SEC Guidance On 404; Nasdaq Rules; XBRL

The Securities and Exchange Commission expects to solicit views “in the next few weeks” for its guidance on how management should assess the effectiveness of its internal control over financial reporting, Commissioner Paul Atkins said last week—indicating that the much-anticipated guidance might arrive later rather than sooner.

Atkins

Atkins made his remarks in a June 15 speech delivered to the Association Française De Gouvernement D’entreprise—the French Association of Corporate Governance. Atkins said the SEC will also seek input on the appropriate role outside auditors should play in the management assessment required by Section 404 of Sarbanes-Oxley, and on the manner in which outside auditors provide the required attestation.

Atkins didn’t specify exactly when the SEC would issue guidance for management on conducting a top-down, risk-based assessment of internal controls. He did say the guidance will be “scalable and adaptable” for non-accelerated filers and smaller public companies.

Issuers have been eagerly awaiting guidance from the SEC since it and the Public Company Accounting Oversight Board announced on May 17 that it would revise and improve the rules surrounding Section 404 compliance (see box at righ for details and related coverage). As part of those plans, the PCAOB will revise Audit Standard No. 2, which outside auditors use as a benchmark for their reviews of clients’ internal controls. The SEC, meanwhile, has promised guidance for executives as a counterpart to AS2, so they can gain more control over Section 404 compliance rather than be at the mercy of outside auditors using AS2.

Still, if the SEC has barely begun soliciting input from corporate executives about what its guidance should be, those rules may well not arrive until the end of summer.

“The SEC and other agencies are actively seeking approaches that would mitigate the costs of implementing Section 404,” Atkins told the group. “I can assure you that in the coming months, the SEC and the PCAOB will be considering steps to cut the costs while maintaining the benefits of Section 404.”

Nasdaq Eyes Overhaul Of Compliance ‘Cure Period’

Nasdaq wants to bring more order to its rule allowing a grace period for companies out of compliance with its director independence rules.

The exchange has filed a rule proposal with the SEC to modify the “cure periods” available to listed companies when they lose independent directors or members of the audit committee and end up violating Nasdaq’s director independence rule. The new rule would give a minimum of six months for companies to find replacement directors and come back into compliance.

Currently, issuers that lose an independent director or audit committee member—either because the member ceases to be independent for reasons outside the member’s reasonable control or because a vacancy arises—are allowed a cure period that lasts until one year from the date of noncompliance or the company’s next annual shareholder meeting, whichever comes first. But that can leave some companies little time to find replacements if their annual meetings are looming.

Nasdaq says the cure period has caused “anomalous results,” and “widely varying cure periods,” which the exchange says can create a hardship, particularly on smaller companies that might have more difficulty attracting and recruiting new independent directors.

Specifically, Nasdaq proposes adopting a minimum 180-day cure period in cases where within 180 days before the company’s annual meeting: (i) a vacancy arises on the audit committee or board, or (ii) the company ceases to have a majority of independent directors on its board because a director loses his or her independence through no fault of the director.

The 180-day minimum will help assure adequate time for companies that lose an independent director just before their annual meeting to conduct an appropriate search, but would not shorten the compliance time for companies that fall out of compliance just after their annual meeting, since those companies will still have as long as a year to regain compliance, Nasdaq says.

If the rule is approved, Nasdaq will allow any company then eligible to use the new 180-day minimum period from the date of the vacancy or the event that caused non-compliance, even if the vacancy or non-compliance happened before the date of approval, provided that the company hasn’t exceeded the cure period allowed under the rule’s prior language.

Nasdaq says it will implement the rule immediately upon SEC approval.

XBRL Census Grows To 24

Automatic Data Processing, Ford Motor Co., Ford Motor Credit and Radyne Corp. have joined the group of companies participating in the SEC’s pilot program to use interactive data in their financial statement filings.

The new additions mean a total of 24 companies will now furnish their financial information to the SEC in eXtensible Business Reporting Language, the new reporting language much touted by the SEC and little embraced by anyone else. In exchange for their participation in the XBRL pilot, the SEC has promised expedited review of the companies’ registration statements and annual reports.

Cox

“As the number of companies voluntarily submitting interactive data continues to grow, it’s obviously becoming clear that making information available to investors in a more useful way is also cost effective,” SEC Chairman Christopher Cox said in a statement.

The announcement comes one week after the SEC held the first in a series of roundtable discussions to explain how interactive data can be used to improve the investment decision-making and to expand the reach of analyst coverage. Still, despite Cox’s enthusiasm, few corporations see any real value in implementing XBRL right now, while critics say the language’s technological underpinnings remain weak.

And while the SEC has been relentless in its push for companies to participate in its XBRL trials, mandated XBRL still appears to be a ways off, based on recent remarks by SEC Chief Information Officer Corey Booth. Last month, Booth told attendees at the XBRL International Conference in Madrid: “We have not yet reached an inflection point where there is significant critical mass and knowledge of the XBRL standard.” For now, he said, “I think we can do better by aiming for a market-driven transition to XBRL rather than a regulatory mandate.”