Yesterday, the SEC cancelled an open meeting that had been scheduled to consider the proposal to create an exemption from the SOX 404(b) auditor attestation requirement for low-revenue smaller reporting companies. (See this PubCo post.) True to form, the SEC nonetheless went ahead and adopted the rule amendments largely as proposed, with Commissioner Allison Lee dissenting. (BTW, all so predictable, I wrote that sentence two days ago.) The final rules were adopted today, and the rules and related press release have now been posted. The amendments revise the accelerated filer and large accelerated filer definitions by providing a narrow carve-out for companies that qualify as smaller reporting companies (SRCs) and reported less than $100 million in annual revenues in the most recent fiscal year for which audited financial statements were available. The final rule will become effective 30 days after publication in the Federal Register. Watch this space for an updated post with more details of the final rules and Commissioner statements.
Most significantly, under the final amendments, companies qualifying for the carve-out will no longer be subject to the SOX 404(b) requirement to have an auditor attestation report on internal control over financial reporting (ICFR), a requirement that has been anathema to many deregulation advocates. (The requirement applies to accelerated and large accelerated filers.) In addition, qualifying companies will no longer need to comply with the shorter timeframes for filing periodic reports applicable to accelerated filers and large accelerated filers, nor will they have to provide disclosure regarding unresolved staff comments on periodic reports or whether they make their filings available on their websites. Notably, companies with public floats between $75 million and $250 million will still be subject to all of the accelerated filer requirements unless their revenues are under the $100 million revenue cap. The final amendments also exclude certain business development companies from the definitions.
In addition, the new amendments will increase from $50 million to $60 million the transition thresholds for accelerated and large accelerated filers to become non-accelerated filers and increase the threshold for exiting large accelerated filer status from $500 million to $560 million. And, the amendments add more complexity with a new revenue test as part of the transition thresholds for exiting both accelerated and large accelerated filer status. (There's a reason it's not described in the press release and fact sheet!) The amendments will also add a check box to the cover pages of annual reports on Forms 10-K, 20-F, and 40-F to indicate whether an ICFR auditor attestation is included in the filing.
In adopting these amendments, the SEC said that the amendments will "more appropriately tailor the types of issuers that are included in the definitions, thereby reducing unnecessary burdens and compliance costs for certain smaller issuers while maintaining investor protections. The amendments are consistent with the Commission's and Congress's historical practice of providing scaled disclosure and other accommodations to reduce unnecessary burdens for new and smaller issuers." Interestingly, though, and probably in response to critical comment, the press release emphatically downplays the impact on investor protection of the elimination of the auditor attestation requirement for qualifying companies. In particular, the SEC contends that these companies will still be required to maintain effective ICFR, will still need to provide related CEO and CFO certifications), and will continue to be subject to a financial statement audit by an independent auditor, who is required to consider ICFR in the performance of that audit. What's more, the argument goes, the JOBS Act already exempts emerging growth companies from the ICFR attestation requirement during the first five years after an IPO.
March 12, 2020
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