Risk & Compliance

SEC Extends Small-Company 404 Deadlines

The commission is also proposing a one-year transition period for newly public companies.
Stephen TaubAugust 9, 2006

The Securities and Exchange Commission on Wednesday granted smaller public companies, including many foreign private issuers, extensions for complying with Section 404 of the Sarbanes-Oxley Act.

Further, the SEC has proposed that newly public companies not be required to meet Section 404 requirements, covering internal controls over financial reporting, in their first annual public filing.

In May, the SEC, contradicting the recommendations of its own Advisory Committee on Smaller Public, announced that small companies as well as large ones would be required to comply with Sarbox 404. Wednesday’s actions, however, “continue the Commission’s efforts to be sensitive and responsive to the particular needs of smaller public companies and foreign private issuers, and to minimize the burdens that Section 404 may impose on them,” SEC Chairman Christopher Cox said in a press release.

“By offering further relief for smaller companies and most foreign issuers, today’s actions will allow time for the Commission and the PCAOB to redesign Section 404 implementation in a way that is efficient and cost effective for investors,” he said.

For non-accelerated filers—generally speaking, companies with a public float of $75 million or less—the SEC proposed extending the date by which they must start providing a report by management assessing the effectiveness of the company’s internal control over financial reporting. The initial compliance date for those companies would be moved from fiscal years ending on or after July 15, 2007 to on or after Dec. 15, 2007.

The SEC also proposed extending the date by which non-accelerated filers must provide an auditor’s attestation report on internal controls in their 10-Ks. This deadline would be moved to the first annual report for a fiscal year ending on or after Dec.15, 2008. That would result in the smaller companies’ being required to complete only the management report in their first year of 404 compliance, the commission noted.

Comments on the proposal on non-accelerated filers should be submitted within 30 days of the proposal’s publication in the Federal Register, according to the SEC. Roughly 44 percent of the domestic companies and 38 percent of the foreign private issuers that file reports with the Commission are non-accelerated filers.

The SEC also extended the 404 auditor-attestation deadline for foreign private issuers that are accelerated filers—but not large accelerated filers—and that file their annual reports on Form 20-F or 40-F. Such companies will now have an extra year before they must provide an auditor’s report on internal control over financial reporting in their annual reports until fiscal years ending on or after July 15, 2007. (Accelerated filers are companies with market caps between $75 million and $700 million, while large accelerated filers are companies with market caps of $700 million or more.) Thus, foreign private issuers that are accelerated filers with the SEC need only to include management’s report for their first fiscal year ending on or after July 15, 2006.

The extension for foreign private issuers that are accelerated filers is a final SEC action that will be effective soon.

The commission also proposed that newly public companies have a transition period for complying with 404. Under the plan, for which it seeks comment over the next 30days, the SEC would amend its rules so that a company wouldn’t have to provide either a management assessment or an auditor attestation report until it has filed one annual report. The proposal would apply to companies that have gone public via an IPO or a registered exchange offer or ones become subject to reporting requirements in some other way.

“This relief is being proposed in recognition of the fact that preparation of a newly public company’s first annual report can be a time and resource intensive process that may quickly follow an IPO or initial listing,” the SEC said.