b) Extension Proposed; SEC’s 2008 Priorities; More

As expected, the Securities and Exchange Commission has unanimously proposed giving non-accelerated filers a one-year extension on compliance with Section 404(b) of Sarbanes-Oxley, the auditor’s attestation part of the nettlesome rule.

The extension coincides with a study of SOX compliance costs to assess whether new compliance rules issued last year will deliver any savings to companies—particularly the non-accelerated filers, who often say Section 404 will be a formidable struggle.

Under the proposed extension, announced officially last Friday, the Section 404(b) requirements would apply to smaller public companies beginning with fiscal years ending on or after Dec. 15, 2009. Non-accelerated filers must still comply with 404(a), which requires company management to assess the effectiveness of the company’s internal controls over financial reporting, for fiscal years ending on or after Dec. 15, 2007.

Larger companies have been subject to both provisions since 2004, but with significantly higher costs than projected when the original rules implementing Sarbanes-Oxley were adopted.

The SEC said its staff has begun the study, which will collect and analyze “real world” cost-and-benefit data from companies currently complying with Section 404 under the new rules published last year. The SEC said the final report will “inform any decision to improve the efficiency and effectiveness of Section 404 implementation.”

The proposed extension was previously announced by SEC Chairman Christopher Cox during testimony before Congress last December.

Cox

“The study will give us the opportunity to ensure that the investor protections of Section 404 are implemented in the way that Congress intended and do not impose unnecessary or disproportionate burdens on smaller companies,” Cox said in a statement at the time.

The study, led by the SEC’s Office of Economic Analysis, will consist of a Web-based survey of companies subject to Section 404 and in-depth interviews, including companies just becoming compliant. The SEC expects to complete its research by late summer or early fall, since much of the key financial data won’t be available from companies until at least March or April.

Public comments on the proposed extension of the auditor attestation requirement for smaller companies are due 30 days after its publication in the Federal Register. The SEC said that full text of the detailed proposing release will be posted to its Web site as soon as possible.

SEC Gets Busy in 2008

It looks like 2008 will be another busy year for the staff in the Securities and Exchange Commission’s Division Corporation Finance.

In his latest comments offering insights into the division’s rulemaking priorities this year, Corporation Finance Director John White noted that international matters and financial reporting will be the top concerns. Those issues include the use of interactive data, adoption of International Financial Reporting Standards, compliance with Sarbanes-Oxley’s Section 404, disclosure of oil and gas reserves, and recommendations by the SEC Advisory Committee on Improvements to Financial Reporting.

Speaking at a securities litigation conference in San Diego on Jan. 23, White said his division is ready to start further rulemaking for XBRL (eXtensible Business Reporting Language) “whenever the technology is ready.” And, he added, “That time is fast approaching.”

White

SEC Chairman Christopher Cox has asked for a staff recommendation related to XBRL this spring. White noted that such a timetable would let participants in the SEC’s voluntary pilot program for XBRL submit first-quarter 2008 financial statements using the new XBRL taxonomy for U.S. Generally Accepted Accounting Principles. “If successful, you can guess where this is all likely to lead,” he said—a clear reference to a rule mandating XBRL, which Cox would like to see in place by the end of this year.

White added that the SEC is also keeping a close eye on expected recommendations from its Financial Reporting Advisory Committee, which will vote Feb. 11 on a number of what the committee describes as “developed proposals.”

“We are looking at how best to react to the developed proposals when they are issued,” White said.

Among those expected proposals is a plan to phase in a mandate for financial statements to be reported to the SEC using XBRL, starting with the largest 500 domestic public reporting companies furnishing a separate XBRL-tagged document. Other ideas include recommendations related to materiality and restatements, topics White said the SEC staff is “looking closely” at.

The staff is also considering whether and how to update guidance issued in 2000 concerning the use of corporate Web sites to disclose information. The financial reporting advisory committee is already exploring how those rules can better reflect investors’ modern use of technology to get financial data, and White said the idea is “something [the SEC staff] has been thinking about pretty seriously for some time now.”

White hopes the SEC will be able to proceed later this year on a concept release issued in December, seeking comment on revising the oil and gas reserves disclosure requirements in Regulation S-K and Regulation S-X. Comments on the release are due Feb. 19.

White also said adoption of International Financial Reporting Standards is a subject “you all should be paying attention to.” A project to allow U.S. companies to file financial statements in IFRS is “a project that appears to have some momentum,” he said.

The staff will also spend a “significant” amount of time pondering recognition, which would allow foreign brokers and exchanges from selected jurisdictions permission to operate in the United States without registration.

White urged companies to share their experiences with the new “e-proxy rule,” which took effect Jan. 1 for large accelerated filers other than registered investment companies. The rule requires companies to post their proxy materials online and alert shareholders about how to view it. White noted that the SEC is monitoring the rule so it can make any changes necessary “to smooth its use” before other registrants are due to comply Jan. 1, 2009.

“Although we’ve heard that the companies that have used e-proxy have seen significant savings, we’ve also heard that the retail vote goes down under e-proxy,” White said. “We’re paying attention and this type of information is really helpful to us. So keep sharing your experiences with us—good and bad.”

Meanwhile, he said, the staff is “gearing up” for more work in shareholder director nominations, an issue the SEC promised to revisit following the adoption in November of a rule that effectively lets companies block shareholder efforts to put director nominations in the proxy statement.

SEC Posts Rules Advice for Small Filers

Smaller reporting companies have two new guides from the SEC to help them comply with newly effective rules aimed at easing the processes of capital raising and filing financial statements.

A 12-page compliance guide is targeted for small-business issuers and other non-accelerated filers eligible to use the SEC’s scaled disclosure rules, so they can make the changeover to the new rules “with minimal effort and expense.”

Topics include how one qualifies to be a “smaller reporting company,” guidance on compliance dates and transitioning to non-SB forms for current small-business issuers and guidance for newly eligible smaller reporting companies. The guide also includes a chart of scaled item requirements in Regulation S-K for smaller reporting companies.

A separate one-page guide explains the conditions of eligibility for smaller companies to use Form S-3 or F-3 for primary securities offerings. It also explains how companies should calculate how much capital they can raise through an offering on Form S-3 or F-3 and information for contacting the SEC staff.

Footnote disclosures in both guides warn that they summarize and explain rules adopted by the SEC, but are “not a substitute for any rule itself.”

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