Advisors to the Securities and Exchange Commission have recommended regulators lighten up on smaller public companies by delaying internal control reporting requirements, and by scrapping or postponing accelerating filing deadlines. At the same time, the advisory group is working on a new definition for “smaller” that, if ultimately adopted, would cast a much larger net on who would qualify for small-company treatment.
SEC’s Advisory Committee on Smaller Public Companies met in Chicago for two days last week to compare notes and hammer out their recommendations. At the end of the session, the Committee handed the SEC a two-page resolution recommending a one-year delay on the effective date of internal control reporting requirements for non-accelerated filers. That would give smaller companies until their first fiscal year ending on or after July 15, 2007, to comply with Section 404 of Sarbanes-Oxley.
Wander
The Committee also took and acted on a motion from the floor to recommend the SEC either temporarily or permanently abandon its requirement that smaller companies speed up the filing of various reports following the period-ending dates, according to committee chair Herbert Wander. The recommendation was so fresh it was not even presented in written form to the SEC by the end of the week.
Newly installed SEC chairman, Christopher Cox, will present the recommendations to the full Commission, but there’s no timetable for when or how the Commission might act, according to an SEC spokesman.
While the Commission mulls its response, the Advisory Committee is hammering out a new definition for “smaller public company” that seeks to create three categories of public companies: large, small and microcap. The categories would be based not on a set market capitalization figure but instead on a ranking of where companies stand in relation to one another. It would describe the bottom 6 percent of all companies based on total U.S. public market capitalization as “small,” with the bottom 1 percent categorized as “microcap.”
SOX 404 Delay
In its resolution to the Commission, the Advisory Committee called for another one-year delay in the requirement that companies report on the effectiveness of their internal controls over financial reporting. The Committee cited the overall cost of compliance, the complexity of the process, and efforts under way to improve the process as a result of recently issued or soon-to-be issued guidance.
Hinting it has further rule-relief ideas on the back burner, the Committee implored the Commission to act quickly on the suggested delay. “Otherwise, non-accelerated filers, who are currently in the process of implementing their internal control over financial reporting, will incur heavy costs and base their implementation on rules that the Advisory Committee will most likely recommend be changed,” the resolution says.
Wander declined to elaborate on what additional rule changes the Committee might be planning. “There are lots of ideas,” he said. “I really wouldn’t want to forecast what those might be.”
Wander said the Committee is asking SEC for the delay because smaller companies are unfairly burdened by the high cost associated with learning and implementing the rules. “As people become more familiar with the rules and more experienced with them, the costs will go down,” he said. The whole reporting process should be delayed, he said, as rule changes are considered and guidance remains outstanding.
In part, the Advisory Committee is referring to the much-anticipated guidance from the Committee of Sponsoring Organizations of the Treadway Commission, which is working on a document to scale its widely accepted control framework in a way that makes it more applicable to smaller companies. COSO began this project early this year and projected a release by early summer.
Rittenberg
Earlier this summer, COSO Chairman Larry E. Rittenberg offered a new projection of Aug. 15. Then last week he said, “We are close to a final draft but expect that it will be Sept. 1 before it is posted on the web page.”
The Committee also wants more time for companies and their auditors to implement guidance issued in May by the SEC and the Public Company Accounting Oversight Board. “[T]he Advisory Committee does not believe these efforts will bear fruit for some considerable time,” the resolution says. “Therefore, non-accelerated filers should have an opportunity to delay filing until these efforts progress further.
Slow The Acceleration
On only a voice vote, the Advisory Committee told the SEC it should scrap or postpone for smaller companies the final phase-in of rules that would accelerate the deadlines for various periodic reports following the period-ending dates, Wander told Compliance Week.
UPDATE
Last week, Compliance Week learned that the task force established by the Committee of Sponsoring Organizations of the Treadway Commission to develop internal control guidance for small companies had delayed the release of its guidance.
According to COSO task force member Dan Swanson, the group is in the process of reviewing that guidance internally, and now expects to issue the draft for public comment on or after Sept 1, 2005.
The guidance was originally expected to be released to the public on Aug. 15.
Original Coverage
COSO Targets Aug. 15 For Small Company Guidance (Aug. 16, 2005)
In late 2004, the SEC postponed the third and final phase of the accelerating filing requirements to give all companies more time to cope with internal control reporting requirements. Currently, companies have 75 days following the end of their fiscal year to file annual reports and 40 days following the end of each quarter to file quarterly reports. That schedule will ultimately “accelerate” to 60 days and 35 days for annual and quarterly reports, respectively.
According to the SEC spokesman, the Committee is recommending that smaller companies “should not be subject to further acceleration of the due date of periodic reports required under the Securities Exchange Act of 1934.”
According to Wander, “We’re suggesting that those dates should stay at the same place that they are now.”
The request applies to “smaller” companies as currently defined by the SEC, which is any company with a market capitalization of less than $75 million. However, the spokesman pointed out that the Advisory Committee would prefer to see the acceleration relief extended to include the wider group of companies that would qualify for “small” treatment based on the new definition the Committee is writing.
Definition Of Small
The spokesman said the Committee is still finalizing its proposal on how the SEC should define “small” for purposes of applying securities rules. The working document says the definition of a smaller public company should be determined by a number of factors, including:
Total market capitalization of the company;
A measurement metric that facilitates scaling of regulation and that calibrates on its own (e.g. not based on a set figure that must be reviewed or changed periodically);
A standardized measurement and methodology for computing market capitalization;
A clear date for determining total market capitalization; and
Clear and firm rules that describe when a company changes from small-to-large or large-to-small status.
The Committee says the SEC should determine on a defined measurement date the total U.S. dollar value of the market capitalization for each of the three tiers—large, small and microcap—then assign companies to those categories based on where they rank. The SEC asked the Advisory Committee for ideas on how the Commission could better scale regulatory treatment for companies based on their size.
“Essentially, we’re hoping this will be a simpler system to size companies based on their total market capitalization and that it will be self-calibrating,” Wander said. “It’s a very good set of rules.”
The Committee says scaling is appropriate because smaller companies represent a smaller risk to capital markets overall, investors recognize that smaller companies carry an inherently greater investment risk, and the current regulatory burden is not proportional for smaller public companies as they are currently defined. The SEC should act to redefine regulatory treatment for smaller companies because the current disproportion increases the cost of capital, increases the number of companies going dark or avoiding capital markets, and inspires U.S. and foreign companies alike to look to non-U.S. capital markets, the Committee says.
The Committee also is still looking for input from the financial markets on how it can address the variety of issues that are unique to smaller public companies. The Committee recently published a questionnaire that asks for public input as it continues to study and develop its recommendations to the SEC.
A copy of the Advisory Committee On
Smaller Public Companies' resolution, adopted at the
committee meeting Aug. 10, is available in the box above right, as are other related presentations, documents and coverage.
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