Section 404 Compliance Proposed Rules to Postpone Compliance for Selected Filers
On August 9, 2006 the Securities and Exchange Commission (SEC or the Commission) issued a proposal and a final Commission action to offer smaller public companies and many foreign private issuers delayed compliance deadlines with Section 404 of the Sarbanes-Oxley Act of 2002. The SEC proposal is entitled Internal Control Over Financial Reporting in Exchange Act Periodic Reports of Non-Accelerated Filers and Newly Public Companies.
Additional details can be found in the SEC press release at http://www.sec.gov/news/press/2006/2006-136.htm
The first action is a proposal to provide extensions of 404 compliance dates for smaller (non-accelerated) filers and newly public companies. The second is a final Commission action that defers the Section 404(b) compliance dates for certain foreign private issuers. The Commission issued a release with a 30 day comment period that proposes the following measures of relief from Section 404 compliance:
There is a 30-day comment period, and The American Institute of Certified Public Accountants (AICPA) expects to issue a comment letter in response to the SEC proposal. i
Highlights of Proposal to Provide Relief for Smaller Companies and Newly Public Companies ii
Relief from Section 404 Compliance Dates for Non-Accelerated Filers
Non-accelerated filers (companies with a public float of $75 million or less) would receive extensions on the following 404 compliance measures:
Report by management assessing the effectiveness of the company’s internal control over financial reporting:
Current Compliance Date – Fiscal years ending on or after 7/15/07
Proposed New Compliance Date – Fiscal years ending on or after 12/15/07
Requirement to provide an auditor's attestation report on internal control over financial reporting in annual reports (Section 404(b))
Current Compliance Date – A non-accelerated filer would have to begin including the auditor’s attestation report in the annual report filed for its first fiscal year ending on or after 7/15/2007
Proposed New Compliance Date – Auditor's attestation not required until the company files its annual report for a fiscal year ending on or after 12/15/08
As a result of the proposal, non-accelerated filers would only be required to complete the management's portion of the internal control requirements in their first year of compliance with the requirements. According to the SEC's press release, approximately 44 percent of domestic companies and 38 percent of foreign private issuers that file periodic reports with the Commission are non-accelerated filers.
Transition Relief for Newly Public Companies
Under the proposal, any company that has become public through an initial public offering (IPO) or a registered exchange offer, or that otherwise becomes subject to the Exchange Act reporting requirements for the first time would not have to provide either a management assessment or an auditor attestation report until it has filed one annual report.
The full text of this proposal can be found at http://www.sec.gov/rules/proposed/2006/33-8731.pdf.
Final Commission Action to Provide Relief from Section 404(b) Compliance Date for Certain Foreign Private Issuers
In a final Commission action, the SEC extended the 404(b) (auditor attestation) deadline for foreign private issuers (FPIs) that are accelerated filers (but not large accelerated filers) that file their annual reports on Form 20-F or 40-F. FPIs with a market caps below $700 million now have an extra year before they are required to provide an auditor's attestation report on internal control over financial reporting.
The full text of this final rule can be found at http://www.sec.gov/rules/final/2006/33-8730.pdf.
Links and News Sources
i SEC Release 33-8731, Internal Control Over Financial Reporting in Exchange Act Periodic Reports of Non-Accelerated Filers and Newly Public Companies, August 9, 2006, available at www.sec.gov. SEC Release 33-8730, Internal Control Over Financial Reporting in Exchange Act Periodic Reports of Foreign Private Issuers That Are Accelerated Filers, August, 9, 2006, available at www.sec.gov.
ii AICPA Release: SEC Offers Relief from Section 404 Compliance for Smaller Public Companies and Many Foreign Private Issuers – CPCAF Alert #116.