Proposed Agenda for the New SEC Advisory Committee on Smaller Public Companies

By: Cydney Posner

The SEC has just posted a summary of the proposed agenda for the new Advisory Committee on Smaller Public Companies, which met for the first time last week. See: Release  

The agenda outlines the specific issues that the Committee proposes to address in connection with its evaluation of the current securities regulatory system for smaller public companies, including the impact of SOX. The Committee is soliciting comments on the agenda.

The Committee's objective is to assess the current regulatory system for smaller public companies under the securities laws and make recommendations for changes. The Committee's charter directs it to consider the following areas of inquiry, including the impact of SOX in each area:

• frameworks for internal control over financial reporting applicable to smaller public companies, methods for management’s assessment of such internal control and standards for auditing such internal control;
• corporate disclosure and reporting requirements and federally-imposed corporate governance requirements for smaller public companies;
• accounting standards and financial reporting requirements applicable to smaller public companies; and
• the process, requirements and exemptions relating to offerings of securities by smaller public companies, particularly public offerings.

• Definition of "Smaller Public Company"
• Internal Control – SOX 404
  • Evaluation of reports filed with respect to the reasons for effective and ineffective controls, including size and characteristics of companies
  • Evaluation of benefits and costs/burdens for smaller public companies, including disproportionate costs/burdens, competitive disadvantages and effectiveness in preventing fraud
  • Evaluation of procedures used, including effectiveness of company and auditor procedures
  • Evaluation of effectiveness of mechanisms such as questionnaires prepared by FEI, NASDAQ and others and roundtables held by the SEC and PCAOB
• Corporate Governance Standards
  • Evaluation of impact on Boards, committees, controlling shareholders and other stakeholders of requiring independent directors, as well as the impact of stakeholders on effectiveness of independent directors
  • Evaluation of loss of market and company knowledge and experience as a result of independent director requirement
  • Evaluation of impact of independence definitions, including issues of performance, cost and adequacy of supply of competent directors
  • Evaluation of impact of special requirements on audit committee make-up and operation, including special independence, financial expertise and disclosure requirements, as well as potential loss of operational knowledge, experience and depth
• Effects of other Statutory Requirements and SEC Regulations, including SOX, on Smaller Public Companies.
  • Evaluation of officers’ certifications, audit firm’s standards and requirements and loan prohibition and other matters
• Disclosure Requirements
  • Analysis of impact of disclosure requirements on smaller public companies, including benefits/ detriments and potential modifications of Reg S-B (including seeking economic input), periodic reporting and registration forms and requirements and other aspects of the disclosure regime
  • Identification of possible scaling standards, such as size, risk or revenues
  • Consideration of liability concerns
  • Consideration of delinquent and deficient micro-cap disclosure issues
  • Evaluation of the balance of disclosure to protect investors with the competitive needs of smaller public companies
• Accounting Principles
  • Evaluation of whether modifications should be made for smaller companies to GAAP generally or to specific principles, including effective dates for future accounting principle changes
  • Consideration of impact on accounting of importance of cash in many smaller companies
  • Analysis of overlay and impact of other regulatory schemes (financial institutions, insurance, government contractors, etc.)
  • Analysis of role of outside audit firms with respect to smaller companies in areas such as the changing environment for communications, changes in role of auditors, accounting industry concentration and related difficulty in switching audit firms
• Capital Formation
  • Analysis of existing structure and exemptions, including Reg A
  • Analysis of roles of investment bankers and capital formation specialists, including brokers and "finders"
  • Analysis of nature and extent of analysts’ coverage
  • Review of costs and timing of market access, including the possibility of broader access to capital, for example, through foreign markets
  • Consideration of cost of and ability to exit public company status
  • Consideration of possible improvements in interaction between federal or state regulators and SROs
  • Examination of liability issues
• Small Business Forums and Related Issues
  • Analysis of recommendations from recent SEC Small Business Forums
  • Review of small business statutes
• Recommendations