SEC Proposes One-Year Delay In Accelerated Filing

As rumored for weeks, the Securities and Exchange Commission yesterday proposed that it delay the final phase of its accelerated filing schedule, which would have forced companies to file annual reports within 60 days of period close, and quarterly reports within 35 days of period close.

According to the proposal, the Commission expects to delay the third and final phase "for at least 12 calendar months." The rule would be applicable to accelerated filers that have a public float of at least $75 million.

Arel

Though the delay would be appreciated by corporate executives and auditors, experts note that companies would still have pretty aggressive filing deadlines. "Any relief is welcome," notes Testa, Hurwitz & Thibeault partner Jocelyn Arel, "but the proposed postponement for one year ... gives accelerated filers only 15 days more than they would've had under the accelerated schedule."

The Phases

"Year One" of the phase-in period began for accelerated filers with fiscal years ending on or after

Dec. 15, 2002. At that time, the actual filing deadline didn't change—the annual report deadline remained at 90 days and the quarterly report deadline remained at 45 days—but companies were faced with a new disclosure mandate related to Web site access of reports.

In "Year Two," the deadline for annual reports filed for fiscal years ending on or after Dec. 15, 2003,

was accelerated to 75 days, and the deadline for the three subsequently filed quarterly reports was

accelerated to 40 days.

We are currently in "Year Two" of the phase-in period.

In "Year Three," which would have been effective with respect to annual reports filed for fiscal years ending on or after Dec. 15, 2004, the 10-K deadline was to become further accelerated to 60 days, and the deadline for the

three subsequently filed quarterly reports was to change to 35 days.

This would have completed the phase-in, with the 60-day and 35-day deadlines remaining in place for all subsequent periods.

Reasoning

According to the proposal, the SEC "originally determined to phase-in the accelerated filing deadlines over a three-year period in an effort to balance the market’s need for information with the time companies need to prepare that

information without undue burden."

However, the Commission has come under pressure from industry experts who argue the accelerated deadline, when combined with the demands of Sarbanes-Oxley Section 404, is simply too much work for public companies and auditors.

Quigley

At a House Committee hearing in late July, Deloitte & Touche USA CEO Jim Quigley said the deadline "places pressure on public company management, legal counsel, financial reporting staff, and audit committees, in addition to the time constraints placed on the independent auditor."

In a recent speech before the American Accounting Association, SEC Chief Accountant Donald Nicolaisen alluded to the fact that some effective dates might change. Nicolaisen clarified that SOX 404 was "absolutely critical," noting that "... it's so important that the SEC staff is considering whether to recommend that the implementation of other initiatives be delayed, at least temporarily, because we want management and their auditors to put the appropriate emphasis on these requirements and to get them right the first time around."

After the speech, Nicolaisen told Dow Jones, "We're trying to restrain ourselves in the number of new initiatives that we would put in place."

The SEC noted in its action that, "We propose to postpone for one year the completion of the final phase-in of the accelerated filing deadlines to allow additional time and opportunity for accelerated filers and their auditors to focus their efforts on complying with our new requirements regarding internal control over financial reporting."

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border="0">Richman

According to Mayer, Brown, Rowe & Maw partner Laura Richman, "The SEC's proposal represents a very practical compromise." That's because accelerated filers have already reduced the timeframe for filing their periodic reports. "Public companies have been working hard to comply with the body of new regulations that now apply to them," notes Richman.

But many of the executives at public companies focusing on the acceleration of periodic filings are also focusing on internal controls. "With the accelerated filing schedule already partially accomplished through the initial transition rules," says Richman, "it makes sense to allow companies the time to concentrate on the steps they need to finalize to be ready to provide the required report on internal controls."

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border="0">Keller

Palmer & Dodge partner Stanley Keller agrees that the proposed postponement would help companies focus on critical SOX 404 issues as the effective date approaches. "The delay in accelerated filing will give accelerated filers and their auditors additional time to focus on their 404 internal control over financial reporting assessments and attestation," says Keller, "which must be their first priority."

Although the dates for the next step in accelerated filing have been deferred, notes Keller, "internal control reporting still takes effect for fiscal periods ending after Nov. 15."

Jocelyn Arel, who co-chairs the Corporate Finance and Securities Group at Testa Hurwitz & Thibeault, notes that the time frame will be especially compressed, even with the SEC's proposed delay, because of the SOX 404 requirements. In fact, she notes that "Most companies would have preferred a delay—longer than 15 days—in the implementation of 404 itself."

What It Means

Grover

"This proposed rule change is almost certain to go through," says Morrison & Foerster partner Gavin Grover. That's because the SEC staff is concerned about the 404 burden. "Because that rule centers on the accounting control environment, the Staff concluded that the additional burden of accelerated filing deadlines was going to be a problem for the accounting groups at some issuers," notes Grover.

Under the proposal, the current "Year Two" deadlines would remain in place for one additional year. That means the deadline for annual reports filed for fiscal years ending on or after Dec. 15, 2004, would remain at 75 days after

fiscal year end.

Similarly, the quarterly report deadline for the three subsequently filed quarterly reports

would remain at 40 days after quarter end.

The Commission did clarify, however, that it was not suggesting that the proposed one-year delay would be permanent, or that it should cause companies to slow their compliance efforts. "[W]e remain committed to the concept of filing on a more timely basis by

accelerated filers and therefore to the completion of the final phase-in period after the proposed one year

postponement," the proposal noted.

The complete proposal can be downloaded from the box above, right. We've also posted contact information of SEC staffers whom you can call with questions, and instructions for commenting on the proposal.

NOTE: Please note that this is a summary of a proposed SEC rule, and should not be construed to be a complete or final rule, nor should it be construed to be legal guidance. Please refer to the SEC's Web site for updated and final rule information.