COMMENTS

The SEC Advisory Committee on Smaller Public Companies is seeking input from the public on ways to improve the current regulatory system for smaller companies under the securities laws of the United States, including the Sarbanes-Oxley Act of 2002. Comments may be sent to the SEC in three ways:

Online

Click Here To Use An Online Form At The SEC's Web Site

Via Fax

Fax submissions to (202) 772-9324, Attn: Committee Management Officer.

U.S. Mail

Paper submissions should refer to File Number 265-23 and should be sent "in triplicate" to:

Jonathan G. Katz

Committee Management Officer

U.S. SEC

100 F Street NE

Washington, DC

20549-9303.

The Securities and Exchange Commission’s recently established Advisory Committee on Smaller Public Companies is asking for input on ways to improve the current regulatory system for smaller companies, and to examine the impact of The Sarbanes-Oxley Act.

Last week, the Commission posted a series of 29 questions that the Committee will consider in making its recommendations. The questions relate to the general impact of Sarbanes-Oxley, the impact of Section 404, and corporate governance and listing requirements.

Beller

“The Committee is committed to enhancing the regulatory environment for smaller public companies," said SEC Division of Corporation Finance Director Alan Beller. "Seeking public input from all interested participants is an important step in that process.”

As expected, some of the questions imply that the Committee is considering whether to further delay certain compliance requirements. “For smaller companies,” the form asks, “would extended effective dates for new accounting standards ease the burden of implementation and reduce the costs in a desirable way?” As Compliance Week reported July 26, the group is expected to consider a subcommittee report recommending extension of the compliance date for certain smaller public companies to meet requirements relating to Section 404 of Sarbanes-Oxley.

The questions asked by the Committee also probe auditor independence issues. “Would auditors providing assistance with accounting and reporting for unusual or infrequent transactions impair the auditors' independence as it relates to smaller companies?”

It also appears from the questions that quarterly financial reporting is on the table for discussion, as well. “Is the quarterly Form 10-Q or Form 10-QSB information valuable to users of the financial statements of smaller companies? Would a system that required semi-annual reporting with limited revenue information provided in the other quarters reduce costs of compliance without decreasing the usefulness of the reported information to investors?”

How Small Is Small?

The Committee noted that there is no set cut-off in size of smaller companies in responding to its request. That actually reflects the fact that the entire definition of “smaller companies” is up for grabs. In a meeting agenda published in early April, the Committee listed as its first discussion topic “Definition of ‘Smaller Public Company’,” noting that it would examine the “appropriateness” of existing definitions.

Those definitions vary widely by statute and exchange. A “small business” issuer typically has a market capitalization of less than $25 million, but a “non-accelerated filer” has a market cap of less than $75 million. Other definitions exist as well—Section 12(g) of the Securities Exchange Act of 1934 includes a standard based in part on the number of shareholders, and the Commission’s new Securities Offering Reform includes four entirely new categories of issuers, including those that are “unseasoned.”

QUESTIONS

The sample questions below are excerpted from the SEC's online form requesting input on ways to improve the current regulatory system for smaller companies:

Question 11—Do you believe that at least some SOX Section 404 internal controls for smaller companies can be appropriately assessed less often than every year?

Question 12—Current standards require that the auditor must perform enough of the testing himself or herself so that the auditor's own work provides the principal evidence for the auditor's opinion. Are there specific controls for smaller companies for which the auditor should appropriately be permitted to rely on management's testing and documentation?

Question 16—Are the current accounting standards applied to all U.S. companies appropriate for smaller companies? If not, please explain what revisions to existing standards might be appropriate.

Question 17—For smaller companies, would extended effective dates for new accounting standards ease the burden of implementation and reduce the costs in a desirable way?

Question 19—Is the quarterly Form 10-Q or Form 10-QSB information valuable to users of the financial statements of smaller companies? Would a system that required semi-annual reporting with limited revenue information provided in the other quarters reduce costs of compliance without decreasing the usefulness of the reported information to investors?

Question 21—Should accounting standards provide smaller companies with different alternatives for measuring accounting events that would reduce the amount of time that would otherwise be spent by smaller companies to comply with those accounting standards?

Question 24—Is the loan prohibition contained in SOX creating a hardship for smaller companies?

Question 26—Are the costs of preparing and distributing printed paper versions of proxy statements and annual reports to shareholders unduly costly for smaller companies?

Source: "Provide Input to the Advisory Committee," Available At The SEC's Web Site

For the purposes of the Committee’s questionnaire, a set cut-off does not exist: “companies with sales or market capitalization of $100 million, or $750 million, or even more are appropriate where answers provide a basis for considering the company to be a smaller company.”

Respondents should indicate in their answers the size of the company, and the basis of measurement; responses using the form are due by Aug. 31, 2005.

The Advisory Committee was established by the SEC last December to examine the impact of federal securities laws on smaller public companies. The move was one of many by regulators and standard setters to ensure the costs and burdens of regulation are commensurate with the benefits to investors.

Shortly before the Committee was established, the Public Company Accounting Oversight Board had announced a forum on small business auditing for companies and auditors in the “small business community.” Then in early 2005, the Committee of Sponsoring Organizations of the Treadway Commission—which had authored an internal control framework widely used by public companies—announced that it would launch a project to give smaller companies guidance on achieving compliance with new laws and regulations; COSO has targeted Aug. 15 as the release date for its guidance, Implementing the COSO Control Framework for Smaller Businesses.

In April of this year, the SEC hosted a roundtable on SOX 404, soliciting feedback on implementation challenges for market participants, including smaller companies. The SEC had already extended the original Section 404 compliance dates for all issuers in February 2004, and in March 2005 it further extended the compliance dates for non-accelerated filers and foreign private issuers.

The Advisory Committee on Smaller Public Companies is expected to develop recommendations for the SEC and issue a final report by April 2006.

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