Now that small companies know they’ll have to comply with the internal control provisions outlined in Section 404 of Sarbanes-Oxley, John White, director of the Division of Corporate Finance at the Securities and Exchange Commission, has called on small companies to focus their energy on providing input for the SEC’s forthcoming guidance on the subject.
The SEC announced May 17 that it plans to issue a concept release to solicit input about management guidance, followed by actual guidance on the topic. White said the concept release is expected “fairly soon.”
“To date … much of the energy of the smaller public company community has been spent pursuing an exemption from internal control reporting,” White said in May 25 remarks before the SEC Institute. “Now that it looks as if the ‘unless and until’ condition suggested by the Advisory Committee will be met, and the Commission has indicated that it does not intend at this time to extend a permanent exemption to smaller companies, I truly hope that we can harness and redirect the energy that has been spent seeking exemption into helping us craft a more efficient, scalable system.”
To achieve its goal of scalable guidance and the broader objective of providing guidance to help companies perform top-down, risk-based, cost-effective management assessments of internal controls, White said the Commission “needs to hear from the entire spectrum of interested parties.”
Chavern
David Chavern, vice president of the capital market programs for the U.S. Chamber of Commerce, calls the SEC’s plan a “positive step.” He said the group will respond to the concept release.
“We’re excited about the opportunity to re-look at some of the rules underlying SOX 404 and achieving real improvements for companies of all sizes,” Chavern told Compliance Week. “Small public companies are looking for what all companies are looking for with respect to changing the implementation of 404: a more risk-based approach, better definitions of words like ‘material’ and ‘significant,’ a focus on entity controls as opposed to transaction controls, and better rules for analyzing IT systems.”
While he says the “proof will be in the pudding,” Chavern adds that, “We think it’s a positive step that they’re looking at the possibility of issuer guidance and that the PCAOB is willing to re-look at AS2. Those are both things we’ve been advocating.”
Canadian Regulators Eye New Compensation Disclosure
Following in the footsteps of their counterparts in the United States, Canadian regulators are considering updating their rules surrounding the disclosures of executive compensation, as indicated in recent remarks by the chairman of the Ontario Securities Commission.
In May 29 comments to The Canadian Club of Montreal, OSC Chairman David Wilson noted that regulators in Canada “have been trying to bring more clarity to issues related to the disclosure of executive compensation.”
Wilson
“We’re considering to what extent we can move in the direction of a principles-based approach, rather than a strict rules-based approach,” Wilson said. Noting that the SEC took 370 pages to describe its January proposal on executive compensation disclosure, he also quipped, “I’m hoping in Canada we can do it in a way that requires cutting down fewer trees.”
Current Canadian rules around executive compensation disclosure date back to 1993 and “are modeled almost exactly on the rules that are currently in force in the U.S.,” notes Christina Medland, a partner at the Torys law firm and head of its pension and employment group. Like the United States, she says Canada has “fairly detailed disclosure requirements” for the CEO, CFO and three next most highly compensated executives. The information is disclosed in the Information Circular provided to shareholders in connection with any shareholder meeting.
Medland
Medland notes that the Canadian Securities Administrators—the umbrella organization representing Canada’s 13 provincial and territorial securities commissions—has appointed a committee to conduct a preliminary review of executive compensation disclosure requirements. “We expect they’ll consult over the summer and come up with some recommendations maybe in the late fall or early winter,” Medland says. Any proposed rules would then be circulated for public comment.
“There’s a lot of pressure to provide clear, easy to understand executive compensation disclosures,” Medland says, but at the same time “real pressure” exists for companies to pay for performance, which makes compensation plans “very complex.” The more complex the plan, she says, “the harder it gets to disclose in a simple way and the harder it becomes to predict what the compensation is worth, because there are real performance hurdles to earning it.”
Medland says it’s unlikely any new Canadian rules would be in place prior to the effectiveness of the new U.S. rules on executive compensation, which are expected in 2007. “Given our past practice, it would be surprising if Canada made a significant departure from the U.S.,” she says. “I expect our regulators to closely study the proposed U.S. rules. U.S. rules have informed what we do here.”
SEC OKs Nasdaq Name Change; Move To Exchange Delayed
The SEC has approved a proposed rule change to rename the Nasdaq National Market as the Nasdaq Global Market and to create the Nasdaq Global Select Market, a new tier within the Nasdaq Global Market with higher initial listing standards.
The changes will take effect July 1.
When it first announced the planned change back in February, Nasdaq stated that more than 1,000 Nasdaq companies qualify for the Global Select tier.
Separately, Nasdaq recently updated its Exchange Registration Operational Issues Frequently Asked Questions, which now says it is targeting August as the date for its exchange so that firms have more time to prepare their downstream systems. Nasdaq had originally planned to become operational as an exchange beginning June 1.
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